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Andres Knobel ■ Beneficial ownership definitions: determining “control” unrelated to ownership

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Tax justice reports
Tax justice reports

Beneficial ownership definitions: determining “control” unrelated to ownership

Identifying beneficial owners is vital to tackling corporate and private tax abuse, money laundering and financial crime, however, countries only recently started requiring beneficial owners to be registered. Most definitions of who should be identified as beneficial owners are based on ownership thresholds of shares or voting rights. But there are ways to control a company without holding any shares. This brief explores these gaps and proposes ways for authorities to address them.

A “beneficial owner” is the natural persons who ultimately own, control or benefit from a legal vehicle such as a company, partnership, trust, foundation, etc, or who have effective control over them. Identifying beneficial owners is vital to tackling corporate and private tax abuse, money laundering and financial crime, however, countries only recently started requiring beneficial owners to be registered. Most definitions of who should be identified as beneficial owners are based on ownership thresholds of shares or voting rights. But there are ways to control a company without holding any shares.

A widely used threshold to determine whether a person is a beneficial owner is the own “more than 25 per cent” of shares or voting rights, but owning just 0.01 per cent of some companies can be worth millions of dollars.

Thresholds should be reduced to owing just 1 share, but even this may not be enough to identify individuals who are hiding their ownership through ownership chains and financial instruments. That is why legal owners and the full ownership chain should also be disclosed.

This report puts forward a number of proposals for identifying beneficial owners hiding their control of companies.

Key findings

  • A widely used threshold to determine whether a person is a beneficial owner is the own “more than 25 per cent” of shares or voting rights, but owning just 0.01 per cent of some companies can be worth millions of dollars. Thresholds should be reduced to owing just 1 share.
  • Individuals can use more complex methods of control or influence (such as trusts, derivatives and other financial instruments)
  • to avoid beneficial ownership registration.  
  • Disclosure should be required of any relevant individual with the power of attorney to manage a legal vehicle or its assets.
  • Disclosure of contracts affecting shareholdings, votes or income can reveal the structure and some derivative financial instruments.
  • Contracts affecting shareholdings, votes or income could be required to be registered with beneficial ownership registers to have “constitutive effect” (ie, to become enforceable).
  • Policymakers should start questioning whether freedom to establish corporate chains with unlimited layers serves society as a whole.

Key recommendations

  • More information. Require for each legal vehicle more information on any power of attorney, contracts, agreements or arrangements that affect either control or economic benefits (either through ownership or exposure, eg derivatives, or through a right to all of a company’s income). This information should be part of the record of each legal vehicle. While the contract may not be public, the basic elements should be.
  • Establish limits on the complexity of legal vehicle’s ownership and control structure. Policymakers should start exploring and discussing establishing limits on the types of legal vehicles, length of ownership chains, quality of ownership chains, and the contracts, agreements or arrangements that may affect control or exposure to the economic benefits of a legal vehicle.
  • Freedom of choice should only exist within the set limits. If a legal vehicle intended to go beyond those limits, eg set up five layers between the legal vehicle and its beneficial owners, they should justify the commercial need for it (which should not be related to secrecy or tax minimisation). If authorities understood and agreed on the benefits of the more complex structure, it should not only be allowed, but it should be incorporated into existing regulation to allow everyone else to use the same structure, which would become within the set limits.

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