Further to the High Court judgment in the "ISS matter" regarding Danish dividend withholding tax and beneficial ownership, the Danish Ministry of Taxation has just issued a statement confirming that the Ministry will not be appealing the judgment. The High Court confirmed in the ISS judgment that a Luxembourg holding company receiving dividends from its Danish subsidiary was the beneficial owner of the dividends and therefore entitled to the zero rate of withholding tax provided for under the Danish participation exemption regime.

See our briefing on the High Court judgment

MINISTRY STATEMENT

Following the Ministry's defeat in the High Court, the Ministry was quick to state in the press that the new judgment does not set a general precedent for the 15-20 other pending Danish beneficial owner matters regarding cross-border dividends and/or interest payments made by Danish companies, since in the ISS matter the dividends never left Luxembourg, but returned to the Danish subsidiary in the form of a loan from the Luxembourg holding company and the Ministry regards this as decisive for the High Court's judgment.

Following up on these considerations, the Ministry has now confirmed in a statement dated 13 February 2012 that it will not be appealing against the High Court judgment:

"[...]

The Ministry of Taxation has decided not to appeal the decision concerning the Danish company.

The Ministry considers it a clear judgment, and one that is based to a substantial degree on specific facts. According to the High Court, it is a precondition for the denying of benefits of a tax treay "that the dividend has been, or is at least certainly intended to be, passed on" to the underlying owners. In this case the dividend distributed reverts to the distributing Danish company in the form of a loan.

In addition to the question of beneficial owner, a number of additional questions were raised in this case about:

  • whether the receiving parent company in Luxembourg, even if it did not qualify as beneficial owner under the double taxation treaty, would still be entitled to tax exemption under the Parent-Subsidiary Directive (90/435/EEC).
  • whether there was a retroactive tightening of practice, and
  • whether the Danish company would be liable to pay the dividend tax because of negligence.

Because of the decision on beneficial ownership, these questions were never answered.

In the Ministry's assessment, because of the High Court's clear judgment an appeal to the Supreme Court is unlikely to lead to any further clarification of the legal position, nor, consequently, to any decision on the above questions either.

In addition to the case concerning the Danish company, SKAT has brought actions against other Danish companies that have made tax-free payments of dividend and interest to parent companies established in EU countries or countries having concluded double taxation treaties with Denmark. Characteristically in those cases, the dividends and interest were in fact passed on or intended to be passed on to the underlying owners, and the amounts were not - unlike this case - returned to the distributing Danish company.

So it remains unclear what position the courts will adopt in cases where the amounts are in fact passed on or intended to be passed on to the underlying owners. It is the Ministry's view, therefore, that the cases in which the facts are different from the facts of this case ought to be tried by the courts so that the legal position in this area may be resolved finally."

TRIBUNAL RULING - INTRA-EU DIVIDENDS

It belongs to the picture that the Danish Tax Tribunal in December 2012 handed down a ruling confirming that dividend distributions made by a Danish resident company to its EU resident (Cyprus) parent company were protected against Danish withholding taxes by reason of the EU Parent-Subsidiary Directive alone, i.e. without having to consider the parent's beneficial owner quality under the applicable tax treaty.

The Tribunal stated in its reasoning that:

"It should be noted that the Cypriot company to which the dividend from the Danish subsidiary was paid is a legally incorporated and going concern in and with tax liability, etc. to Cyprus. The company is therefore the "rightful recipient" of the dividend under Danish law, even if it is not considered the "beneficial owner" of the dividend. Consequently, the Double Taxation Treaty between Denmark and Cyprus will apply to the assessment of any withholding tax (see section 2(1)(c) of the Danish Corporation Tax Act) - regardless of any transfer of the dividend to the US company. Neither the Double Taxation Treaty between Denmark and Cyprus with commentaries nor the commentaries to the Model Tax Convention seem to provide for the application of any other treaty.

Under Article 5 of Directive 90/435/EEC on a common system of taxation applicable in the case of parent companies and subsidiaries of different member states, dividend distributed by a subsidiary company to its parent company is exempt from withholding tax.

The general provisions of the Parent/Subsidiary Directive cannot be interpreted so as to include any reservation about abuse. But under Article 1(2), member states may derogate from the Directive in case of tax abuse, etc.

Article 1(2) of the Directive provides that the Directive does not preclude the application of domestic or agreement-based provisions required for the prevention of fraud or abuse.

Denmark has not adopted any statutory provisions for that purpose, but under the authority of public policy, including case law, formally legal and proper transactions can be disregarded in case of abuse. However, the Supreme Court has found no basis for setting aside the incorporation of a legally incorporated company merely because it was incorporated for tax saving purposes [...].

The legally incorporated and going concern in this case, the Cypriot company which owns the shares in the Danish company, is therefore the rightful recipient of the dividend distributed by the Danish company. The fact that the Cypriot company's only - or essentially only - activity is to hold shares in the Danish company does not mean that the company has no business activities or that any other outcome can be reached [...].

It follows that under Article 5 of the Directive, dividend is exempt from withholding tax.

As no tax is payable on the dividend under Directive 90/435/EEC, there is no limited tax liability in respect of the dividend under section 2(1)(c) of the Danish Corporation Tax Act.

Consequently, the [Danish subsidiary] has had no obligation to withhold dividend tax on the dividend under section 65(5) of the Danish Withholding Tax Act."

The Tribunal also held that protection under the Danish Treaty with Cyprus was not available since the Cyprus parent company was not recognised as the beneficial owner of the dividends. However, this was not decisive since the Parent-Subsidiary Directive applied.

OUTLOOK

It appears from the Ministry statement regarding the ISS matter that even though the Ministry has now thrown in the towel in the ISS matter, it intends to pursue the remaining pending Danish beneficial owner matters regarding cross-border dividends and/or interest payments made by Danish companies. Reasonably, not many (any?) other matters have facts similar to those of the ISS matter, but still the ISS High Court judgment would seem to be challenging for the Ministry's position in other matters.

It remains to be seen whether the Ministry will appeal against the Danish Tax Tribunal ruling described above.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.