Economic substance test in the case of conduit companies – the beneficial ownership clause and transaction recharacterisation

Abstract

The article examines the economic substance test as applied to conduit companies, analysing the interaction between the beneficial ownership clause (beneficial owner) and transaction recharacterisation (non-recognition) in tax law. The authors review the evolution of the beneficial ownership concept in the context of the OECD Model Tax Convention Commentary, comparing it with the methodology used to assess economic substance under transfer pricing rules. Drawing on case law of the Court of Justice of the European Union (CJEU) as well as domestic and foreign courts, the article argues that the modern approach to assessing economic substance extends beyond formal legal ownership criteria and involves a more comprehensive evaluation of actual business activity. The paper also highlights the growing overlap between mechanisms typical of the WHT and TP regimes, which necessitates balancing the effectiveness of anti-avoidance measures with the protection of taxpayers’ rights. The central thesis is that while the economic substance test serves an anti-abuse function in both regimes, it differs in scope, purpose, and intensity of assessment: under the BO clause it has a binary (qualifying) character, whereas in transfer pricing it operates as a tool for calibrating the allocation of functions and income within multinational groups.