On 4 May 2023, the Danish Supreme Court gave final judgments in the last two of the so-called "Danish Cases". Ruling on interest payments and accruals to group companies in Sweden and Luxembourg, the Supreme Court held in favour of the Danish Ministry of Taxation.
The focal point in the "Danish Cases" is the "beneficial owner" quality of EU resident companies receiving dividend or interest payments or accruals from their Danish resident group companies, and whether the Danish companies should have withheld tax on such payments and acted negligently in not withholding. On 9 January 2023, the Supreme Court gave judgment on dividend withholding tax.
Read more: Beneficial ownership: Final judgments in "Danish cases" - dividends
CJEU rulings
In February 2019, the Court of Justice of the European Union (CJEU) ruled in several joined cases regarding the Danish withholding tax regime for dividends and interest paid to companies in other EU Member States. The CJEU ruled that a general prohibition of abuse exists in EU law and must be applied by the Member States, and that the beneficial ownership doctrine not only applies in international tax law but also in EU law.
The CJEU judgment in the dividend withholding cases is available here: Joined Cases C-116/16 and C-117/16.
The CJEU judgment in the interest withholding cases is available here: Joined Cases C-115/16, C-118/16, C-119/16, C-299/16.
Following the CJEU's judgments and the Danish High Court judgment in 2021, the Supreme Court on 4 May 2023 gave final judgments in the interest cases.
Supreme Court judgments
The Supreme Court heard two cases together and, accordingly, ruled on two sets of facts.
Before going into the specific cases, the Supreme Court reiterated its judgment of 9 January 2023 on dividends. The Supreme Court stated that the notion of "beneficial ownership" must be understood in light of the OECD Model Convention, including the 1977 commentaries regarding the countering of abuse. According to these commentaries, the notion is intended to ensure that double tax treaties do not aid tax evasion or avoidance through "artifice" or "artificial legal constructions", which makes it possible to "benefit from both the advantages following from certain national legislation and the tax exemptions that follow from the double tax treaties". In the revised commentaries from 2003, this is clarified and specified, and it is mentioned, among other things, that it would not be in accordance with the object of the treaty to grant tax exemption if a person, other than as an agent or intermediary, merely functions as a "conduit" for another person who actually receives the income in question.
Both cases concerned payments and accruals of interest from a Danish subsidiary to its Swedish or Luxembourg parent company. The Supreme Court held in both cases that the Danish subsidiary was obliged to withhold tax at source in connection with the interest payments made, and, further, that the Danish subsidiary acted negligently in not withholding tax and hence was liable for payment of the tax.
The Supreme Court stated that in both cases a restructuring had been carried out, involving the establishment of companies in Sweden or Luxembourg, and that the restructuring had to be seen as a comprehensive and "prearranged tax arrangement".
The Supreme Court held that the foreign companies should be considered flow-through entities since they could "not freely dispose" over the interest from their Danish subsidiary. Hence, neither the EU Interest and Royalties Directive nor Danish tax treaties applied.
Further, the Supreme Court held that in the assessment of whether a company should be considered the beneficial owner of the interest or should be considered a flow-through entity, it is irrelevant whether effective payment of the interest has taken place or whether the interest has been added to the loan principal, just as it is irrelevant whether the interest has subsequently been converted into shares of the debtor company.
Moreover, the Supreme Court concluded that it could not be determined who, when not the immediate recipient, was the ultimate beneficial owner of the interest because of lack of information on what had ultimately happened to the interest, etc.
Finally, the Supreme Court held that in both cases the Danish subsidiary was familiar with the basis for the interest payments being subject to Danish tax and, accordingly, acted negligently in not withholding tax and hence was liable for payment of the tax.
Originally published 08 May, 2023
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