Following the withholding tax issues in Denmark where approx. DKK 12bn of Danish WHT was wrongfully reclaimed, the Danish Ministry of Taxation has worked on preparing a new model for dividend taxation in Denmark.
During 2020, it was announced that the Danish Ministry of Taxation had reached an agreement with Finans Danmark (the Danish Financial Sector Organization), certain banks and VP Securities (the Danish Central Securities Depositary) on a new model on relief at source, contrary to the current reclaim at source model.
During 2020, a draft bill was presented, which is currently subject to public hearing. If passed, the general expectation is that the rules will enter into force during 2023 at the earliest.
Current rules
Under the current rules, 27% WHT is levied on dividend payments to foreign shareholders. However, under most double-tax treaties the WHT rate may be reduced. Shareholders entitled to a lower rate than 27% may submit to the Danish Tax Agency an application for a refund (in Danish: Skattestyrelsen).
New model
The proposed new model introduces a relief at source of Danish WHT rather than a refund.
In order to apply for relief at source, the foreign shareholder will be required to register with the Danish Tax Agency with their identity and other information required. The registration shall be made by the shareholder’s custodian bank.
Shareholders such as foreign pension funds or states who may be entitled to a lower tax rate (typically 0%) must be pre-approved in advance by the Danish Tax Agency.
Once the required information has been received, the DTA issues an identification number.
Based on the registration of the shareholder, the correct WHT amount is deducted on the dividend payment when paid to the shareholder. Accordingly, the shareholder will receive a net dividend payment at the correct WHT rate.
To the extent that a correction of the WHT deducted is required, this may be done for a specified period subject to adjusted information provided.
Objective liability for the banks
Under the new model, the custodian banks assume objective liability.
After the payment of dividend tax, the Danish Tax Agency may carry out spot checks. If too little WHT was levied on the dividend payments, the custodian bank shall be objectively liable for the correct payment of WHT to the Danish Tax Agency.
The custodian bank’s objective liability comprises situations where errors have been revealed in spot checks, e.g. when applying the wrong tax rate or if the recipient is not the beneficial owner of the dividend. However, the objective liability does not apply to institutional shareholders who must be pre-approved by the Danish tax authorities.
The banks’ participation in the new model is conditioned upon the banks being able to recover any losses from the foreign banks, i.e. the foreign banks must choose to join the model as well.
Beneficial owner
It is a requirement for applying a reduced double tax treaty rate that a beneficial owner statement has been signed by the shareholder. The beneficial owner statement contains a description of the circumstances in which the immediate recipient of the dividend payment should not be considered the beneficial owner according to Danish law.
Mark-to-market taxation of real estate
On 10 October 2020, the Danish government announced that it expects to introduce a mark-to-market taxation of the value of real estate owned by Danish and foreign real estate companies exceeding a holding threshold of DKK 100,000,000.
Mark-to-market taxation changes the current legislation, whereby the taxation of gains from the sale of real estate can be avoided by transferring the properties by way of a tax exempt transfer of shares. Under the proposed new rules, the gain would be calculated as the difference between the value of a property at the end of the income year and the value at the beginning of the income year.
Furthermore, mark-to-market taxation also provides for taxation at an earlier stage, i.e. before realization of the gain.
At present, a draft bill is yet to be presented. Accordingly, we cannot present details of the envisaged rules yet. However, it is expected that a threshold of DKK 100,000,000 will be introduced, so that groups holding minor property portfolios are exempt from the new mark-to-market taxation.
Based on information from the Danish Ministry of Taxation, it is expected that the properties in question will receive a step-up in their tax basis equal to the fair market value of the properties on 1 January 2023, or an alternative date on which the rules will enter into force. Accordingly, only gains arising after that date will be subject to this taxation.
New initiatives to combat use of non-cooperative jurisdictions
On 25 February 2021, the Danish Ministry of Taxation issued a statement on the combat against the use of companies resident in jurisdictions on the EU list of non-cooperative jurisdictions (the “EU Blacklist”), which is updated twice per year.
The statement addresses two specific measures to be adopted. Firstly, Danish companies will not be able to deduct payments made to group companies resident in jurisdictions on the EU blacklist. Secondly, dividends paid from a Danish company to a parent company/ ultimate owner resident in an EU blacklist jurisdiction will be subject to a 44% WHT in Denmark, as opposed to the current standard WHT rate of 27% (22% subject to reclaim).
On 27 January 2021, a draft bill was presented implementing the rules above and is currently subject to public hearing. If passed, the bill is intended to enter into force on 1 July 2021. Accordingly, payments made on or after this date will be subject to the new rules.
Furthermore, the Danish Ministry of Taxation issued a statement on 25 February of its intention to terminate the double tax treaty with Trinidad and Tobago as the country is listed on the EU blacklist.
If you wish to discuss these topics, please contact: Lundgrens, Copenhagen
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