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Danish Tax Council Reverses Course on Securities Lending Transactions

29 Sep 2010

The case before the Tax Council involved a financial operator resident in the UK who was, on a regular basis, party to securities lending transactions regarding Danish shares. The terms and conditions of a Global Master Securities Lending Agreement ("GSMLA") would govern the securities lending transaction, which normally occurred without any time limitations. In the inquiry, the tax authorities were asked to confirm that payments made under such a securities lending transaction, in which a Danish securities lender would lend a UK borrower some shares issued by a Danish issuer, would be characterised as dividends subject only to a 15% withholding tax (the applicable dividend withholding tax rate under the Denmark - U.K. tax treaty). Taxand Denmark reviews the ruling, and despite its ambiguity, discusses how it could potentially benefit a non-resident borrower of Danish securities.

The Tax Council determined that the shares transferred from the lender to the borrower were to be classified as borrowed shares for Danish tax purposes, even though there was no time limitation on the transaction on the following basis:

(i) no consideration was paid for the shares
(ii) the borrower was required to redeliver the same type and number of shares
(iii) the transaction could be terminated by both parties on demand

Furthermore, the Tax Council determined that the dividends attributable to the shares were distributed to the lender, at least in situations where the borrower would not in fact (regardless of intention) sell the borrowed shares during the borrowing period, and that under the GSMLA, the borrower was required to pay to the lender an amount equivalent to the dividend received on the shares during the loan period. Accordingly, the recipient of the dividends would be the Danish lender, and the UK borrower would not be entitled to claim a reduction of Danish dividend withholding tax under the Denmark - UK tax treaty.

Taxand's Take

The ruling expands the scope of the securities lending treatment to securities lending transactions which are not limited to a six month period provided that certain other criteria are fulfilled. The ruling is rather general in both its wording and reasoning and may potentially impact all securities lending transactions structured in a similar way to the scenario described above.

The ruling thus creates increasing uncertainty regarding the Danish tax treatment of securities lending transactions. The 2010 ruling should not affect existing securities lending structures as, in general, a change in tax practice cannot be applied retroactively.

The ruling did not as such challenge that the payment from the dividend distributing company to the sharehodler could qualify as a dividend, the issue was whether the securities borrower or the securities lender would be considered the shareholder for tax purposes in a securities lending situation. If the dividend payment is considered as made to the securities lender and the lender is tax resident in a jurisdiction with a favourable tax treaty with Denmark, the borrower would then benefit from the dividend withholding tax treaty rate applicable to the lender.

Your Taxand contact for further queries is:
Anders Oreby Hansen
T. +45 72 27 36 02

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