Beneficial ownership: Final judgements in "Danish Cases" - dividends

On 9 January 2023, the Danish Supreme Court gave final judgements in the first two of the so-called "Danish Cases" to reach the Court. Ruling on dividends distributed to holding companies in Luxembourg and Cyprus, the Supreme Court held in favour of the Danish Ministry of Taxation. Read more below.

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.

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 beneficial ownership is not only an international tax law but also an EU law notion.

The CJEU judgement in the dividend withholding cases is avaliable here: Joined Cases C-116/16 and C-117/16

The CJEU judgement 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 judgements and the 3 May 2021 Danish High Court judgements, the Supreme Court gave final judgements in the dividend cases on 9 January 2023.

The Supreme Court judgements

The Supreme Court heard two cases and, accordingly, ruled on two sets of facts.

Before going into the specific cases, 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 in 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, which follows from the double tax treaties”. In the revised commentaries from 2003, this is clarified and specified, and it is among other things mentioned that it would not be in accordance with the object of the treaty to grant a tax exemption if a person, in another way than as an agent or intermediary, merely functions as a “conduit” for another person who actually receives the income in question.

One of the cases (C-116/16 T Danmark before the CJEU) concerned dividends from a Danish subsidiary to a Luxembourg parent company. The Supreme Court held that the dividend paid to the Luxembourg parent company had been transferred to the private equity funds controlling the structure and potentially to the ultimate investors, and that the Luxembourg company had no separate functions. Hence, neither the EU Parent Subsidiary Directive nor Danish tax treaties applied, and the dividend was subject to Danish withholding tax.

The other case (C-117/16 Y Denmark before the CJEU) concerned two dividend distributions from a Danish subsidiary to its Cyprus parent company, a major distribution in 2005 and a minor in 2006. The Cyprus parent company subsequently used the dividends to pay principal and interest on loans from its Bermuda parent company. The Bermuda parent company in turn used the proceeds to pay a dividend to its US parent company. The Supreme Court held that the Danish subsidiary was obliged to withhold tax on the major dividend distribution in 2005. For the minor distribution in 2006, the Supreme Court held that there was no obligation to withhold tax.

The High Court had come to the opposite conclusion, ruling that no tax applied to the major distribution, since the ultimate parent company in the structure was resident in the US and the dividends could have been distributed directly to the US parent without taxation at source. The Supreme Court, however, held that it was key that the dividend remained with the Bermuda company for a period of approximately five months, during which the amount was invested in bonds, and that during this time the group was free to decide to utilise the dividends for other purposes than to repatriate it to the US parent company. On this basis, the distribution of dividend triggered Danish withholding tax.

Also, based on the fact that the Danish subsidiary was familiar with the basis for the distribution to the Cyprus parent company, the Supreme Court found that the Danish subsidiary acted negligently in not withholding tax on the dividend distribution and hence was liable for the payment of tax.

Finally, the Supreme Court held that the Ministry of Taxation was entitled to claim late payment interest - including compound interest - on dividend taxes not duly paid. This conclusion should be seen in the light of the Danish rules, which do not allow a taxpayer to deposit disputed amounts in order to prevent interest from accruing. Due to this lack of a "deposit option" under Danish law, the amount of interest on late payment was about twice as high as the dividend tax claim itself.

Quite unusually, the Supreme Court included an obiter dictum in its reasoning, urging the Danish legislator to change the present interest rules:

At the same time, the Supreme Court finds that there is reason for the legislators to consider whether consequences of the Danish Tax Collection Act such as those at issue, which must be seen in the context of the question about the right to deposit disputed amounts, are desirable.

An English translation of the Supreme Court judgement can be found here.

Final Supreme Court judgements in the Danish Cases on interest withholding taxes are expected in May 2023.