January 9, 2023
Danish Supreme Court issues rulings on beneficial ownership
In February of 2019, the Court of Justice of the European Union (CJEU) ruled on several cases regarding the Danish withholding tax regime with respect to dividends and interest paid by Danish companies to companies in other European Union (EU) Member States.1 These cases were submitted to the CJEU for a preliminary ruling by the Danish high courts.
The underlying issue in the cases was whether dividend and interest payments were exempt from withholding tax when the payments were made from a Danish company to a company resident within the EU, which then fully or partially made payments to an ultimate parent company residing in a third country.
Following the CJEU's decisions2 and remand to the Danish national courts, the six original cases regarding beneficial ownership of dividends and interest have been pending before the Danish courts. On 3 May 2021, the two dividend cases were decided by the Eastern High Court and appeals were subsequently filed with the Supreme Court.
On 9 January 2023, the Supreme Court decided both cases addressing issues on determining beneficial ownership, including the application of tax treaties.
This Alert summarizes the Supreme Court's ruling in each case.
C-117/16, Y Denmark
Case C-117/16, Y Denmark, concerned two dividend distributions from a Danish subsidiary to its Cyprus parent company. The Cyprus parent subsequently used the dividends to pay principal and interest to its Bermuda parent company. The Bermuda parent company then used the proceeds to pay a dividend to its United States (US) parent company under the American Jobs Creation Act.
The first distribution of DKK566 million was determined by the Danish subsidiary on 28 September 2005 and paid to the Cyprus parent company on 27 October 2005. The Cyprus company then paid the dividend to the Bermuda company on 28 October 2005.
On 3 April 2006, the Bermuda company paid the dividend to its US parent. The Danish High Court held that the Cyprus company was not the beneficial owner of the dividend because it had no power of disposition over the dividend and the sole purpose of interposing the Cyprus company in the structure was to avoid payment of Danish withholding tax. Based on this finding, neither the Danish-Cyprus tax treaty nor the EU Parent Subsidiary Directive were applicable.
However, the Court found that to the extent the beneficial owner was tax resident in a country distinct from the intermediary entity, and if Denmark has a tax treaty with such country, the beneficial owner would be entitled to invoke this tax treaty.
Reference was made to paragraph 12.2 of the Commentary on Article 10 of the OECD3 Model Income Tax Convention from 2003. In this situation, no tax treaty abuse would exist because it would be possible to pay a dividend from the Danish subsidiary directly to the beneficial owner without triggering Danish withholding tax. The Court held that the taxpayer had proved that the first distribution had been ultimately channeled to the US group parent company. On this basis the Court agreed that the taxpayer was entitled to invoke the Danish-US tax treaty whereby no Danish withholding tax was due on this dividend. The fact that the dividend stayed in Bermuda for five months did not make a difference because this was a relatively short period and because there was an original plan to repay the funds to the US parent company.
The Supreme Court agreed with the High Court that the Cyprus parent company did not qualify as beneficial owner of the dividend. By contrast, the Supreme Court disagreed with the High Court that the US parent company should be treated as beneficial owner of the dividend. It was key that the dividend remained with the Bermuda company for a period of approximately five months before a decision to the dividend to the US parent company was made. On this basis, the dividend triggered Danish withholding tax.
The second dividend of DKK92 million was determined by the Danish company in 2006, but it was not paid to the Cyprus parent company until 2010 when it was subsequently paid to the Bermuda company. The taxpayer contended that the second dividend was included in the original dividend paid by the Bermuda parent to the US group parent company in 2006. According to the High Court, the taxpayer had not proved that the second dividend in fact was included in the 2006 dividend paid to the US parent. The Danish-US tax treaty was thus not applicable for which reason this dividend triggered Danish withholding tax.
The Supreme Court disagreed with the High Court and held that the taxpayer had proven that the second dividend was included in the 2006 distribution, and that the US parent company was the beneficial owner of the dividend. On this basis the DKK92 million dividend did not trigger Danish withholding tax based on the provisions of the Danish-US tax treaty.
The taxpayer also presented additional reasons why the dividends did not trigger withholding tax.
First, the taxpayer asserted that the tax authorities' interpretation of the EU Parent Subsidiary Directive and the beneficial ownership clauses of the respective tax treaties involved a change of administrative practice to the detriment of the taxpayers which could only be applied following a notification thereof to the taxpayers. Specifically, the taxpayer's position was based on statements made by the Minister of Taxation according to which Danish withholding tax on dividends could be eliminated by interposing intermediary EU holding companies. The Court held that the statements did not express the view that the tax authorities would accept abuse of the EU directive and tax treaties, and that the taxpayer had not proven the existence of an administrative practice according to which the use of intermediary EU holding companies was accepted by the tax authorities.
Second, the taxpayer asserted that the Danish subsidiary had not acted negligently by not applying withholding tax and accordingly, the subsidiary was not liable for payment thereof. The Court held that the subsidiary was liable for the withholding tax because it was aware at the time of payment of all the facts related to the distributions and the purpose of interposing the Cyprus company in the structure.
The Supreme Court affirmed the opinion of the High Court regarding both these positions.
In summary, the first case is important because the Supreme Court accepts a look-through approach whereby Danish dividend withholding taxes may be eliminated under a tax treaty with the country of residence of the beneficial owner. However, this approach requires that the identity of each beneficial owner is disclosed, a certificate of residence is provided and that any intermediary companies are held not to be beneficial owners.
Case C-116/16, T Danmark
Case C-116/16, T Danmark, concerned a binding ruling from the Danish tax authorities from June 2011 according to which a dividend from a Danish subsidiary to a Luxembourg parent company organized as a partnership limited by shares (SCA) would trigger withholding tax.
The Luxembourg parent company owned 59.1% of the Danish subsidiary. The Luxembourg parent company was owned (>99%) by another Luxembourg company organized as a public limited company (SA), which was owned by private equity funds.
In August 2011, a dividend of DKK1,050 million was paid by the Danish subsidiary to the Luxembourg parent company. The Danish subsidiary applied withholding tax and submitted the tax to the tax authorities. At the same time an appeal against the binding ruling was filed with the National Tax Tribunal. The taxpayer prevailed before the Tribunal, and the tax authorities refunded the withholding tax. However, the tax authorities also filed an appeal against the decision with the courts.
The taxpayer contended that the Luxembourg company had its own separate management and a decision to pay a dividend could only be made by the management for which reason the company was the beneficial owner of the dividend from the Danish subsidiary. Based on limited information provided by the taxpayer regarding activities performed in Luxembourg, the Court held that the dividend paid to the Luxembourg parent company had been repaid to the private equity funds and potentially to the ultimate investors, and that the Luxembourg company had no separate functions.
On this basis, a statement from the Luxembourg tax authorities according to which the Luxembourg parent company "to the best knowledge … is the beneficial owner of any dividends paid on the shares in TDC" was not provided any weight. The taxpayer had not disclosed the identity of each of the ultimate investors and had not asserted that the private equity funds would be able to invoke Danish tax treaties if the dividends had been paid directly to the funds. On this basis, the Court concluded that neither the EU Parent Subsidiary Directive nor Danish tax treaties were applicable and that the dividend thus triggered withholding tax.
The Supreme Court affirmed the decision of the High Court.
For additional information with respect to this Alert, please contact the following:
EY P/S, Copenhagen
EY P/S, Aarhus
1 See Joint Cases C-116/16 and C-117/16 and Joint Cases C-115/16, C-199/16 and 299/16 of the CJEU.
2 For background on the CJEU rulings, see EY Global Tax Alert, CJEU rules on application of Danish withholding tax on dividends and interest payments, dated 26 February 2019.
3 Organisation for Economic Co-operation and Development.