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Potential Changes to the Parent/Subsidiary Directive


On 16 December 2011, the Danish Tax Tribunal (the Supreme Administrative Tax Body), with reference to the Parent/Subsidiary Directive exempted a Danish company from a dividend withholding tax requirement, even though the recipient of dividends did not qualify as beneficial owner. The Tax Tribunal accordingly exempted the Danish company from a requirement to withhold taxes on dividends of DKK 658 million (app. EUR 88 million), distributed to a Bermuda-based holding company via a Cypriot company. Taxand Denmark examines this case and potential implications for multinationals.

A tax withholding requirement applies to Danish companies distributing dividends, unless the recipient is entitled to an exemption under the Parent/Subsidiary Directive or a tax treaty. The Danish Tax Authorities contend that a prerequisite for exemption is that the recipient is the beneficial owner of the payments made.

In September 2005, internal restructurings of a group were carried out and as part of the process, a Danish company distributed DKK 566 million (app. EUR 76 million) to its Cyprus based parent company. A year later, additional dividends of DKK 92 million (app. EUR 12 million) were paid out. The Danish Tax authorities imposed a withholding tax requirement on the Danish company as the Cyprus company was found not to be the beneficial owner of the dividends.

The Danish Tax Tribunal agreed with the Danish Tax Authorities and disregarded the Cypriot company as beneficial owner. Accordingly, under the Danish tax treaty with Cyprus, the company did not qualify for exemption from the withholding requirement. The Tax Tribunal points to the fact that a number of interdependent transactions had been carried out, which resulted in the transfer of funds to the Bermuda company via the Cypriot company. As the company was otherwise without substance, the company could not be considered the beneficial owner of the dividends. The Danish Tax Tribunal however, contrary to the Tax Authorities, did not find beneficial ownership to be a prerequisite for exemption from the withholding requirement under the Parent/Subsidiary Directive.

The Tax Tribunal stated that the Parent/Subsidiary Directive allows for the member states to implement rules to avoid fraud or abuse. Denmark has, however, not implemented such rules and, accordingly, the requirement for beneficial ownership does not apply in relation to the Directive. The Danish Tax Tribunal further remarks, that as the Danish Supreme Court has previously refused to disregard legally incorporated companies, even if the reason for incorporating has been tax reduction, the possibility of disregarding legal transactions to prevent abuse, existing under basic principles of Danish law, is not available.

Accordingly, under the Parent/Subsidiary Directive, the Cypriot company was entitled to exemption from the Danish withholding requirement, despite the lack of beneficial ownership.

Taxand's Take

The Danish Tax Tribunal is very firm in the rejection of a requirement for beneficial ownership under the Parent/Subsidiary Directive and the decision may impact the outcome of a number of cases being brought forward by the Danish Tax Authorities. Rejection by the Danish Tax Authorities is definite, however, it is likely that the case will be brought before the courts by the Tax Authorities and a final decision in the question of beneficial ownership under the Parent/Subsidiary Directive may thus not be available until a later time.

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

Arne Riis
T. +45 72 27 33 22

Taxand's Take Author