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Beneficial Ownership: Defeat for Danish Tax Authority
In the first Danish decision on "beneficial ownership" to dividends distributed out of Denmark in a cross-border structure, the Danish Tax Tribunal held against the Danish Tax Authority and recognised a Luxembourg holding company as the beneficial owner of the dividends. Taxand Denmark examines the detail of the ruling.
Outbound dividends from Danish corporation to foreign shareholders are subject to a 28% withholding tax. However, dividends paid to a foreign parent company (i.e. a company holding at least 10% of the shares in the Danish subsidiary) within the EC or in another tax treaty country may be paid without withholding tax, provided, however, that the foreign company is the beneficial owner of the dividends and, thus, not regarded as a conduit company.
The Danish National Tax Tribunal has just made a ruling specifying some guidelines in which a foreign company within the EU or in another tax treaty country cannot be regarded as beneficial owner of the dividends in which case the dividends are subject to withholding tax in Denmark. The ruling concerned dividends paid by a Danish subsidiary to its Luxembourg holding company. The Luxembourg holding company was owned by a number of foreign equity funds all located in jurisdictions with no tax treaty with Denmark. The Tax Authorities had ruled that the Luxembourg holding company was a conduit company and that the dividends, therefore, were subject to Danish withholding tax.
However, the Danish National Tax Tribunal ruled that the Luxembourg holding company was the beneficial owner of the dividends which, therefore, were not subject to withholding tax.
In its decision, the Danish Tax Tribunal first referred to the OECD Commentary to the OECD Model treaty which states that a conduit company cannot normally be regarded as the beneficial owner if, though the formal owner, it has actually very small powers which render it, in relation to the income concerned, a mere fiduciary or administrator acting on account of other parties.
- 'A' did not pass on the dividend to its parent company, or to the shareholders of the parent company
- but instead lent it to its subsidiary 'B'
- which used it to increase the capital of 'C'
- which ultimately used the amount to buy 'D'
The Tribunal found that, in these circumstances, 'A' should not in relation to the dividend from 'B' be regarded as a conduit company, but as the beneficial owner of the dividend.
Even though the Tax Tribunal's decision on beneficial ownership was sufficient to settle the matter in favour of the taxpayer, the Tax Tribunal also referred to the Parent/Subsidiary Directive (Directive 90/435/E?F).
Article 1 (2) of the directive provides that the directive does not preclude the application of domestic or agreement-based provisions required for the prevention of fraud or abuse.
The Danish Tax Authority had argued that the insertion of 'A' constituted such abuse and had therefore denied 'A' the benefits of the directive.
However, the Tax Tribunal did not find that there was sufficient legal basis in domestic Danish tax law to set aside the distribution of dividend from 'B' to 'A' and therefore found that 'A' was entitled to the benefits of the directive.
The main reason for this ruling was the fact that the dividends were not paid on from the Luxembourg holding company to its shareholders but were paid back to the Danish subsidiary as a loan.
The Danish Tax Tribunal is the first instance tax appeals body for Danish companies and the Danish Tax Authority is currently considering whether to appeal the Tribunal decision to the Danish courts. The Danish Tax Authority has for a couple of years been actively scrutinising beneficial ownership issues and is preparing a number of further cases on this issue. The impact of Danish Tax Tribunal's decision on these cases remains to be seen.
This ruling is the first case where the Danish Tax Authorities have tested a more aggressive interpretation of the beneficial ownership / conduit concept under Danish law. There are a number of cases pending and it remains to be seen whether the Danish National Tax Tribunal - and ultimately the courts - will come to the same conclusion in the cases were e.g. dividend have been routed upstream. We will monitor the cases closely.
Your Taxand contact for more information is:
Anders Oreby Hansen
T. +45 72 27 36 02