The Danish National Tax Tribunal has made a ruling in a case concerning a Danish company's payment of interest to its Swedish parent company. It was held by the Tax Tribunal that the Swedish company was not the beneficial owner, and therefore the Danish company should have withheld tax at source. The Danish company was liable for payment of the tax. This is the first decision agreeing with the Danish Tax Administration's (SKAT's) opinion that a company is not the beneficial owner.
Generally, no tax must be withheld at source from interest paid to a consolidated company situated in e.g. a EU member state. However, if the interest is paid to a company which is considered not to be the beneficial owner of the interest, it might be necessary to withhold tax at source.
According to the comments to the OECD model tax convention, the assessment of the "beneficial ownership" involves an assessment of whether the formal recipient of the interest only acts as a conduit on behalf of another entity which actually receives the relevant income.
In this specific case, a Danish company had paid interest to its Swedish parent company. The Swedish company then transferred the amounts to its own Swedish parent company, which paid the money onward as interest to a company in Jersey.
The Danish National Tax Tribunal: The parent company was not the beneficial owner
The Tax Tribunal held that the Swedish parent company could not be considered the beneficial owner of the interest, and that the Danish company therefore should have withheld tax at source.
In its decision the Tax Tribunal attached importance to e.g. the factual arrangement between the related parties, according to which the first Swedish company transferred the interest income received from the Danish company to the other Swedish parent company in accordance with the Swedish rules on group contributions - and this company transferred the money to its Jersey parent company, so that in fact the Jersey company was the recipient of the interest payments from the Danish company.
The Tax Tribunal further stated that the purpose of setting up the Swedish companies - which had no commercial activities apart from holding shares - and the simultaneous raising of identical loans between the companies was to avoid taxation of the interest paid by the Danish company on the loan without affecting the right to deduct interest.
The fact that part of the interest was not paid in cash, because the interest was part of a debt conversion in the Danish company, could not result in another decision in these circumstances.
The Tax Tribunal further held that the Danish company had demonstrated negligence in not having withheld tax at source, and that the company was therefore liable for payment of the tax.
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