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Danish Tax Authorities vs. Cypriot Company

Danish Tax Authorities vs. Cypriot Company
31 Jan 2012

The Danish Tax Authorities on 13 January 2012 lost yet another case regarding withholding taxes on dividends after the Danish Tax Tribunal issued a tax ruling against them. The Tribunal held that a Danish company is not obliged to withhold tax on dividends paid out a Cypriot holding company. Taxand Denmark and Taxand Cyprus discuss the case and how it may add weight to the view that the law regarding withholding tax on dividends under Danish tax law needs to be looked at.

As a general rule, a Danish company is obliged to withhold taxes on the distribution of dividends, except if one of the EU Directives or a Double Tax Treaty provides for a reduction or elimination of Danish withholding tax. In either case, Danish domestic tax law will then exempt such dividends from Danish taxation. However, the Danish Tax Authorities claimed that such an exemption is only available when the shareholder receiving dividends is the beneficial owner of the dividends.

The Danish company in question was a subsidiary company, by the use of a holding company in Bermuda, of an American Group. The Bermuda limited company incorporated a subsidiary in Cyprus that obtained the shares in the Danish company. Subsequently, the Danish company distributed dividends to the Cyprus holding company resulting in 88 million euro and the Cypriot holding company paid an analogous sum to its parent company in Bermuda as a repayment for a loan granted by the Bermuda parent company.

Taxand Cyprus and Taxand Denmark review the withholding tax issue and the tax structure of the scheme


Taxand's Take

This decision adds to the pending clarification regarding the standing of Double Tax Treaties and EU Directives as regards withholding tax on dividends under Danish tax law. Based on precedence from the Danish Supreme Court it also recognises the holding of shares as a commercial business activity and therefore Cyprus holding companies whose only function is to hold shares will not be considered abusive and for that reason disregarded, even with limited substance. The Danish Tax Tribunal's decision is a firm one, however the Danish Tax Authorities are now considering the possibility of an appeal and the result of such a continuance remains to be seen. It is, however, considered likely that the decision will be appealed as the ruling deals a significant blow to the Danish tax authorities in relation to all pending cases concerning dividend paid to EU holding companies.

Your Taxand contacts for further queries are:
Georgia Papa
T. +357 22 699 222

Arne Riis
T. +45 72 27 33 22

Taxand's Take Author