No Danish dividend tax refund to foreign investment funds

Background

In 2016 the Danish Eastern High Court referred the case to the Court of Justice of the European Union (CJEU). The CJEU concluded that the Danish rule exempting Danish investment funds from withholding tax constituted a restriction on the free movement of capital because of the differing tax treatment of non-resident investment funds. 

In the relevant years 2000-2009, investment funds would qualify for exemption from paying withholding tax on dividends from Danish companies if two conditions were met. First, the investment fund had to be resident in Denmark. Second, it was a requirement that the investment fund had elected to be qualified as a distributing investment fund under section 16 C of the Danish Tax Assessment Act. In that case, the investment funds had to withhold tax based on the calculation of an annual minimum distribution which included, inter alia, dividends from Danish companies, so that the minimum distribution could be taxed at the level of the investors within the framework of the Danish tax legislation.

Read more about the background, the Danish rules and the CJEU decision here: The Court of Justice of the European Union rules against Danish tax legislation (kromannreumert.com)

The Danish Supreme Court's ruling

On 24 June 2021 the Danish Supreme Court handed down the final judgement in the Fidelity Fund case.

The foreign investment funds argued before the Supreme Court that the CJEU had set aside the Danish rule exempting Danish investment funds from withholding tax to the effect that the funds were entitled to a refund of the dividend tax.

However, the Supreme Court read the CJEU's judgement differently. According to the Supreme Court, the requirement for calculation of an annual minimum distribution was justified by the need for correct taxation and the need to safeguard the coherence of the Danish tax system. The Supreme Court also held that the requirement did not constitute a disproportionate restriction. Therefore, the fact that the requirement for residence in Denmark was contrary to EU law did not in itself make the foreign investment funds eligible for dividend tax refunds. 

The Supreme Court further concluded that since the foreign investment funds had chosen not to be qualified as distributing investment funds and did not calculate an annual minimum distribution, they did not qualify for exemption from tax at source on dividends.

Accordingly, the Supreme Court ruled that the foreign investment funds were not entitled to a refund of taxes withheld, even though the Danish residency requirement had to be disregarded as being contrary to EU law.

New rules introduced

In June 2021, Danish Parliament passed a Bill amending the rules. It provides that all Danish investment funds qualifying as distributing investment funds will no longer be entitled to receive tax-exempt dividends from Danish companies, thus eliminating the difference in the tax treatment of non-resident investment funds and Danish investment funds.

Read more about the new rules here: Taxation of investment funds in Denmark (kromannreumert.com)   

Kromann Reumert's tax law group provides focused advice, planning and litigation in the fields of Danish and international tax law and is, of course, available if the above gives rise to any questions.