Danish investment institutes with minimum taxation (“section 16 C funds”) effectively bear no Danish tax at fund level on dividends distributed from Danish companies whereas similar foreign investments funds traditionally have suffered a 15% Danish withholding tax after treaty relief.
This difference in tax treatment depending only on residency lead the foreign funds to challenge this regime as the difference in tax treatment constituted a violation of Article 63 TFEU. This led to CJEU decision C-480/16.
Fidelity (C‑480/16) and SKM2021.353.HR
In Case C‑480/16 Fidelity Funds, the CJEU ruled that restricting the Danish withholding tax exemption only to funds resident in Denmark violated Article 63 TFEU. The Court had no reason to comment on the other conditions in Section 16C of the Danish Tax Assessment act – conditions that funds must also meet to be eligible for a full refund.
In SKM2021.353.HR the Danish Supreme Court confirmed the C-480/16 decision and stated that foreign funds can be entitled to withholding tax exemption. However, the Supreme Court also stated that the remaining conditions described in Section 16 C must still be met for any fund requesting a full refund. Foreign funds that had not met these conditions for the relevant years would not be entitled to refunds beyond ordinary treaty relief.
From a practical point of view none of the funds in question had complied with the remaining conditions of Section 16C. The reason for this was that Section 16C according to the original wording was giving the possibility for favourable tax treatment to Danish funds only – leaving no reason for foreign funds to comply with the remaining conditions.
SKM2026.23.LSR
The Tax Appeals Board’s decision in SKM2026.23.LSR is the latest confirmation that foreign funds must meet all conditions in section 16 C to qualify for tax-exempt treatment.
The case concerned a German UCITS fund that had already obtained a 12% refund under the Denmark-Germany tax treaty but claimed an additional 15% refund for the years 2014–2017.
The Board rejected the claim as the fund had not complied with the remaining conditions of Section 16C in the fiscal years 2014-2017.
The problem is that the fund in 2014-2017 had no reason to comply with the other conditions in Section 16C as Section 16C in those years did not apply to foreign investments funds. Foreign funds only got the opportunity to use Section 16C after the CJEU decision in the Fidelity case and the following Supreme Court decision in 2021.
From a practical point of view many of the funds did not comply with Section 16C because only Danish funds could use that rule. Once it was established that also foreign funds were eligible to use Section 16C it was too late to do so for the fiscal years that had already passed.
As a result, foreign funds that were effectively prevented from using Section 16C by an unlawful domestic‑residence requirement are now denied the use of Section 16C because they cannot retroactively adjust their structure, governance or reporting to satisfy conditions that, at the relevant time, they had no legal possibility of meeting.
The conclusion is that full tax-exempt treatment under Section 16C is, as a practical matter, inapplicable to foreign investment funds for fiscal years prior to 2021.
For fiscal years from 2022 and onwards, Section 16C has been amended by legislation so that all minimum‑taxed funds (Danish and foreign) are now subject to a 15% withholding tax on dividends from Danish companies. Accordingly, full tax‑exempt treatment under Section 16C is no longer available for any (foreign or Danish) investment fund from 2022 and onwards.
Unfortunately, it seems that the past WHT treatment of foreign investment funds up to the fiscal year 2022, which in our view qualified as a discrimination, is not likely to be remedied via Danish court decisions.
