An interpretation of the Beneficial Ownership Concept following Canada’s Husky Energy Case

Welcome to a special edition of "The Voice of International Tax and Trade" In this edition, we will explore the recent landmark decision by the Tax Court of Canada concerning treaty benefits. The case addressed whether the beneficial ownership clause in the Canada-Luxembourg tax treaty restricts treaty benefits for dividends paid to two Luxembourg-based shareholders. Our article delves into one key aspect: the court’s determination that no reduced withholding tax applied, as the direct recipients were not the true beneficial owners. Join us as we explore the concept of beneficial ownership, its interpretation for treaty benefits, and the implications this decision may have on your cross-border tax structures.

This article is written by Leticia de Moura ([email protected]) and Melle van der Stoel ([email protected]) . Leticia and Melle are members of the RSM Netherlands International services with a strong focus on international tax.

Beneficial Ownership in International Taxation

The concept of “beneficial ownership” is fundamental within international tax treaties, which are generally based on model tax conventions. These conventions not only outline tax policies but also clarify the meaning and intent behind specific terms used in treaties. The term "beneficial owner" appears in key provisions of both the OECD Model Tax Convention and the UN Model Tax Convention, especially concerning income types such as dividends, interest, and royalties (and in the case of the UN model, fees for technical services as well). According to OECD guidance, "beneficial owner" should not be interpreted in a narrow, technical way that aligns with any single country’s domestic laws. Instead, it should be understood within the broader treaty context, considering its intent to avoid double taxation and prevent tax evasion.

In OECD commentary, a "beneficial owner" is defined as the individual who has the right to control and enjoy the income, without being legally or contractually required to pass it on to another party. Under this principle, agents, nominees, or conduit entities that receive income on behalf of others do not qualify as beneficial owners, as their control over the income is limited by obligations to a principal or another party. The OECD guidance, therefore, promotes a "substance over form" approach to determine beneficial ownership, emphasizing the actual economic rights over technical arrangements. This interpretation is also supported by the UN Model Tax Convention commentary, reinforcing the idea that beneficial ownership should reflect real economic substance rather than formal structures.

The Canada’s Husky Energy Case

In the Husky Energy case, the court considered whether the beneficial ownership provision in the Canada-Luxembourg tax treaty would prevent reduced withholding tax on dividends paid to two Luxembourg entities, concluding that these recipients were not the true beneficial owners. The court's focus on substantive rights to income emphasises the OECD commentary’s interpretation of beneficial ownership rules, which seek to prevent tax avoidance and allow for the correct application of treaty benefits.

This case involved three parties disputing Canadian tax assessments related to dividends: Husky Energy Inc. (a Canadian company that paid out the dividends) and two Barbados-based shareholders (known as the BarbCos) who the Canadian government claimed were the true beneficial owners of these dividends. The dividends were paid initially to two Luxembourg-based entities (the LuxCos), which had received Husky Energy Inc. shares based on a temporary loan agreement with the BarbCos. This setup allowed the BarbCos to direct dividend payments to an entity in Luxembourg to take advantage of a lower withholding tax rate under the Canada-Luxembourg tax treaty. Husky Energy Inc. withheld tax on the dividends at a reduced rate of 5%, based on the Canada-Luxembourg treaty.

However, the Canadian government argued that the BarbCos were the actual beneficial owners of the dividends, not the LuxCos, and therefore Husky Energy Inc. should have applied a higher withholding tax rate of 15% under the Canada-Barbados treaty.

The court ultimately ruled partially in the government’s favour. It agreed that the BarbCos were indeed the beneficial owners, meaning that Husky Energy Inc’s decision to withhold tax at the Canada-Luxembourg treaty rate was incorrect. However, the court also decided that instead of the 15% rate from the Canada-Barbados treaty, Husky Energy Inc. should have withheld tax at Canada’s domestic statutory rate of 25%, since the LuxCos were not the beneficial owners and no treaty rate applied. On the other hand, the court rejected the government’s attempt to assess the BarbCos directly for the tax owed on the dividends. According to Canadian domestic law, non-residents are taxed at a 25% rate on dividends from Canadian companies, but the court declined to hold the BarbCos liable, questioning why the government did not instead assess the LuxCos (who had directly received the dividends).

Consequently, the Court determined that the appropriate withholding rate was Canada’s domestic 25% rate, as LuxCos, not being the beneficial owner, was ineligible for any treaty relief. Under section 215, Husky Energy Inc. was held liable for not withholding this correct amount. Meanwhile, BarbCos incurred no Canadian tax liability, as it did not directly receive the dividend from a Canadian resident corporation (with LuxCos acting as an intermediary). Thus, the payment ultimately did not qualify for treaty relief in any jurisdiction.

The Court’s Interpretation of Beneficial Ownership

This decision not only impacts Husky Energy Inc. but may also set a precedent for how beneficial ownership is interpreted in future cases. In this case, the court took a particularly strict substance-over-form approach to beneficial ownership under the Canada-Luxembourg tax treaty, which lacks a limitation on benefits clause. Historically, Canada’s Supreme Court has allowed taxpayers to rely on this treaty for determining the outcome of international tax structures involving Luxembourg and Canada.

However, the Husky Energy Inc. case raised the question of whether routing dividends through Luxembourg for a reduced tax rate was an abusive structure. However, since the structure did not achieve the intended tax savings, the court did not go so far as to classify it as abusive. It is also peculiar that the Canadian Supreme Court did not focus on where the beneficial owner is resident. The fact that the beneficial owner is not the entity receiving the payment is sufficient for the Court to disregard the Canada-Luxembourg tax treaty. There is no access to the Canada-Barbados tax treaty according to the Court. If this is followed, that would impact many international (tax) structures.

International Implications

The Husky Energy Inc. decision may have significant implications for the interpretation of beneficial ownership across jurisdictions, especially for international tax planning and treaty-based arrangements. The Canadian court’s determination that the BarbCos were the true beneficial owners (despite the dividend routing through Luxembourg entities) underscores a stricter substance-over-form approach, which follows the OECD commentary’s interpretation. In line with other international court cases such as the Danish beneficial ownership cases of the European Court of Justice, the outcome is that Multinational Enterprises (MNEs) can no longer rely on formal structures alone, like intermediate holding companies in favourable treaty jurisdictions, as these may not protect from higher withholding rates if the ultimate economic benefit flows elsewhere.

This case serves as a warning that tax authorities globally may increasingly scrutinize treaty-shopping arrangements . Additionally, with many countries incorporating beneficial ownership rules into their tax frameworks, cross-border structures that do not reflect genuine economic substance risk exposure to similar tax challenges.

For MNEs, the decision highlights the importance of documenting substantive business purpose and operational substance in intermediary entities. While the LuxCos formally received the dividends, the court’s focus on the BarbCos’ role illustrates that beneficial ownership must align with economic reality, not just legal form.

The Canada Court also decided to disregard the place of residence of the beneficial owners and potential access to the tax treaty between the country of the withholding agent and the country of residence of the beneficial owners. This interpretation underscores the need for international tax planning that fully considers the substantive rights and economic benefits of all parties involved.

The Husky Energy Inc. decision reinforces that beneficial ownership can be a central factor in international tax structures. This ruling, although specific to Canadian tax law, offers a cautionary perspective for MNEs employing similar structures. It emphasizes the need for transparency, genuine economic activity, and alignment between the legal form and economic substance of cross-border arrangements.

Forward thinking

The Husky Energy Inc. case underscores the increasing scrutiny on beneficial ownership and the growing complexity of treaty-based tax planning. When jurisdictions, such as Canada, take a stricter approach to interpreting beneficial ownership, this can create potential mismatches, especially for structures involving intermediary entities in countries with favourable treaty rates, such as Luxembourg or Barbados. These mismatches risk unexpected tax liabilities, whether through increased withholding rates or limitations on treaty benefits, potentially leading to double taxation or denial of treaty advantages. RSM Netherlands can guide you through these challenges by offering strategic insights on beneficial ownership requirements, helping to structure cross-border arrangements that align with substance-over-form principles, and ensuring compliance with anti-treaty shopping measures to mitigate tax risks and optimize tax efficiency.

RSM is a thought leader in the field of international tax and trade consulting. We offer frequent insights through training and sharing of thought leadership that is based on a detailed knowledge of regulatory obligations and practical applications in working with our customers. If you want to know more, please reach out to one of our consultants.

[1] “Treaty shopping typically involves the attempt to indirectly access the benefits of a tax treaty between two jurisdictions by a person who is not a resident of one of those jurisdictions, often through complex structures and arrangements. Taxpayers engaged in treaty shopping and other treaty abuse strategies undermine tax sovereignty by claiming treaty benefits in situations where these benefits were not intended to be granted, thereby depriving jurisdictions of tax revenues.”