n Business Tax and Company Law Quarterly - Who is a beneficial owner?

Volume 3, Issue 1
  • ISSN : 2219-1585


The question of who is the beneficial owner of an amount of income (usually passive income in the nature of dividends, interest and royalties), is often very important in determining the tax incidence attaching to that income. Thus, from an international tax perspective, relief from withholding tax imposed by the so-called contracting state in which the income arose, is dependent on whether the recipient of such income is a resident of the other contracting state and the 'beneficial owner' of such income in terms of most double taxation agreements. In the case of dividends, the beneficial owner must also own a prescribed interest in the domestic company declaring the dividend.

While there is as yet no settled South African law as regards the meaning of the term 'beneficial owner', two recent Canadian cases provide some sound jurisprudence in regard to the interpretation of the term. In essence, the courts held that a taxpayer will be regarded as the beneficial owner of dividend/royalty income in an international context if the taxpayer can satisfy the traits of beneficial ownership, being possession, use, risk and control. It is submitted that the dicta of the two cases will have persuasive authority in our courts.
If the beneficial owner of a dividend subject to dividends tax is a resident company, no dividends tax is payable. The term is, however, defined for purposes of the dividends tax as being 'the person entitled to the benefit of the dividend attaching to a share'. It is submitted that the meanings of 'entitled to' and 'the benefit' should be interpreted by applying the test of beneficial ownership postulated by the Canadian courts referred to above.
While it is clear that a vested domestic company beneficiary of a trust that owns the shares in respect of which the dividend income is derived may claim exemption, the position of a discretionary domestic company beneficiary is problematic. It is submitted that unless the relevant dividend income is vested in the domestic company beneficiary prior to the date on which liability for the dividends tax arises, no exemption may be claimed.

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