Interpreting the Factor of Dominion in Conduit Company Cases

Abstract

The official commentary on the OECD Model as it stood in 1977 has misdirected the Conduit Companies Report and courts to draw an analogy between a “nominee or agent” and conduit company. On the basis of this analogy, courts have transposed the dominion test from cases involving agents and nominees into conduit company cases. A problem with the reasoning of such cases is that courts have treated beneficial ownership as a test of ownership, not as an anti-avoidance test. The official commentary has also misdirected Danish judicial forums in ISS Dividends and ISS Interest despite the fact that they treated beneficial ownership as an anti-avoidance test. The shortcomings in the reasoning of the Danish judicial forums can be better understood in the light of the reasoning of the Swiss Federal Supreme Court in the Swiss Swap case. In the Swiss Swap case, the Swiss Federal Supreme Court interpreted “beneficial ownership” in the light of the object and purpose of the tax treaty in question. The court considered beneficial ownership to be a requirement that is inherent in double tax treaties and applied beneficial ownership as a general anti-avoidance test. The court interpreted the dominion test in the light of the object and purpose of restricting treaty benefits to residents of contracting states. It examined the arrangement as a whole and found that the arrangement was inconsistent with the object and purpose of the Switzerland-Denmark double tax treaty. By contrast, in ISS Dividends and ISS Interest, the Danish judicial forums did not interpret the term “beneficial owner” in the light of the object and purpose of the Denmark-Luxembourg double tax treaty. They considered beneficial ownership to be a specific anti-avoidance test that was added separately to the OECD Model in 1977. They assigned dominion as a criterion by which the beneficial ownership test would work. They narrowed the scope of the dominion test and applied the test to the facts in the context of corporation law. They allowed treaty benefits to the recipient company on the basis that the recipient company did not immediately pass on passive income.