Advocate General issues opinion on Danish with­holding tax treatment of dividends distributed to foreign investment funds

Overview

On 13 October 2016, the Danish Eastern High Court referred the case to the Court of Justice of the EU (CJEU). The Danish Eastern High Court enquired whether the principle of free movement of capital precluded a tax regime like the Danish, where a non-resident investment fund pays a 15 per cent withholding tax on dividend payments from Danish companies. As an equivalent Danish investment fund can obtain an exemption from tax at source, either because it makes a minimum distribution to its members, which is subject to withholding tax, or technically calculates a minimum distribution that is also subject to withholding tax. 

Advocate General's opinion

In the opinion, the Advocate General states that the existing Danish tax legislation constitutes a restriction of the free movement of capital due to the difference in the tax treatment of non-resident investment funds. 

The Advocate General states that due to the logic underpinning the Danish rules – exemption from tax at source is granted to resident investment funds only if it is accompanied by an (actual or technical) minimum distribution to their members, on which those undertakings levy a tax by means of a tax at source – both the situation of the investment fund and of its members should be considered when examining the comparability of the situations. In this regard the tax situations of the members are to be examined from three different angles: 

1. The tax situation of resident members, depending on whether they make investments in a resident investment fund or a non-resident investment fund. 
2. The tax situation of resident members of a resident investment fund and that of non-resident members of a non-resident investment fund.
3. The comparability of the situations of non-resident members, depending on whether they make investments in a non-resident or resident investment fund is examined.

Based on this analysis, the Advocate General concludes that the Danish rules constitute a restriction of the free movement of capital because they apply to objectively different situations. Hence, the rules can only be upheld by an overriding reason in the public interest. 

The Advocate General dismisses the Danish government's argumentation that the restriction is justified based on a balanced allocation of taxation powers, but accept the argumentation that the restriction may be justified based on the need to safeguard the coherence of the tax system, as he considers there to be a direct link between the advantage granted and the tax levied. Hence, the issue at hand is, in essence, whether the Danish rules are appropriate and proportionate to safeguard the coherence of the tax system. 

On this the Advocate General concludes that the rules are not appropriate and proportionate as a less strict measure – in the form of a measure where the undertakings are allowed the exemption provided that the tax authorities of the relevant Member State ensure that the undertakings fulfil similar requirement as the Danish investment funds – is available. 

In the finishing note, the Advocate General observes that as Fidelity Fund did not attempt to meet the Danish requirement – even as a precautionary measure – then in all likelihood Fidelity Fund may not succeed in its action.

Comments

On the face of it, the opinion of the Advocate General might seem like a win for Fidelity Fund, as the current Danish rules are considered a restriction and a disproportionate measurement, but at the same time the victory is a bit hollow as Fidelity Fund may not in all likelihood succeed in their specific claim, due to their specific facts and circumstances as they did not try to fulfil the Danish requirement.