Beneficial ownership in law: Definitions and thresholds

Draft beneficial ownership definition

A beneficial owner (A) is a natural person (B) who has the right to some share or enjoyment of a legal entity’s income or assets (C) or the right to direct or influence the entity’s activities (control - (C)). Ownership and control can be exerted either directly or indirectly. (D)

Beneficial ownership should be disclosed when an individual’s aggregate control of, or economic benefit from, a company reaches or exceeds (E):

  • 5% (F) of the company’s stock, votes, profits or assets; or
  • The right to appoint board members or company officers.

The 5% threshold (G) applies in particular to, but is not limited to, the following types of economic or control interest:

  • Ownership of shares
  • Control over voting rights
  • The right to profits or distribution of assets
  • The right to enjoyment of the company’s assets (H)
  • Other influence or control over the company
  • Other economic benefits derived from the company.

The interests of a beneficial owner may be maintained directly or indirectly via mechanisms including, but not limited to (A):

  • Influence or control granted through the rules or articles of the company or via a special class of share
  • A legal instrument (i.e, a contract or agreement) that grants an individual control or financial benefit, such as a profit-sharing agreement
  • An informal agreement that grants an individual control over the company or financial benefit from the company, such as exercising control via a family member or associate without a legal contract (I)
  • A financial instrument that grants ownership or control rights, such as conditions attached to a loan
  • A legal arrangement or structure that allows an individual to exercise control through a nominated intermediary, such as a nominee shareholding arrangement or a parent exercising control on behalf of a minor.

Where no beneficial owners of a company reach the thresholds for disclosure, all board members and senior managing officials should be disclosed as the parties responsible for the declaration. (J)

This definition captures the main ways in which a legal entity can be owned and controlled but will need to be altered for local circumstances, and is not intended to be used as a replacement for legislative expertise. The draft definition demonstrates the principles of best practice covered in this briefing.

Explanatory notes

[A] Legislation in a jurisdiction should include a single and unified definition of what constitutes BO consisting of a broad catch-all definition, coupled with a non-exhaustive list of example ways in which BO can be held

[B] The definition should specify that a beneficial owner is a natural person

[C] The definition should cover both ownership and control interests

[D] The definition should encompass both indirect and direct interests

[E] Governments should require the disclosure of, and publish the way in which, an individual exercises BO over a company, including the exact percentage of ownership and control

[F] Thresholds should be set low to ensure that most or all people with relevant BO and control interests are identified in the disclosures

[G] Countries should apply a risk-based approach to thresholds, and should consider applying even lower thresholds to companies, sectors or individuals with higher associated risks – such as politically exposed persons (PEPs) – in secondary legislation

[H] Governments should provide companies with clear guidance on how to identify qualifying beneficial owners and how to calculate indirect ownership percentages; for instance, how to calculate the threshold on the enjoyment of assets

[I] Definitions should be adapted for local contexts; for instance, by assuming joint action by family members in countries where this is common

[J] The law should include reporting requirements for firms where no person falls within the threshold or definition of BO

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