“Final Beneficiary” or “Effective Beneficiary”?

In these times of transparency, it is becoming increasingly necessary to know or reveal who, what individual, is behind each entity, whether a corporation or other legal entity, whether domestic or foreign.

In English, de facto the working language of the international institutions and organizations, the expression of beneficial owner12 has been in use to refer to that person. But its direct translation into Spanish has been the subject of some controversy, since the actual translation of the term beneficial owner , which is already present in the Double Taxation Conventions (CDT), has become, in all Spanish and Portuguese-speaking countries the one of “effective beneficiary” (beneficiario efectivo).

However, both OECD documents officially translated into Spanish as well as many legal systems of Spanish and Portuguese, for example, Argentina, Brazil, Costa Rica, Peru, the Dominican Republic and Uruguay incorporate in their legal texts in force, mainly in their tax codes3 , the term “final beneficiary” when the expression “beneficial owner” is translated in the field of tax transparency.

In my view, this expression of final beneficiary – not used in my own country, Spain, where “real owner”4 is used , a term taken from the acquis of the European Union, particularly from the Third Anti-laundering Directive (Article 3.6 Directive 2005/60 / EC) – is correct.

By using it, we overcome the legal problem that occurs in Anglo-Saxon legal texts. Indeed, the paradox that the English versions of the legal texts (or soft law) most important in tax transparency, particularly those of the OECD or EU, employ beneficial owner, without clarifying, and thus confusion is created with the same term when used, as mentioned, in the double taxation Conventions (DTC), in particular in articles on dividends, interest and royalties. In these, the concept of “beneficial owner“ has a meaning simultaneously more indefinite (because there no strict and detailed definition of what is considered beneficial) and also more restricted (according to the prevailing international jurisprudence), as it refers basically to the one who has the ultimate power of disposing of funds remitted as interest from dividends or royalties respectively. This is regardless if the remittance may come later to another person or entity. Therefore, this concept is closely linked to the contractual nature of the relationship between the receiver, which may be apparent or nominal if such is the contractual relationship with the ultimate potential receiver, with respect to the dividends, interest or royalties concerned.

An example may help to understand this better: in a chain of two companies located in two states, 100% parent-subsidiary, and which are 100% owned by a single individual, a payment of dividends from the subsidiary to the matrix can make the parent an “effective beneficiary“(beneficial owner ) for the purposes of a DTC. This, if the parent can have and have reasonable freedom of funds (for example, if it has a policy of distributing them to an individual who is not 100% and varies with the criteria decided each year by the society), but it is clear that this company, 2nd in the ownership chain, is not the “final beneficiary” (ultimate beneficial owner ).

In contrast, the legal concept of beneficial owner used in the field of money laundering or tax transparency (also, and with greater success, denominated in banking jargon ultimate beneficial owner) gives a precise definition of beneficial owner. It also it points out the importance of determining ownership or effective final control- even if it is necessary to inquire about ownership chains – an issue that, in principle, remains outside the interest and scope of the term “beneficial owner“of a DTC, as explained.

1 However, it is fair to acknowledge that in the literature and the financial and banking uses   frequently used the term, ultimate beneficial owner (UBO).

2 The French, other official language of OECD, use the same expression (bénéficiaire effectif).

3 Argentina uses it in registration rules and Uruguay incorporates in its Law 18.930 of Technical convergence in matters of International Tax Transparency.

4 Especially unfortunate expression because we lose the idea of looking for who, in final instance, actually owns or controls. For the hue of the expression in Spain, it is more about the action of owning or controlling, that the way it is owned and controlled (i.e., control effectiveness). In addition, it is confusing because the term “real” in the civil law of our countries is often used to talk about the “real rights” or rights over things (primarily for real estate). Additionally, the substitution of “beneficiary” by “holder” is probably misconceived, because the term “holder” means, “one who has to his name a title or legal document that identifies him, gives him a right or ownership of something” (DRAE). I.e., the concept is sticking to legal titles, when precisely what is the expression seeks, from the definition, is to overcome the formal framework of the law to inquire into effective control.

 

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