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UCITS Withholding Tax Regime Under Pressure

Denmark

On 10 May 2012 the ECJ in the Santander-case ruled that the French rules on withholding tax on dividends distributed to foreign UCITS was a violation of the free movement of capital. Just days before the Santander-ruling, the Danish Government received a letter of formal notice from the European Commission concerning the Danish withholding tax regime applicable to UCITS. As such, the Danish Ministry of Taxation now struggles both in national and European legal forums to uphold the Danish withholding tax regime. Taxand Denmark assesses whether the existing dividend withholding regime as applicable to the foreign UCITS will prevail as being compliant with EU law.

On 30 April 2012, the Danish Government received a formal notice sent by the European Commission concerning the Danish withholding tax regime applicable to UCITS. In a statement of 3 July 2012 to the Danish Parliament, the Danish Ministry of Taxation accounts for the position of the Commission which considers the Danish withholding tax regime applicable to UCITS to be a violating of EU law and the position of Danish Ministry of Taxation in relation hereto.

According to the statement, the Commission states that the Danish rules prevent Danish investors from investing in foreign UCITS and prevent foreign UCITS from selling their services to Danish consumers. As such the Commission claims, that the Danish rules may be considered a restriction on the free movement of capital and services under the EU Treaty.

While struggling to uphold the Danish withholding tax regime both in national and European legal forums, the Danish Ministry of Taxation has simultaneously reduced the interest rate applicable to withholding tax refunds from 7.45% to 1.3% per annum with effect as of 1 July 2012 regardless of whether the reclaim was submitted prior to this date and introduced a 6 month grace period during which no interest is accrued.

Further, certain specific requirements for utilising a unique tax beneficial Danish UCITS regime are being abandoned as of 1 January 2013 for the benefit of especially foreign UCITS.

Taxand's Take


The Danish Ministry of Taxation claims that any differential treatment of Danish and foreign UCITS is justified under the need to safeguard the balanced allocation between the Member States of the power to tax. The Commission has already prior to the Santander-ruling sent a formal notice to Denmark in this respect. The Santander-ruling further seems to suggest that the claimed justifications will not be accepted by the ECJ.

Even though the Danish UCITS tax regime does have some unique characteristics, it is our assessment that the existing dividend withholding regime as applicable to the foreign UCITS will not prevail as being compliant with EU law.

Your Taxand contacts for further queries are:
Arne Riis
T. +45 72 27 33 22
E. ari@bechbruun.com

Poul Erik Lytken
T. +45 72 27 35 31
E. poe@bechbruun.com

Taxand's Take Author