Foreign sovereigns become subject to Danish dividend tax
A bill has just been presented, proposing to abolish the current exemption of foreign sovereign entities from Danish withholding tax on dividends. The change will apply to dividends distributed on 1 March 2023 or later.
Historically, a foreign sovereign entity has been exempted from Danish tax on dividends to the extent that the foreign entity was comparable to the Danish State and its institutions. That will now come to an end as a measure to finance Danish Government aid to citizens challenged by the rapidly increasing energy prices.
Dividends distributed on 1 March 2023 or later will be subject to a 22% final Danish withholding tax, irrespective of the size of the foreign sovereign's shareholding. If a double taxation treaty applies, the lower treaty rate will prevail, typically 15%.
As for the obvious considerations that the change may fall foul of Denmark's obligations under international law, the preparatory works for the bill state just that (unauthorised translation):
"It is assessed that the introduction of limited tax liability on dividends received by foreign states and their institutions from sources in Denmark will not conflict with Denmark's obligations under international law. States have organized themselves in such a way that entities which are an integral part of the state handle placement of government funds in shares and other securities with the aim of achieving a return. Such activity in the form of investment management is not considered to differ from the acquisition of shares by companies and associations to such an extent that it can warrant that the states and their institutions should not be taxable on share dividends."
Similarly, any concerns as to the compatibility with EU law are laid to rest as follows (unauthorised translation):
"The Danish state and its institutions are exempt from tax liability […]. With the proposal for dividend taxation of foreign states and their institutions, there will be a difference in relation to the treatment of dividends paid to the Danish state and its institutions. However, it is assessed that this different treatment will be compatible with EU law. Danish taxation of a foreign state will involve an increase of Danish tax revenue and will thus amount to an extra contribution to the financing of the Danish state's expenses. Conversely, Danish taxation of the Danish state will not provide the Danish Treasury with increased funds to finance public expenditure, as it will simply be a transfer of funds within the state. As a result of this difference in the effects of introducing taxation of the Danish state and of a foreign state, it is assessed that the situations are not comparable and that the introduction of limited tax liability on dividends to foreign states must therefore be considered compatible with the EU rules on the free movement of capital."
The bill is expected to go through Parliamentary hearing and is currently scheduled to be adopted 29 September 2022.
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