Who Is the Beneficiary or Beneficial Owner in the EU and the UK?

The term “beneficiary” can be confusing, as its meaning varies depending on the context. In some cases, “beneficiary” and “beneficial owner” are used interchangeably, but they carry distinct definitions in different legal frameworks. For instance, in anti-money laundering and counter-terrorist financing (AML/CFT) regulations, the term “beneficial owner” has a precise definition. Let’s explore these concepts together.

Where Are the Terms “Beneficiary” and “Beneficial Owner” Used?

• In AML/CFT laws of individual countries and international directives aimed at combating money laundering and terrorist financing, as well as in regulations governing banking activities. For brevity, we’ll use the abbreviation AML/CFT (Anti-Money Laundering and Counter-Terrorist Financing).

• In UK laws regulating businesses and trusts.

• In international double taxation agreements signed by countries to prevent double taxation.

• As a synonym for the “controlling person” in certain tax codes, such as in Russian legislation.

  
  

Beneficial Owner in EU AML/CFT Regulations

The Fourth EU Anti-Money Laundering Directive (adopted on 20 May 2015) provides a common definition of a “beneficial owner” across EU member states. A beneficial owner is an individual who:

• Ultimately owns or controls a client (e.g., a company or trust), and/or

• Acts on behalf of another individual for whom a transaction or activity is carried out.

  
  

How Is Ownership or Control Exercised?

For a legal entity, a beneficial owner is a natural person who:

• Holds a direct ownership interest, defined as owning more than 25% of the shares or voting rights, or more than 25% of the entity’s property.

• Exercises indirect ownership, where a controlling stake (more than 25%) is held by another legal entity or person(s) controlled by the individual.

• Controls the entity through other means, such as significant influence over decision-making.

  
  

The threshold for control (e.g., 25%) may vary slightly, as EU member states have some flexibility in setting their own rules.

Beneficial Owners of Trusts and Funds in the EU

For trusts, the beneficial owner includes:

1. The settlor (the person who establishes the trust).

2. The trustee (the person who manages the trust for the benefit of the beneficiaries).

3. The protector (if appointed), who holds specific decision-making powers within the trust.

4. The beneficiaries, or, if not specifically named, the group of persons for whose benefit the trust was established.

5. Any other natural person exercising ultimate control over the trust.

   
   

For funds established as legal entities, the beneficial owners are individuals holding roles equivalent to those in trusts.

In the EU, all participants in a trust relationship may be considered beneficial owners for AML/CFT purposes, not just those receiving direct financial benefits.

How Are Beneficial Owners Monitored in the EU?

The Fourth EU Directive requires all organisations—whether companies, trusts, or funds—to:

• Record and store information about their beneficial owners.

• Provide this information to supervisory authorities upon request.

EU member states must maintain a central register of beneficial owners, including:

• Name

• Date of birth

• Nationality

• Country of tax residence

• Nature and extent of ownership or control (e.g., percentage of shareholding)

Governments must ensure that individuals or entities with a legitimate interest (e.g., law enforcement or financial institutions) have access to this register. Additionally, financial institutions in the EU are required to identify the beneficial owners of their corporate clients before entering into service contracts or conducting transactions.

How Are AML/CFT Beneficial Owners Monitored in the UK?

In the UK, all companies registered in England and Wales must submit an annual report to Companies House in a prescribed format, detailing their Persons with Significant Control (PSCs). This information is publicly accessible, making transparency a key feature of UK business regulation.

Beneficial Owners in UK Companies

In UK companies, a beneficial owner may be:

1. A registered shareholder, whose name appears on the company’s share certificate and who exercises control based on their shareholding.

2. An actual owner, who controls the company indirectly through a nominee shareholder.

   
   

The use of nominee shareholders is permitted in the UK but is less common elsewhere. In this arrangement, the beneficial owner does not directly own shares but instructs the nominee shareholder and receives the company’s profits. This relationship is formalised through a Declaration of Trust, a unilateral statement by the nominee shareholder that:

• They will not act on the shares without the beneficial owner’s instructions.

• The beneficial owner is entitled to dividends, voting rights, and the ability to dispose of shares.

  
  

When opening a corporate bank account in the UK, both the nominee and beneficial owners must be identified. Legal liability for the company’s actions typically falls on the beneficial owner, not the nominee.

Beneficial Owners in UK Trusts

A UK trust is a unique legal arrangement with roots dating back to the Crusades. It involves a trustee managing assets for the benefit of beneficiaries under a trust agreement. The standard structure of a UK trust includes:

1. The settlor, who establishes the trust and transfers assets to the trustee via a trust agreement (distinct from a Declaration of Trust used for nominee shareholders).

2. The trustee, who manages the trust’s assets for the benefit of the beneficiaries.

3. The beneficiaries, who receive income or benefits from the trust’s activities as outlined in the trust agreement.

   
   

Depending on the type of trust, beneficiaries may have full control over the trust’s management or no control at all, with the trustee making all decisions.

Beneficial Owners in Double Taxation Agreements

In international double taxation agreements, the terms “beneficiary” and “beneficial owner” are used to prevent tax avoidance schemes. A beneficial owner is a natural or legal person who has the actual right to income, such as dividends, interest, or royalties. For example:

• Nominee owners of foreign assets or individuals who do not fully control their foreign income are not considered beneficial owners and cannot claim tax treaty benefits.

• Only those with genuine control over the income qualify for exemptions or reduced tax rates under these agreements.

  
  

Conclusion

The terms “beneficiary” and “beneficial owner” have varied meanings depending on the context—whether AML/CFT regulations, UK trusts, or double taxation agreements. In this article, we’ve clarified how beneficial owners of companies and trusts are identified and monitored in the EU and UK to prevent money laundering and terrorist financing, as well as their role in international tax treaties to avoid double taxation.

For expert assistance in navigating these complex regulations or optimising your tax position, contact Foundry Accounting. We’re here to help you avoid double taxation and ensure compliance.