On 21 June 2018, the Court of Justice of the European Union (CJEU) delivered its ruling in the case of Fidelity Funds against the Danish Ministry of Taxation, C-480/16, regarding the taxation at source on dividends applicable to foreign mutual investment funds while comparable national investment funds are exempt from taxation at this level.
About the legal background of the case
The case concerns the free movement of capital (article 63) and the freedom to provide services (article 56) – although the latter is merely considered secondary to the former – against the Danish rules on the taxation of certain mutual investment funds which state that national funds may be exempt from taxation while this is not the case for foreign investment funds.
The general rule under Danish tax law is that resident companies are unlimited tax liable to Denmark and that non-resident companies are liable to tax on income from Denmark; among other things on dividends received from companies situated in Denmark. The dividend is generally subject to a withholding tax at a rate of 27%. However, according to the Danish Withholding Tax Act, certain exceptions may be adopted regarding investment funds that distribute a minimum amount to its members, or at least establishes a minimum amount to be taxed in the hands of its members though not necessarily distributing this amount.
Discover more: Danish differential tax rules for mutual investment funds in conflict with EU law
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The ruling of the CJEU is a welcome development for non-resident mutual investment funds making or looking to make investments in Denmark. It constitutes a significant step towards the Danish courts acknowledging the many claims being filed for the reclaim of dividend tax. Also, a ruling will require an amendment to Danish legislation to the effect that both resident and non-resident investment funds (when undertaking the obligation to be taxed accordingly) fulfilling the necessary requirements will be treated equally under Danish tax law.
