Beneficial Ownership and Networks of Incorporation


1. Introduction

The theory of beneficial ownership is simple. The owners or shareholders of companies are those who retain their profits. In private companies, shareholders are identified in foundation documents which are submitted to a country’s business register (as in the UK) or via provincial and territorial registries (as in Canada). Public companies, usually larger in size, are listed on stock exchanges, which means their shares can be bought and sold freely by the public.

However, the reality can be a lot more complex. Many other parties can exercise control over, and benefit from, commercial activity than the shareholders recorded in public documentation. This is outlined at the beginning of the topic overview where the key terms and definitions are outlined.

Under this topic overview, networks of incorporation are also covered. Put most simply, this is the situation where one company is owned by another, which is then owned by another.

These networks are a significant feature of business in the modern world. However, the scale and complexity of networks of incorporation have increased significantly in the last few decades, as economic liberalisation and the digital economy has become more important. It is not uncommon for multinationals to have several thousand affiliates.

The question of how these networks of ownership are structured is controversial. Since the global financial crisis of 2008/2009, governments have become more focused on how corporate networks may be used to reduce tax payments.

In the United States, for example, President Barack Obama has criticised US corporations who engineered “reverse takeovers” in Ireland to take advantage of lower tax rates there. There were outcries in the UK after it emerged that corporates such as Amazon and Google paid less taxes in the UK than expected, because the affiliate vehicles in those countries were not recording profits.

These issues also affect the extractives sector. Countries such as Guinea, the Democratic Republic of Congo or Angola have all seen cases in recent years where ownership structures were partly or wholly hidden, resulting in the corrupt transfer of funds to unknown parties.

Likewise, incorporation networks in the oil and mining industries have frequently been responsible for unexpectedly low tax outcomes. In 2011, for example, Mongolia decided to cancel a double taxation treaty with the Netherlands, in reaction to the reduction of tax liability for Rio Tinto in the large-scale Oyu Tolgoi gold and copper mine.