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Danish High Court Judgment in Beneficial Ownership Case
On 20 December 2011, the Danish High Court made its judgment in a high profile case, exempting a company from the obligation to withhold dividend taxes of app. DKK 1.55 billion (app. EUR 208 million) on distribution of dividends made by the Danish service conglomerate ISS. The High Court ruled that the Luxembourg based parent holding company of ISS was the beneficial owner of the dividends. Taxand Denmark explores the concept of beneficial ownership in a Danish context and what it means for the tax position of multinationals.
On 15 May 2009, the Danish tax authorities found that the Danish service giant ISS was required to withhold dividend taxes on the payment of dividends as part of a debt push down in a leveraged acquisition of the company. The investors - two fund of funds, investing through LLPs based in Delaware, Guernsey, Germany and Bermuda - purchased the ISS group for DKK 13 billion (app. EUR 1.75 billion) through a Luxembourg holding company.
The Danish Tax Tribunal (the supreme administrative authority) contrary to the decision of the tax authorities found the Luxembourg company to be the beneficial owner on 3 March 2010. Therefore, the Danish company was not required to withhold taxes. The decision was appealed by the Danish Ministry of Taxation.
The High Court has now stated that the Danish definition of the concept of beneficial ownership concurs with the definition of the concept made in the commentary to the OECD Model Tax Treaties of 1977 and 2003. Accordingly, a dividend receiving company which is merely a fiduciary or an administrator and which is subject to full control by the actual recipient cannot be considered the beneficial owner of the dividends. Specifically, in relation to intermediary holding companies in multinational groups, the Court stated that "in order for an intermediate holding company not to be considered beneficial owner, the owner must be required to exercise control of the company that goes beyond the planning and management at group level usually seen in international groups".
Furthermore, the High Court states that it is a prerequisite for the Danish withholding requirement to apply that funds received are actually paid to recipients not entitled to an exemption from the withholding tax.
The Luxembourg holding company had used the dividends received to grant loans to its Danish subsidiary, and no funds passed on to recipients not entitled to exemption. Accordingly, the Luxembourg holding company which was the formal owner was found also to be the beneficial owner of the dividends received and as such entitled to exemption from the withholding requirement.
The judgment of the High Court is an important contribution to the ongoing discussions as it clearly states that in order for an intermediate holding company not to be considered beneficial owner, the investor(s) must be required to exercise control of the company that goes beyond the planning and management at group level usually seen in international groups. This statement is noteworthy coming from the Danish High court in a matter like this. It is not yet known whether the tax authorities will appeal the decision to the Danish Supreme Court but the Ministry has been quick to state in the press that the new judgment does not in the view of the Ministry set a general precedent for the 15-20 other pending Danish beneficial owner matters.