- Professional News
- 09 January 2013
New anti-abuse bill
The beneficial ownership requirement is currently undergoing a rapid development in Denmark. On December 14, 2012, a new anti-abuse bill with the purpose of once again tightening the Danish tax legislation was adopted.
The new anti-abuse bill follows a line of high profile court and administrative cases on the issue of beneficial ownership and illustrates a tendency towards tightening the Danish dividend withholding tax rules to ensure that only beneficial owners in qualifying jurisdictions will qualify for the Danish dividend withholding tax exemption.
The bill, however, goes even further in that it also imposes a beneficial ownership requirement on other jurisdictions which to our knowledge has not yet been seen anywhere else in Europe.
The bill was made effective as of December 20, 2012. To prevent tax speculation, the rules concerning intra-group transactions were, however, made effective as of October 3, 2012 (the date the bill was published). The rules intended to terminate the use of Denmark as a holding jurisdiction were made effective as of January 1, 2013.
Further restrictions on the Danish rules on dividend withholding tax
The bill introduces withholding tax on certain intra-group sale of shares. The bill effectively targets transactions aimed at repatriating funds from Danish companies but could potentially affect a large number of intra-group transactions and restructurings.
The bill entails that any payment for shares in a group related Danish company will be considered dividends subject to Danish dividend withholding tax if
- the shares in a Danish company is transferred by the seller to another group related company, and
- the payment for such shares is in a form other than shares (e.g., a debt claim issued by the buyer), and
- the seller does not qualify for tax exemption on receipt of dividends or contributions from the buyer (if the seller is the legal entity) or is not domiciled in the EU/EEA or a tax treaty jurisdiction (if the seller is an individual).
This proposed amendment was prompted by an alert received by the Danish Tax Ministry under the early warning system by the Danish tax authorities of certain restructuring models whereby foreign parent companies which do not qualify for the Danish dividend withholding tax exemption have circumvented the Danish dividend withholding tax regime through the conversion of taxable dividends into tax exempt debt repayments.
Termination of Denmark as a holding company jurisdiction
A number of holding companies located in Denmark have over the years attracted media attention in Denmark due to the fact that no tax has been paid on rather large sums channelled through Denmark - often based on the misconception that Denmark hereby is defrauded of tax revenue when in fact no income has been produced in Denmark at all. The new bill is intended to abolish the use of Denmark as a holding jurisdiction.
The new anti-abuse bill effectively imposes a beneficial ownership requirement on other countries. Thus, if a Danish company is used as a perceived conduit entity in an international “treaty shopping structure” and thereby facilitating the reduction of foreign dividend withholding tax, Denmark will impose dividend withholding tax on the otherwise tax exempt dividend distributions from the Danish company to the foreign parent.
The bill will mainly affect international structures where a Danish company is used as an intervening holding company to funnel dividends received from a foreign subsidiary to its foreign parent, and therefore does not constitute a beneficial owner (according to the Danish tax authorities) of the dividends received from its foreign subsidiary.
The new anti-abuse rule does not apply if the distribution of dividends from the Danish conduit company is covered by the EU Parent/Subsidiary Directive.
The dividend withholding tax imposed will be equivalent to the dividend withholding tax that Denmark is entitled to impose under the applicable double tax treaty (typically 5% or 15%).
The bill is another example of the Danish Government’s disdain of the Danish investment climate. The bill may potentially affect a large number of intra-group transactions and restructurings – not least in connection with an exit from investments in Denmark. It will undoubtedly also add to the disrepute of Denmark as an unstable investment jurisdiction and reduce foreign investments into Denmark.