Global Legal Compass

For an international investor, incorporation in a foreign jurisdiction may be relatively straightforward. Establishing the identity of the individual who owns or controls it can prove far more challenging.

A company may possess a local subsidiary, an offshore holding company, multiple tiers of investment vehicles, nominee arrangements or a trust somewhere in its ownership chain. Regulators are increasingly seeking to pierce such structures to reach the natural person behind them.

The terminology differs, with some jurisdictions using the term “ultimate beneficial owner”, or UBO, while others utilise “beneficial owner”, “registrable controller” or “significant beneficial owner”, but the principle is similar. The existence of corporate structures should not conceal the identity of the person or persons who own or control an entity.

The rules differ in important ways, however. Thresholds of ownership and control which trigger disclosure obligations can vary. Control may be decisive even in the absence of substantial equity. The information may be confidential or publicly available, depending on the jurisdiction. For investors seeking to operate across borders, such inconsistencies can have critical implications.

A Global Standard With Local Variations

The global push to improve the transparency of ownership falls under the auspices of the Financial Action Task Force (FATF). Its updated Recommendation 24 seeks to ensure that competent authorities have access to information enabling them to carry out their duties in relation to money laundering, terrorism financing and other predicate offences.

While the FATF does not specify a minimum threshold, it recognises that jurisdictions need to be able to identify persons who own or control legal persons and arrangements, based on a risk-based approach to different categories of entities and instruments. This reflects the fact that beneficial ownership can take many forms, including indirect ownership.

For investors, the implication is that, when assessing ultimate ownership, attention needs to be paid not only to direct ownership but also to indirect ownership and control. Ownership of shares in another entity may be a factor, as might voting rights or other contractual arrangements. Put differently, the question should not only be, “who owns the shares?” but also, “who owns the company?”

UAE Puts The Focus On The Ultimate Owner

The UAE has a national beneficial ownership regime which is set out in Cabinet Decision No.109 of 2023, which concerns procedures for determining beneficial ownership. The UAE’s emphasis on transparency extends to the prevention of money laundering and financial crime. As such, entities which fall under the purview of the UAE’s anti-money laundering framework must maintain beneficial ownership information.

For corporate groups which operate in the UAE, beneficial ownership is not simply a matter for banks which seek to undertake customer due diligence. Businesses which incorporate in the UAE or which are target companies for acquisition by local entities must consider the disclosure obligations attaching to beneficial ownership.

The UAE’s beneficial ownership regime is critical for international corporate groups which incorporate a company or foundation in the UAE, establish a free zone entity or a holding company structure and/or which acquire local entities. A foreign corporate shareholder should not necessarily be considered the ultimate beneficial owner. Particular care should be taken where there are complex ownership structures involving multiple entities or where control is exercised indirectly.

For investors seeking to incorporate in the UAE, the beneficial ownership disclosure should be considered at the structuring stage rather than after incorporation, when a bank or regulator requests the information.

Singapore Tracks Ownership And Control

Unlike the UAE, Singapore does not have a unified beneficial ownership disclosure regime for companies, foreign companies and limited liability partnerships. Entities are generally required to maintain a Register of Registrable Controllers, or RORC, pursuant to certain exemptions, and to file information with the Accounting and Corporate Regulatory Authority’s (ACRA) central register.

The focus in Singapore is on “significant interest” and “significant control”. The definitions are critical in understanding the disclosure requirements because they enable authorities to access information pertaining to controllers even in cases where a traditional analysis of shareholding would stop short of identifying them.

The central register is not a publicly accessible database; rather, the information is for the purposes of law enforcement and regulatory oversight.

For international investors, the importance of understanding the nuances of Singapore’s beneficial ownership rules lies in the fact that not all information is subject to disclosure to the public. A jurisdiction may impose significant disclosure obligations on businesses while limiting the availability of such information to regulators, and not making it publicly accessible.

Hong Kong Uses A Significant Control Test

In Hong Kong, the Significant Controllers Register (SCR) is the main vehicle for determining beneficial ownership. Except for companies (exempt companies), local companies are required to identify their significant controllers and to maintain the register in accordance with the rules.

A significant controller can be a natural person or a registrable legal entity, including a subsidiary. Significant control encompasses situations where a person or entity has more than 25% of the issued share capital or voting power, or where a person or entity has the right to appoint or remove a majority of the directors of the company. The definition also extends to situations where a person exercises significant influence or control over the company through any other means.

The Hong Kong rules highlight the importance for international investors to look beyond the question of share ownership to understand whether and how a person exercises control over a company. It is not enough to consider whether a person owns more than 25% of the issued share capital. Even indirect ownership can be sufficient to trigger beneficial ownership disclosure obligations.

At the same time, a person who has fewer than 25% of the issued shares may need to be considered a significant controller if they possess decision-making rights over the company. In addition, it is important to understand who holds significant control where control is decentralised, i.e., where there is more than one significant controller. The register must be maintained by the registrant and be available for inspection by law enforcement officials. It is typically kept at the registered office or another address within Hong Kong.

Luxembourg Places Ownership Information In A Formal Register

Luxembourg has a centralised beneficial ownership regime which involves the Register of Beneficial Owners (RBE). Entities which fall under the scope of the regime are required to provide information concerning beneficial ownership to the registry.

The RBE covers a wide range of entities. The beneficial owner is generally the natural person who owns or controls the entity. Where no beneficial owner can be identified, the senior executive is entered in the register pursuant to the applicable rules.

Luxembourg highlights the need for international investors to understand the tension between transparency and confidentiality in relation to beneficial ownership. On the one hand, the beneficial ownership information is available to the public. On the other hand, personal data can be restricted under certain conditions, including where disclosure would expose an individual to serious risks.

For multinational investors, the distinction between the identity of an owner and sensitive personal information concerning that owner is critical.

Mauritius Adds Another Layer For International Structures

Mauritius is a popular jurisdiction for investment holding structures, particularly in relation to Africa, Asia and other emerging markets. Its regulatory framework requires identifying beneficial ownership information for inclusion in relevant processes, including documentation, and there are additional requirements in the financial services sector, including in relation to ultimate owners, controlling shareholders and persons connected with trusts.

For investors, the Mauritian rules serve as a reminder that a seemingly simple structure, such as an onshore Mauritian company between an investor and an operating company, may require disclosure of beneficial ownership information. This is particularly the case where nominee arrangements, trusts, investment funds, several holding companies and/or private equity structures are involved. The relevant questions concern not only who nominally owns the shares but also who ultimately benefits from the arrangement and who controls the Mauritius company.

India Uses A Lower Significant Ownership Threshold

India, in turn, has a significant beneficial ownership regime which touches on many aspects of the Companies Act. Thresholds for significant beneficial ownership are generally based on the level of direct or indirect ownership or control by an individual, including indirect ownership by way of nominees.

The relevant tests are based on a 10% beneficial interest threshold, but the application of the test is not necessarily limited to situations where an individual possesses more than 10% of the shares in an entity. Where an individual exercises significant influence or control, even indirect influence or control, they may also need to be captured by the significant beneficial ownership regime.

The implications for multinational investors are twofold. First, they need to be aware that even small, indirect shares can give rise to significant beneficial ownership disclosure obligations. Second, there is a risk that the same person might simultaneously fall under the significant beneficial ownership regimes of different jurisdictions.

The rules in India require companies to take reasonable steps to determine whether there are significant beneficial owners, including obtaining certain declarations and providing the necessary information. This highlights the importance for multinational investors not only to comply with their disclosure obligations but also to bear in mind that they may have responsibilities in relation to significant beneficial ownership.

The Real Challenge Is The Ownership Chain

For multinational investors, the real-world challenge in relation to beneficial ownership rarely concerns situations where an individual owns a company outright. More common are scenarios which involve multiple layers of ownership, from holding companies to nominee arrangements, trusts or private equity funds, particularly where different investors possess differing voting rights and economic interests.

A proper analysis of beneficial ownership should consider direct and indirect ownership, voting rights, appointment of directors, contractual control, economic benefits and the relevant tax position, while also considering the implications for governance, succession planning and banking. Trusts, in particular, should be analysed with care, with due consideration given to the settlor, trustee, beneficiaries and any other persons who may possess significant influence or control, depending on the exact terms of the trust and the relevant jurisdiction.

Nominee arrangements can also present challenges for multinational investors. A nominee shareholder may hold shares on behalf of another person but possess neither the economic interest nor the voting rights in relation to the shares. As such, they may not be the beneficial owner. At the same time, regulators are keen to pierce such arrangements to identify the person who possesses the economic and voting interests in the shares. Investors should accordingly review nominee arrangements to ensure that they fully understand their beneficial ownership position and the implications for disclosure.

Disclosure Is Becoming A Structuring Issue

The single most common error which international investors make in relation to beneficial ownership concerns their approach to disclosure in relation to their structures. Investors frequently fail to appreciate that the jurisdiction, vehicle and intermediate holding structures which they select can have critical implications for their disclosure obligations. Those obligations, in turn, can affect not only the documentation required by banks, auditors, corporate service providers and regulators, but also their ability to meet those requirements.

The differences between the beneficial ownership rules which apply in the UAE, Singapore, Hong Kong, Mauritius, Luxembourg and India illustrate the fact that there is no universal solution which multinational investors can apply across their different structures and jurisdictions of incorporation. A single investor may encounter different requirements in different jurisdictions because each applies a combination of disclosure tests in relation to ownership thresholds and control.

As such, investors should consider beneficial ownership in tandem with tax, governance, succession, banking and other considerations when designing their structures. The trend in many jurisdictions is that while corporate groups and holding company structures can offer legitimate advantages, they are no longer viewed as an effective way to conceal the individuals who possess significant ownership or control.

In that sense, international investors have two responsibilities: to design their structures so that they possess the commercial and tax advantages which they seek, and to ensure that those structures are capable of withstanding scrutiny in relation to beneficial ownership in every jurisdiction in which they operate.

Cross-border investment rarely ends when the money has been transferred to the target company. If the company starts to generate profits and needs funding to finance its expansion, or pay for consultancy and intellectual-property services, the capital will flow in the other direction. Each type of payment has different implications for taxes and compliance, and the nuances can easily lead to problems for investors.

A dividend is not a shareholder loan, a capital injection is not a management fee, and a payment for the use of intellectual property is not an ordinary commercial purchase. Each transaction has its own requirements in terms of tax, transfer pricing, foreign exchange, company law and banking.

The challenge for investors is that there are no standard global rules for such transactions. Company law, tax legislation, foreign exchange and banking rules, as well as bilateral tax treaties and transfer-pricing rules, all need to be taken into account. Even within one jurisdiction, a seemingly straightforward payment can involve additional approval or documentation processes.

The key point for any cross-border transaction is that the legal nature of the payment is clear. The reason for the transfer, the parties involved, and the terms should be fully understood and properly documented.

Start With The Legal Character

The first step in any cross-border transfer is to define the legal nature of the payment.

A shareholder injecting capital into a company could take the form of subscribing for new shares, a capital injection or a shareholder loan. These options have different tax treatment, risk exposure, and requirements in terms of company law. An equity injection normally strengthens the share capital of the target company, whereas a shareholder loan creates a creditor-debtor relationship and involves terms such as interest rates, repayment schedules, and security.

The distinction between the two is particularly relevant for tax purposes. If the loan is between related parties, tax authorities may question whether it is truly a loan, or whether it is in fact an equity injection disguised as a loan.

Poorly documented transactions can cause headaches for investors down the line. What may seem like a routine bank transfer can trigger scrutiny from tax authorities, requiring extensive justification.

Dividends Require Careful Planning

Dividends are usually the main way for shareholders to withdraw profits from a target company, but there are a number of steps to be taken before dividend payments can be processed.

The company’s board of directors must approve a dividend distribution, having taken into account company law and tax considerations.

Company law requirements can vary depending on the jurisdiction, but generally a company can only distribute dividends if it has sufficient distributable reserves. In addition, all corporate governance requirements in the company’s constitutional documents, including shareholder or board approvals, must be met.

Once the board has authorised the payment, the next step is to consider the tax implications. Dividend payments are subject to taxation in both the country of origin and the country of residence. In addition, some countries levy a withholding tax on dividend payments. Double taxation agreements usually relieve shareholders of double taxation, but certain conditions must be met, such as tax residency and documentation requirements.

Finally, investors should be aware that the amount of the dividend payment they receive will depend on the amount of the gross payment less any applicable taxes.

Shareholder Loans Need Proper Terms

In some cases, a shareholder loan can be a good option for injecting capital into a company. A loan can be used to finance working capital, acquisitions, and other corporate purposes without immediately increasing the share capital of the company.

A loan can also be useful for temporary financing needs. However, a shareholder loan can give rise to significant tax and regulatory challenges if the terms are not properly structured.

A cross-border loan agreement should clearly state the principal amount, currency, interest rate, repayment schedule, and maturity date. In addition, the parties should consider which law will govern the contract. If the lender and borrower are related parties, the loan terms should reflect what independent parties would agree under generally accepted commercial principles.

The interest on a shareholder loan is subject to taxation in the country of residence of the lender. In addition, interest payments may be subject to withholding tax in the country of the borrower. However, tax deductions for interest payments may be limited if the loan agreement is considered to be between related parties or if the interest exceeds the arm’s length principle.

In addition, a shareholder loan that is supposed to be short term but turns out to be permanent, or where interest is not paid on time, runs the risk of being challenged as a disguised equity injection.

Capital Injections Leave A Paper Trail

Equity injections may seem less complicated than loans since, unlike loans, they do not involve repayment of principal. However, capital injections usually involve a number of formalities under company law.

Depending on the legal structure of the target company, injecting capital may require the preparation of certain documents, filing changes with the appropriate authorities, and adjustments to the company’s share capital. In the case of foreign investment, there may also be issues with foreign investment regulations.

The main thing to remember is that the injection of capital may require documentation, approvals, and filing of documents with the appropriate authorities. In addition, the difference between a formal subscription for new shares and an informal injection of capital may become relevant when the investor wants to withdraw money from the company.

A bank may require proof of payment, as well as documents indicating the approval of corporate authorities, to process a withdrawal of any funds.

Royalties Raise Intellectual Property Questions

A royalty payment represents another category of payments that require careful consideration from both a tax and a commercial perspective.

A royalty is a payment made by one party to another for the right to use intellectual property, which may include trademarks, patents, copyright, technical expertise, and other know-how. In most cases, the receipt of royalties is subject to taxation and therefore withholding tax in the country of origin.

If the parties are related, the amount of royalties is subject to transfer pricing rules. In addition, determining the value of intellectual property for the purposes of royalties can sometimes be a challenge, especially when it comes to intangible assets such as brands, technical expertise, and know-how.

A properly drafted licensing agreement should state which intellectual property is being used, the scope of the licence, the territory, the term of the licence, and the terms of payment. The commercial justification for the royalty must also be established to ensure that the transaction meets the requirements of the tax authorities.

Management Fees Need Substance

Similar to royalty payments, management and consultancy fees also require careful documentation to ensure that the transaction meets the requirements of tax and company law.

If a company is to account for management fees as an expense, it must be able to demonstrate that the fees were actually incurred and that the cost was justified. Contracts, invoices, and documents confirming the provision of services, as well as a detailed cost breakdown, may be required.

This is especially important in the case of parent-subsidiary relationships, where the parent company pays fees to the subsidiary for services rendered. In this case, the description of the services provided under the contract is of particular importance to the tax authorities, since vague wording such as “management services” does not provide sufficient information about the services rendered.

The tax authorities may also review whether the services were actually provided and whether the cost was justified. It is therefore important to understand that a management fee is not automatically deductible as an expense, even if it is documented.

Foreign Exchange Can Alter The Transaction

Another factor to consider when making cross-border payments is the foreign exchange regulations of the countries involved.

In some jurisdictions, the currency regime is completely liberalized. In others, there may be restrictions on currency conversions, as well as reporting requirements for large transfers of funds. Some jurisdictions may require prior approval from the local central bank for transfers, loans, dividends, or other types of payments. In addition, there may be specific requirements for documenting each transaction.

Currency risk is also an important aspect of cross-border payments. For example, a shareholder loan denominated in US dollars can turn into an expensive burden for a company that earns income in a different currency.

The terms of the contract should therefore clearly state the currency of the payment, as well as any additional details related to currency conversion and bank fees. This applies to all types of payments, including dividends, fees, interest on loans, and royalties.

Banks Are Part Of The Process

Even if a transaction meets all the requirements of the law, investors need to be aware that banks can impose their own requirements when processing payments.

In particular, banks can ask for information on the beneficial owners of companies, the source of funds, and documentation on the transaction. Large transactions and complex cross-border payments often require additional documentation from banks, including information on the parties to the transaction, the purpose of the payment, and supporting documents such as tax documents, contracts, and invoices.

If the payment documentation is not prepared correctly, the transfer of funds may be delayed. In addition, different banks may have different requirements for the same transaction.

Withholding Tax Can Change The Final Amount

Withholding tax deserves special attention because it is applied to the payment itself, reducing the amount received by the payee.

Dividends, interest on loans, and royalties are some of the most common types of payments subject to withholding tax, but management and consultancy fees can also be subject to it. The applicable rates and the responsibilities of the tax authorities may differ depending on the jurisdiction, but the principle is the same: the tax is withheld from the payment by the party responsible for making the payment.

Tax treaties between countries often reduce or eliminates withholding tax, but in order for a company to benefit from a reduced rate, it must apply to the local tax authorities to withhold tax at the lower rate.

The timing of withholding tax is also of great importance. In many cases, the company that makes the payment is required to withhold tax at source and remit it to the tax authorities, even if the final recipient of the payment is a tax resident in another jurisdiction.

Documentation Is The Common Thread

For all types of cross-border payments, one rule applies: the legal and commercial documentation should clearly state the nature of the transaction.

Investors considering cross-border payments should therefore be aware of the differences between dividends, shareholder loans, capital injections, royalties, management fees, and other types of payments. The parties should also be aware of the company law and tax implications of each type of payment, as well as any documentation requirements imposed by banks.

In addition, the documentation should be consistent with the nature of the payment. If a payment is made as a dividend, it must not appear as a loan in the accounting records or as a management fee in the bank transfer documents.

Cross-border investment is not simply a matter of transferring money from one account to another. At every stage, the legitimacy of the transaction and its compliance with the requirements of the law must be established. It is therefore important for investors to carefully consider the options for withdrawing profits, injecting capital, and paying fees to related parties, as well as the consequences for taxes and banking.