Denmark: First Danish Judgement On "Beneficial Ownership"

"The concept of "beneficial owner" has been used in OECD model treaties since 1977 and is generally an unknown concept in Danish law. The 1977 OECD model treaty, on which the 1980 tax treaty between Denmark and Luxembourg is based, and the 2003 model treaty do not define the term "beneficial owner" However, the comments on the treaties provide some guidance on the perception of this concept. Having regard to this and to the fact that according to the purpose of the OECD model treaties uniform application in law of the OECD model treaties should be aimed for, the High Court finds that the requirement for the recipient to be the beneficial owner should as far as possible be interpreted in compliance with the international perception expressed in part in the comments on the model treaty, see, by analogy, the Court of Appeal's judgment dated 2 March 2006 in the matter of Indofood International Finance Ltd. v. JP Morgan Chase Bank N.A. London Branch, regarding application of an independent international interpretation. In this connection, importance can be attached to the subsequent comments from 2003, provided they do not for all practical purposes entail a change in the perception of Article 10(2) seen in relation to the original comments on the 1977 model treaty. The High Court finds that the changes in the 2003 comments constitute clarifications and thus includes these comments in its interpretation of the concept of beneficial owner.

The introductory comments on the 1977 model treaty refer to treaty abuse as a situation in which a person acts through a legal entity established in a state mainly to benefit from a double taxation treaty where such benefits could not be obtained directly by the person concerned. According to the comments, some of these treaty abuse situations are countered by introducing the concept of beneficial owner in Article 10, among others. At the same time reference is made both in the introductory comments and in paragraph 22 of the comments on Article 10 to the possibility of adopting further provisions in bilateral tax treaties to counter abuse. Similarly, the 1986 report of the OECD Committee on Fiscal Affairs and the comments on the 2003 model treaty refer to the possibility of inserting specific provisions in bilateral treaties to prevent abuse. A common feature of the three examples mentioned in paragraph 12 of the comments on the 1977 model treaty and in paragraph 12.1 of the comments on the 2003 model treaty, respectively, in which an interposed intermediary cannot be considered beneficial owner, is that the interposed intermediary is subject to the control of the legitimate recipient of the amount of money concerned and thus, see the 2003 comment, is "a mere fiduciary or administrator". When this is related to the fact that the comments on the two model treaties as well as the 1986 report recognise that using the concept of beneficial owner does not eliminate any form of abuse – which contracting states are urged to regulate bilaterally instead – it cannot be assumed that dividend-receiving holding companies, whose managements in corporate law terms are authorised to control the company, including dividends received from underlying subsidiaries, should not normally be considered beneficial owners. This must also apply in cases where one or more intermediate holding companies are interposed in a state with which Denmark has concluded a tax treaty while the underlying owner/owners of the intermediate holding company is/are resident in a third country with no tax treaty. For such an intermediate holding company not to be considered beneficial owner, the owner must be required to exercise control of the company that goes beyond the planning and management at group level usually seen in international groups, see, by analogy, the 1986 report, part II, B, para b, seventh sentence.

In the present case there is no need to consider whether the underlying investors have exercised such control of [the Luxembourg holding company]. Accordingly, it follows both from the definition of abuse provided in the comments and the report and from the examples of abuse mentioned in clauses 12 and 12.1 of the 1977 and 2003 comments that the person or the company in the state with which the tax treaty has been concluded must be interposed between the payer and the legitimate beneficiary as an intermediary passing the tax-free payment on to the controlling person in a third country with no tax treaty. Against this background it can be assumed that setting aside an income-tax limitation based in a tax treaty requires the payment to have been passed on or at any rate to positively be intended to be passed on to persons in third countries with no tax treaty. This requirement is not fulfilled in the present case. Accordingly, the dividend paid by [the Danish subsidiary] has not been passed on by [the Luxembourg holding company] but, on the contrary, has been reversed as a loan to [the Danish subsidiary]. According to the information received, nor has any decision been made to subsequently pass on the reversed dividend to the underlying investors. Consequently, [the Luxembourg holding company] must be considered to be the beneficial owner of the DKK 5,444,200,000 dividend received and accordingly, is not liable to tax on the dividend, see section 2(1)c) of the Danish Corporation Tax Act (Selskabsskatteloven), and Article 10(2) of the tax treaty with Luxembourg. Consequently, liability for [the Danish subsidiary] for dividend tax not withheld is ruled out."