Who Is a Beneficial Owner? Clear Answers to Confusing Questions

The answer to the question of who or what a beneficial owner is complicated by the fact that beneficiary rights are spread across various legal and economic areas, and in all of them designation of rights is performed and termed differently. Thus, the definition for the holder of the assigned rights given by a financial specialist will differ significantly from that one of an economist, a bank employee, an investor, a business person, an offshore businessman, or the owner of a foreign company. However, all those multiple answers to this question are unlikely to leave you will a full understanding of who the beneficial owner really is.

There is also another important factor that creates confusion: the difference in the mentality of people in different regions. If we talk about beneficiaries appointed to inherit personal property, in the developed countries the idea of drawing up a will at the age of 25 and designating the person who will receive your belongings and movable / immovable property after your death – called a beneficiary – is completely normal. The same applies to a beneficiary of the insurance policy, and the manager of your retirement savings.

The use of the term “beneficiary” in this context is certainly correct, even though the notion itself is somewhat alien in the developing countries. There, if a person wants to appoint a beneficiary who will receive the right to dispose of property after your death, they will encounter a poorly hidden misunderstanding on the part of others.

However, the term “beneficial owner” denotes a slightly different thing. It is not only a person to whom you entrust the right to dispose of your property, but also a person who directly or indirectly owns your business in another geographical area. This may sound strange in the countries, where most people are used to thinking that the director of the company is its only beneficial owner. However, it is a perfectly legitimate way of organizing your asset management.

In this article we tried to explain in the simplest and most understandable terms who the beneficial owner is and why this concept is so important for modern business. This approach will allow you to understand the main issues and get rid of the most significant “white spots”.

The article will be especially useful for those of our readers who plan to do business, but are afraid that the ideas of using or becoming a beneficial owner will create problems for them with the Tax Services and the regulatory authorities. In reality, if a commercial project has been carefully worked out, there should be no questions or claims from the Tax Services. A beneficial owner does not create hassle, but allows you to deal with it, and we will try to prove it to you.

Who is a Beneficial Owner? Key Notions and Definitions

The concept of a beneficial owner is much more closely connected with the principles of organizing and conducting business than it might seem at first glance. First of all, you must clearly understand that the status of the beneficial owner predetermines many legal consequences for its owner.

If the director in many jurisdictions (primarily offshore ones) can be fairly nominal, or formal, with the beneficial owner such a trick will not work. It is impossible for the company owner to “hide” behind the nominal representative. Moreover, most countries have introduced mandatory registration of beneficial owners. And even if they are not public, it is no longer possible to talk about complete confidentiality in the current times of deoffshorization.

If we go beyond formal definitions, we will discover that a beneficial owner is the real owner of the company – not just formally, but actually. Also, the beneficial owner of the company is a person who has a significant impact on the company’s business and on making important management decisions. Also, in the wide-spread interpretation it is generally accepted that only an individual can be a beneficial owner, however, it is not necessarily the fact.

In which context should the term beneficial owner be used:

• Legislation to combat money laundering and terrorism financing (the widely known abbreviation AML / CFT that stands for Anti-Money Laundering, Counter Financing of Terrorism).
• International legislation governing the efforts of different countries in these matters. In the first place, these are FATF (Financial Action Task Force on Money Laundering) – and OECD (Organization for Economic Co-operation and Development).
• Company/trust law within the British legal framework. Here the term beneficial owner is interpreted as a) title shareholder; b) a person who is the beneficiary of shares (regardless of who actually owns them); c) the person who actually benefits from the property invested in the trust.
• International agreements for avoiding double taxation. Here, the concept of a beneficial owner is defined as a person entitled to getting the income (the recipient of income).
• Interpretation of the term “controlling person”. Here the situation is a bit confusing. The corresponding concept only exists in Russia and is used to determine the purposes of taxation. It is sometimes it can be quite difficult to understand the logic of Russian legislation, so if you need to clarify this aspect, please do not hesitate to contact our experts.

Beneficial Owner for AML / CFT Purposes in the EU

EU legislation is quite thoughtful and logical. In addition, it is considerably “fresh” in terms of the times when it was drawn up, as it is based on the fourth anti-money laundering directive 2015/849 adopted in May 2015. It defines a beneficial owner as an individual who directly or indirectly controls another individual, in whose interests the business is conducted or the transaction is made.

A beneficial owner in relation to a legal entity is a person who… a) owns the structure; b) controls it directly and/or indirectly through shareholding, voting rights, business interests or in any other way. The described criterion for indirect ownership is 25% of shares + 1 share, the share of participation is more than 25%. Note that EU members may establish other, lower values.

Beneficial Owner of Trusts: what are the key qualifying conditions?

• Founder;
• Trustee;
• Protector;
• Beneficial owner;
• Entities or persons for whose benefit the trust was registered;
• Any individual who has the ability to control the trust.

What else you should pay attention to?

• If we talk about foundations (with regard to legal entities), then their beneficial owners in the European Union are individuals who have a status similar to the one they have in trusts;
• Identification (classification) of the beneficial owner of a customer of a bank (or, generally, any other financial institution) is mandatory. If this condition is not met, the bank will refuse to cooperate with you, or terminate the existing agreement;
• All registered legal entities in the EU are required to keep information on beneficial owners (including a detailed description of their interest), regularly update it and provide it upon request from the competent authorities.

Generally, beneficial ownership transparency has been the top priority in the agenda on anti-corruption, anti-money laundering and combating terrorist financing. FATF (Financial Action Task Force) has been introducing important changes in their procedures to estimate beneficial ownership. To familiarize yourselves with the work of this group in this connection, please read more in the statement on FATF website.

In the coming years all these measures will be tightened. What can we expect from FATF? Its recommendations called R.24 will be altered in order to increase control over the disclosure of beneficial ownership. The following changes have been suggested:

• Make centralized beneficial ownership registries mandatory for all participating countries;
• Clearly define the meaning of beneficial ownership rights in national laws;
• Provide for independent verification of beneficial ownership data;
• Restrict the use of tools to ensure anonymity, such as bearer shares and denominations;
• Increase the transparency of ownership of foreign companies.

Consequently, lately there have been important developments in the legal systems of many countries. If your business is connected with transferring beneficial rights, we suggest you make note of the following information.

– The United Kingdom. A series of laws aimed at countering economic crimes in the country were passed at a meeting of the House of Commons on March 7, 2022. The main measure within this packet of legislation directed at combating economic crimes is the maintenance of the obligatory Register of Beneficial Owners for foreign companies that own real estate in the country. For more information you can consult the experts of the International Wealth portal.

– Cyprus. Last year, The Registrar of Companies and the Department of Intellectual Property at the Cyprus Ministry of Energy, Trade and Industry announced the creation of a Central register of Ultimate Beneficiary Owners (UBO) of local businesses. Officials of Cypriot companies are required to identify and electronically record the necessary information about the UBOs of such organizations.

This change followed the implementation of the requirements of the Fourth (4AMLD) and Fifth (5AMLD) Anti-Money Laundering Directives into national legislation. Namely, article 5AMLD was transposed into Cypriot law through the Money Laundering Prevention and Suppression Acts 2007-2021. (AML Law).
To avoid fines, all foreign companies in Cyprus must submit data on their ultimate beneficial owners by the end of the second week in March. To get assistance in preparing the right set of documents and following the procedures correctly, you can always request a consultation from International Wealth experts. Contact us at info@offshore-pro.info 

– The Seychelles. All companies are required to register their beneficial owners on the FIU portal. The new regulation was adopted in autumn 2021, when the Financial Intelligence Unit (FIU) launched a web portal for online registration of beneficial owners of companies in the Seychelles opened in accordance with the local Seychelles Companies Act 1972. According to the local 2020 Law on beneficial ownership, this procedure is obligatory for all registered enterprises in the state. 

– British Virgin Islands. In 2016, the country introduced a register of companies, and in 2017 – a database of beneficiary owners (the Law on the BOSS System).  All corporations must submit data to these systems through registration agents. Local laws have strict regulations on the confidentiality of data about beneficial owners: some data is open and should be available in the public domain, while other information remains confidential. If you need expert assistance in figuring out the intricacies of the law of British Virgin Islands regarding beneficial owners, our experts will be happy to help.

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Beneficial Owner in Trust and Corporate Law

Let’s see how the concept of beneficial owner is interpreted in the corporate / trust law in European countries.

Who is recognized as the beneficiary of the company doing business:

• The title shareholder;
• An individual, for whose benefit the hired nominal shareholder is acting (in those jurisdictions whose corporate laws permit a nominee service).

By law, the relationship of the nominee and the beneficial owner must be regulated by an agreement called declaration of trust (Please note that a trust is a completely different concept!). Among other things, this document describes restrictions on the nominee, which legally protects the beneficial owner.

From everything said above we can make an obvious conclusion. A beneficial owner is not only a person who owns shares in the business, but also a person who has the right to manage the business, determine its further development, give instructions and distribute/control the company’s income. We have already said that when a person opens a corporate account in a bank, the provision of submitting information on the beneficial owner of the business is mandatory. We must also note that full and unlimited responsibility for the actions of a legal entity is not borne by the nominee (whose rights are rigidly outlined prescribed in a declaration of trust), but rather by the beneficial owner.

If we talk specifically about a trust (fiduciary relationship), and not about an abstract company, then the beneficial owner will be the person in whose interests the trustee performs the functions connected with managing the property. Please note that the actual beneficial owner in a trust is deprived of the ability to manage property and control the activities of the trustee.

Beneficial Owner and DTT 

If we are not talking about business (whether offshore or ordinary one, it doesn’t matter), then the concept under discussion has a slightly different meaning. Double tax treaties exploit the concept of a beneficiary / beneficial owner as a person entitled to income. Moreover, this term may refer not only to an individual, but also to a legal entity. In the English texts, the concept of “income recipient” is reflected with the term “beneficial owner”, but this does not change the essence of the matter.

In some countries, like the Russian Federation, the law contains certain limitations and obstacles to appointing a foreign person a beneficiary / beneficial owner of a company. The reasons for such a legislative approach are quite clear. These measures are aimed at preventing any abuse of benefits under the DTT (when the beneficiary of the income is a person with tax residency in a jurisdiction with zero taxation).

But practice is somewhat different. With a certain persistence, they can be bypassed. If your business interests involve setting up a beneficial owner of a company in the Russian Federation, please contact our experts for clarification of the issue.

Summary and Recommendations

You might think that the information presented in the article is not useful to the average person. At first glance, setting up a business, registering a company, and opening a bank account can be easy. Sadly, this “easy” approach can get you into trouble. A sound, unbiased analysis of the situation is necessary to avoid a conflict of interest with the tax authorities and the possible allegations of tax evasion, which any beneficial owner risks to get. This is especially true if you are planning to start a new business in a low-tax / tax-free jurisdiction, because the temptation to “hide” it in the papers for the tax bodies will be really big. You should also note that in some situations a person recognized as a beneficial owner in a non-EU country may not be regarded one in the European Union or the USA. 

Therefore, if your own business or your participation in a foreign company gives reason to believe that the tax authorities can consider you a beneficial owner, you should seek help from the experts of the International Wealth portal (info@offshore-pro.info). Everything is very different from country to country, and the tips that were quite suitable for one of our readers may be unnecessary and even harmful for another. The only thing we want to warn you against in any case is any attempts to play hide and seek with the tax service. Especially if there is reason to believe that you have been given the status of a beneficial owner. Choose to be on the safe side, even if it seems that some “cool” (albeit slightly shady) advice you have obtained on the Internet can solve all your problems. Use only trusted information sources and seek the advice of specialists on our portal, not some random “experts”, whose qualifications are extremely low in 99% of cases.

Stay safe and secure your business operations by relying on qualified experts and reliable verified information.