Defining the beneficial owner in Egypt: Aligning Egyptian tax law with international practices

The term beneficial owner (BO) is not clearly defined within Egyptian tax law. While the concept is addressed in the context of the Egyptian money laundering law, a comprehensive definition specific to taxation is absent. As a result, Egypt often relies on the definition provided in the OECD Model Tax Convention Commentaries on Articles 10, 11, and 12, which cover dividends, interest, and royalties.

What is a beneficial owner? 

The OECD introduced the concept of beneficial owner in respect to passive income earned by residents of a contracting state for the first time in its 1977 Model Convention. Since then, almost every country has adopted this concept in their double-tax conventions.

According to the OECD, a beneficial owner is the person who has the right to use and benefit from a payment without any legal or contractual obligation to pass it on to another person. This definition is critical in determining who is entitled to the benefits of tax treaties, as it excludes nominees or agents and generally refers to the individual or entity with primary ownership rights.

While the term beneficial owner also has a definition from the Financial Action Task Force (FATF) and the exchange of information perspectives, the definition of beneficial owner in tax treaties is not intended to have a specific technical meaning under any country's domestic law. Instead, it should be understood in the context of avoiding double taxation and preventing tax evasion and avoidance.

In situations where an agent, nominee, or conduit company receives a payment but is legally or contractually obligated to pass it on to someone else, they are not considered the beneficial owner. This obligation often arises from legal documents but can also be situational. If the recipient can use the payment freely without needing to pass it on, they are deemed the beneficial owner.

Distinction between legal and beneficial owner 

• Legal owner: The legal owner is the person or entity whose name is registered on legal documents as the owner of a property that generates income.
• Beneficial owner: The beneficial owner is the person who enjoys the benefits of the income generated by a property. 

For example, consider a scenario involving a corporate structure where a company named HoldCo, incorporated in a low-tax jurisdiction, is the registered owner of a factory located in another country. While HoldCo appears in all official records as the legal owner of the factory and holds the formal rights to the income generated by it, the true economic benefits and control over the factory's operations and profits rest with another company, ParentCo, based in a different jurisdiction.

In this arrangement, HoldCo is the legal owner of the factory, as it holds the title and is officially recognized as the proprietor of the asset. However, ParentCo is the beneficial owner, as it ultimately exercises control over HoldCo and enjoys the profits and economic benefits derived from the factory's operations.

Determining beneficial ownership in trusts for tax treaty purposes

A trust is a legal arrangement where one party (the settlor) transfers assets to another party (the trustee) to manage for the benefit of a third party (the beneficiary). 

A trust is a legal arrangement involving three key parties:

• Settlor: The settlor creates the trust by transferring assets into it and sets the terms for how these assets should be managed and who will benefit.
• Trustee: The trustee is the legal owner of the trust assets. They manage and control the assets according to the trust's terms, with a duty to act in the best interests of the beneficiaries.
• Beneficiary: The beneficiary is the person or entity that benefits from the trust. They have an equitable interest in the trust assets, meaning they enjoy the income or assets, even though they do not hold legal title to them.
• Protector: Appointed to direct or restrain the trustees in relation to their administration of the trust. 

For instance, in a trust where the shares of a company are held in the name of a trustee (the legal owner), but the income generated from those shares is meant to benefit a beneficiary, the trustee is considered the legal owner because their name is on the shares, and they have control over them. 

However, the trustee does not have the right to personally enjoy the income generated, meaning they are not the beneficial owner. The beneficiary is the beneficial owner because they receive and enjoy the income (dividends) from the shares, despite not holding legal title to them.

Types of trust

• Fixed Trust: a type of trust in which the beneficiaries have a definite and predetermined interest in the trust's assets or income, as specified in the trust deed.
• Discretionary Trust: a specific type of trust where the trustee has the discretion to decide how to distribute the trust's income or capital among a group of beneficiaries. Discretionary trusts give the trustee flexibility to make decisions about distributions based on the beneficiaries' needs, circumstances, or other criteria set out in the trust deed.

Based on this, trusts should generally be accepted under the terms of double-tax treaties. However, several key points must be fulfilled:

1. Residence requirement: The trustees must reside in one of the contracting states and manage the trust's day-to-day operations independently, without interference from the settlor or beneficiaries.
2. Treaty acceptance (trust as a person): Trusts should be accepted under the treaty unless explicitly excluded, which is uncommon as most treaties do not specifically address trusts.
3. Beneficial interest: In some cases, particularly with complex trust arrangements or in situations involving multiple layers of trust and entities, identifying the beneficial owner can be complex. However, the beneficial owner is always the person or entity that ultimately enjoys the benefits of the trust property.

Implications for Egypt

Multinationals operating in Egypt must be fully aware of the beneficial ownership concept, as it grants them access to the benefits offered by tax treaties. Egypt’s issuance of a clear and comprehensive law that regulates the beneficial owner concept and its requirements, would not only benefit these companies but ensure Egypt remains an attractive destination for international business. 

Ensuring companies operating in the country are fully informed of the regulation and that the legal framework is transparent and unambiguous would go far in aligning Egypt with international best practices as the landscape of international tax continues to evolve. 

Additionally, companies should seek the advice of tax professionals before engaging in any transactions that might raise questions about the beneficial owner concept. This precaution will help ensure they fully benefit from the advantages provided by tax treaties while avoiding potential legal disputes.

For more information on how our international tax experts can help you navigate this landscape, reach out to us today.