Foreign civil proceedings against dividend WHT claimants and their advisors

According to the Minister for Taxation the defendants will be presented with claims in the matters regarding fraudulent reclaims of Danish dividend withholding tax in the amount of more than DKK 12.7 billion (USD 2.1 billion).

Furthermore, the Ministry announced that additional proceedings are expected to be initiated against pension funds and companies in the US, Great Britain, Canada, Luxembourg and elsewhere.

The setup behind the scandal

According to the Danish tax authority, pension funds have been used in a systematic fraud where Danish dividend withholding tax has been reclaimed even though the pension funds have not owned shares in any Danish dividend paying companies.

According to writs filed, the setup has been that US citizens have established one or more pension funds and granted an intermediary a power of attorney to make reclaims on behalf of the fund. The intermediary has then contacted several companies specialized in processing tax refunds. Using false receipts from custody accounts, these companies have then reclaimed dividend withholding tax from the Danish tax authority.

The Danish tax authority claims that the intermediary brokers and financial institutions involved have profited from the fraud and has now initiated civil proceedings against the participants to the schemes and is claiming damages.

Reclaiming Danish dividend WHT 

In parallel with the proceedings, the Danish tax authority has started processing foreign investors' claims for repayment of Danish withholding tax following the total freeze of such claims in 2015. The first claims are now being paid out.

Since 2015, the process and requirements for making a (successful) reclaim have become significantly more comprehensive and burdensome for foreign investors. As of April 2017, applications for repayment of withheld Danish dividend tax must be submitted using an online form available on the website of the Danish tax authority. 

To apply for repayment, several requirements must be met, and the applicant must document:

1. the tax residency of the shareholder;
2. that the shareholder has received Danish dividend, and the amount of the dividend received;
3. that Danish dividend tax has been withheld, and the amount of the tax withheld;
4. that the shareholder was the beneficial owner of the shares at the time of the decision to distribute dividend;
5. that the shareholder is liable to tax in another country, and that the tax withheld exceeds the applicable tax rate under the double tax treaty; or
6. that the withheld tax exceeds the applicable tax rate under applicable Danish tax law. 

Although no official guidance on the documentation required has been published, in our experience the Danish Tax Authority primarily focus on items 2 and 4 on the list above. Documentation required to meet those requirements includes:

• complete data trails in the form of bank transcripts 
• swift notifications 
• purchase and sales notes and similar transaction notes.

Documentation must be provided both regarding the cash and transaction flow for the purchase and sale of the shares and for the distribution and transfer of the dividend all the way through the chain from the dividend paying company to the shareholder.