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Taxpayer Wins Another Beneficial Ownership Case

7 Dec 2010

The Danish Tax Tribunal recently recognised a Luxembourg holding company as the "beneficial owner" of the interest payments out of Denmark in a cross-border structure. This is the first Danish decision on beneficial ownership to interest payments. The Danish Tax Tribunal previously considered a case on dividend distributions with a similar outcome. Taxand Denmark reviews the case and why taxpayers should watch the outcomes of cases such as this carefully to understand how they will be impacted.

A number of foreign institutional investors established a Danish company via a Luxembourg holding company. The Danish company distributed dividends to the Luxembourg holding company and the same day the holding company granted two loans to the Danish company on which the Danish company paid interests.

In April 2010, the Danish Tax Tribunal recognised a Luxembourg holding company as the beneficial owner of dividend distributions. An important part of the basis for the ruling of Tax Tribunal was the fact that the dividends distributed were not immediately paid on to the shareholders. The Danish tax authorities have appealed the case to the courts.

The Danish Tax Tribunal has now also considered the beneficial ownership to interest payments. The Danish Tax Tribunal also recognised a Luxembourg holding company as the beneficial owner of the interests. Consequently, the Danish company did not have a duty to withhold taxes on the interest payments. Also in this case, the decisive criterion was the fact that the interest payments were not channeled further up to the holding company's shareholders. The Luxembourg holding company was thus not considered a "conduit company".

Withholding taxes on interest payments are, besides in the OECD Model Treaty, separately regulated in the interest / royalty directive. The Tax Tribunals decision, at least in this situation, interprets the concept of "beneficial ownership" in the interest / royalty directive in the same way as according to the Treaty. In April 2010, The Tax Tribunal considered the interpretation of the Treaty, and the outcome of the two cases are therefore the similar.

Taxand's Take

A number of additional cases on the beneficial ownership issue are to be prepared by the Danish tax authorities; also cases where the interest payments / dividend distributions are channeled further up to the shareholders. These cases are expected to clarify the interpretation of beneficial ownership according to Danish law. So far taxpayers have been successful in the cases where there is no back-to-back upstream payments made to tax havens in connection with the payments of dividend and interest. All rulings will be subject to appeal, or have been appealed, so nothing can be regarded as final at this stage in time. Taxpayers should keep a close eye on these decisions.

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

Taxand's Take Author