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Administrative Tax Practices Tightened Through Beneficial Ownership
The Danish tax authorities have changed their interpretation of the requirements which foreign companies must meet in order to qualify for exemption from Danish withholding tax on Danish sourced dividends and interest. Taxand Denmark provides an overview of the Danish dividend and interest withholding tax rules and explains the change in their interpretation. Possible courses of action will also be examined which may be considered in situations where an exposure to Danish withholding tax exists.
It is argued that the new interpretation will mean that Danish companies more often than previously will be required to withhold tax from dividends and interest paid to foreign companies. The tightening of this practice is primarily aimed at structures whose investors based in tax-haven jurisdictions receive dividends or interests from Danish companies via holding companies set up in so-called normal tax jurisdictions which give access to exemption from Danish withholding tax.
The rules and the change in administrative practice
Any distribution of dividends to non-Danish companies is subject to withholding tax of 28%. As regard interest, withholding tax only applies if the recipient is group related with the interest paying Danish company. In such an event, withholding tax applies at a rate of 25%.
The new interpretation concerns the requirement that the foreign recipient "must qualify for a reduction of the Danish tax pursuant to a tax treaty or an EU Directive". Until recently, this requirement was considered to be met if the foreign recipient was resident in an EU state or in a state which had a tax treaty with Denmark.
Under the Danish tax authorities' new interpretation, the concerned requirement is only considered to be met if the foreign recipient can be considered the beneficial owner of the dividends and interests received. It is the opinion of the Danish tax authorities that a company will not qualify as a beneficial owner if the company has the characteristics of a conduit company. In determining whether a holding company should be considered a conduit company, it appears that the Danish tax authorities in particular will consider:
- The right of the foreign holding company to dispose freely of the funds received.
- The flow of funds, i.e. how are the payments of dividends/interests orchestrated and are the funds received by the foreign holding company passed on automatically to the investors.
- The substance in the holding company, i.e. the physical presence of the company in the jurisdiction of incorporation and the extent of work being carried out in and from the holding company in the jurisdiction of incorporation.
Who is liable?
Danish companies which have paid dividends or interests without duly withholding taxes are jointly and severally liable for the tax payment with the foreign dividend / interest recipient. The Danish company may however only be held liable if it has acted with negligence when omitting to withhold taxes.
Ways of responding
If a structure is considered to involve a risk of withholding taxes on dividends or interests, it should be considered to withhold tax from payments of dividend / interest and then have the foreign recipient reclaim the tax withheld from the Danish tax authorities. This procedure is relevant if one wishes to eliminate the risk of liability on the part of the Danish company and its management. Whether or not it is decided to withhold taxes from payments of dividends/interests it should be considered if the risk of withholding tax could be eliminated or reduced.
In light of the Danish tax authorities' interpretation of the beneficial ownership condition it may be relevant to consider changes in respect of the following:
- The legal and de facto right of the foreign holding company to dispose of dividends and interests received
- The flow of funds to and from the foreign holding company
- The physical presence and activity of the foreign holding company in the country of domicile
Depending on the circumstances, it may also be relevant to change the legal structure. However, it depends on the structure in question which steps (if any) could and should be taken.
Whether or not the current practice is correct is open to debate. Further, given the fact that a number of cases on the issue of beneficial ownership are pending we expect that the current interpretation of the beneficial ownership condition will develop and that a number of the questions not yet clarified will be answered.
Read the full article on the Beneficial Ownership Requirements from Taxand Denmark here
Your Taxand contacts for further queries are:
Anders Oreby Hansen
T. +45 72 27 36 02
T. +45 72 27 33 22