🌎 After Action 6 of the OECD – OCDE BEPS Action Plan, it is fair to say that “beneficial ownership” has become something of a secondary filter against treaty shopping. Far more attention has been devoted to the Principal Purpose Test (PPT) in recent years, and many tax treaties have either been signed with it after October 2015 or amended to include it bilaterally or under the BEPS MLI.
That said, clauses referencing the term “beneficial owner” (e.g., Art. 10(2), Art. 11(2)) are still featured in the near-totality of tax treaties signed by Latin American countries. Local courts are every now and then asked to interpret it in light of domestic and international law, and one such ruling was recently issued by the Supreme Court of Justice of Peru (on May 15, 2024). Here are some of its highlights:
âž¡ In Sentencia Casación N.º 34212-2023, the Supreme Court analyzed whether a payee in Chile (Arrendadora Móvil) could benefit from the reduced WHT of 15% on royalties paid by a Peruvian company (América Móvil Perú). Art. 12(2) of the Peru-Chile tax treaty says that the reduced rate applies if the payee is the “beneficial owner” of the royalties.
âž¡ The Supreme Court stated that analyzing whether a payee is the beneficial owner of a given item of income requires looking through the formal recipient of the payment. To be its beneficial owner, the recipient of the payment must have “effective economic power” over its amount, meaning that one should analyze the operation from both formal and substantive viewpoints (p. 53).
âž¡ Per the evidence gathered during litigation, the Supreme Court was able to identify that the payee did not have a fixed place of business in Chile, that they did not have equipment in Chile (the equipment they booked in their balance sheet was physically located in Peru), that they were very minimally capitalized in the first place, and that over 90% of their cash was wired from Chile to legal entities located in other countries (p. 44/45).
âž¡ The Supreme Court concluded that the payee had no economic substance and no operational/financial capacity, meaning that it should not be entitled to a benefit under the Peru-Chile treaty. The domestic WHT rate of 30% should have been applied to the royalty payment instead.
We thank Roberto E. Polo Ch. for sharing the PDF of the Peruvian Supreme Court decision and for his insightful comments (his original post can be found here: https://bit.ly/45ZVYhF).
