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September 30, 2022
2022-1470

Denmark provides withholding tax exemption for nonresident charities as of 1 January 2023

  • Nonresident charities will be exempt from Danish dividend withholding tax from 2023.
  • Nonresident charities will be entitled to claim a refund of Danish dividend withholding tax paid in 2022 and previous income years.

Executive summary

On 27 September 2022, the Danish Tax Authority published a practice memo according to which qualifying nonresident charities can obtain a tax exemption certificate meaning that they will be exempt from withholding tax on dividends for income years beginning 1 January 2023 or thereafter (SKM2022.464.SKTST). In addition, qualifying nonresident charities are entitled to a full refund of dividend withholding tax paid in income year 2022 and previous income years.

Detailed discussion

Background

Historically, resident associations and certain other organizations have been exempted from taxation of all income except business income. Tax exemption has included dividends. By contrast, nonresident associations have been subject to Danish taxation on dividends. The dividend withholding tax is 27%, and a 12% refund is applicable in most cases reducing the effective taxation to 15%.

The European Commission considered the Danish tax legislation to be in breach of the free movement of capital enshrined in Article 63 of the Treaty of the Functioning of the European Union and requested Denmark to amend the relevant provisions. Denmark amended its tax legislation in June 2021 (Act no. 1179 of June 8, 2021). The law change has the following consequences for qualifying nonresident charities:

  • From income years beginning 1 January 2023, or thereafter, exempt from taxation on dividends
  • For income year 2022 and previous income years, entitled to a full refund of dividend withholding tax

Qualifying charities

The following conditions must be satisfied for an entity to be in scope for tax exemption:

  • The taxpayer is resident in a foreign country.
  • The taxpayer is comparable to a Danish association.
  • The taxpayer has a pure charitable purpose as defined under Danish tax law.

The key question of whether a nonresident entity is comparable with a Danish association is not addressed in the law or the practice memo.

Whether a nonresident charity has a pure charitable purpose must be evaluated under Danish law. This will require that the potential beneficiaries are defined by objective criteria, and that the potential beneficiaries cover a wide group of persons. Distributions must be made to recipients that are in financial need, or that the recipient will use a distribution in general that will be considered to the benefit of society, e.g. distributions for social, artistic, scientific, or humanitarian purposes.

Tax exemption certificate

Tax exemption for nonresident charities will be applicable from income years beginning 1 January 2023 or thereafter. Qualifying nonresident charities can request a tax exemption certificate (frikort) from the Danish tax authorities, meaning that no dividend withholding tax must be applied by Danish companies. Considering the case handling time for obtaining a tax exemption certificate, nonresident charities should consider submitting an application as soon as possible.

Refund claims

Qualifying nonresident charities that have paid Danish dividend withholding tax in income year 2022 and previous income years will be entitled to a full refund from the Danish state. According to the Danish tax authorities, the statute of limitations is three years from 14 April 2021, i.e., that a refund claim can be filed for dividends declared 14 April 2018 or thereafter. In this respect it should be noted that the question of whether the statute of limitations for a dividend refund claim is three or five years is currently subject to litigation. Qualifying nonresident charities may thus consider filing a refund claim covering five years.

A refund claim must be filed no later than six months after end of income year 2022.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young P/S, Copenhagen

Ernst & Young P/S, Aarhus

 

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