• Professional News
  • 18 January 2012

Danish Tax Authorities lose withholding tax case concerning DKK 165 million

On 13 January 2012, a decision of the Danish Tax Tribunal (the highest Danish administrative appeals body) made on 16 December 2011 in yet another case concerning the requirement to withhold dividend taxes was published. The Danish Tax Tribunal exempted a Danish company from a requirement to withhold taxes on dividends amounting to DKK 658 million (approx. EUR 88 million) paid out to a Cyprus-based holding company.

The facts of the case
Generally, a Danish company is required to withhold taxes on the distribution of dividends and the payment of group-internal interest, unless the recipient is entitled to an exemption under an EU Directive or a tax treaty. In the opinion of the Danish tax authorities, such exemption is only granted if the recipient qualifies as beneficial owner of the dividends.

The case concerns a Danish subsidiary company held by an American group via holding companies in Cyprus and Bermuda.

Following group-internal restructurings in September 2005, the Danish company distributed dividends amounting to DKK 566 million (approx. EUR 76 million). In October 2006, additional dividends of DKK 92 million (approx. EUR 12 million) were paid out. Shortly after receiving the dividends, similar amounts were paid on by the Cyprus company to its Bermuda-based parent company.

The Danish tax authorities imposed a withholding requirement on the Danish company due to the fact that the Cyprus company according to the tax authorities was not found to be the beneficial owner of the dividends.

The decision of the Danish Tax Tribunal
The Danish Tax Tribunal agreed with the Danish tax authorities in their view of the Cyprus company and, accordingly, the Cyprus company could not invoke the Danish tax treaty with Cyprus. In its decision, the Danish Tax Tribunal points to the fact that a number of interdependent transactions had been carried out in the group, which undisputedly resulted in the transfer of dividend payments from the Danish company to the Bermuda company via the Cyprus company. As the Cyprus company was found to be without substance, the company did not qualify as beneficial owner of the dividends.

The Danish Tax Tribunal did, however, side with the Danish company in the view that under the Parent/Subsidiary Directive (90/435/EEC), the Cyprus company is entitled to be exempt from the withholding requirement, regardless of whether or not the company qualifies as beneficial owner.

The Danish Tax Tribunal stated that the Parent/Subsidiary Directive does not prevent the use of national legislation or treaties necessary to avoid fraud or abuse. Denmark has, however, not implemented such legislation and, accordingly, the requirement for beneficial ownership does not apply. The Danish Tax Tribunal further states that there is a possibility of disregarding legal transactions to prevent abuse under basic principles of law. The Danish Supreme Court has, however, several times rejected to disregard legally existing companies, even if the singular reason for incorporating has been tax reduction.

On these grounds, the Danish Tax Tribunal found the Cyprus company to be entitled to protection under the Parent/Subsidiary Directive, and thus entitled to exemption from the withholding requirement, even though the company could not be considered the beneficial owner of the dividends.

Impact of the decision
The case at hand is one of many instigated by the Danish tax authorities concerning the requirement to withhold taxes. The case is the second case lost by the tax authorities within a range of few days. On 20 December 2011, the Danish tax authorities lost a case before the High Court concerning the requirement to withhold taxes on combined dividends of app. DKK 5.5 billion (approx. EUR 740 million). In that case, the recipient was found to be the beneficial owner.

The decision of the Danish Tax Tribunal is characterised by its clarity and the firm rejection of a requirement for beneficial ownership under the Parent/Subsidiary Directive. The structure established by the American group in question is, to a large extent, similar to the structures established by a number of other groups. The decision of the Danish Tax Tribunal may thus potentially impact the outfall in a number of the cases being brought forward by the Danish tax authorities concerning beneficial ownership.

However, due to the firmness by which the position of the Danish tax authorities is rejected, it must be expected that the case will be brought before the courts. A final decision of whether or not the Danish implementation of the Parent/Subsidiary Directive includes a requirement for beneficial ownership will thus not be available until a later time.

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