Conclusion after the judgment of the Danish Supreme Court
The Danish Supreme Court confirms that Danish withholding tax (“WHT”) imposed on dividends distributed by Danish companies to several non-Danish investment funds was not in conflict with EU law, and the Supreme Court therefore dismisses the claims made in the Fidelity Funds case.
Introduction and background
The Danish Supreme Court delivered its judgment on 24 June 2021 (case 59/2019).
The case relates to the non-Danish investment funds, Fidelity Investment Funds, Fidelity Institutional Funds and Fidelity Funds (the “Fidelity Funds”) being denied entitlement to a refund of dividend WHT which Danish companies had withheld on dividends paid to the non-Danish investment funds during the period 2000-2009.
Under section 16 C of the Danish Tax Assessment Act, investment funds could opt for exemption from WHT. The conditions in section 16 C had to be met, 1) the investment fund must be resident in Denmark, 2) the investment fund must opt for being qualified as a distributing investment fund and compute an annual minimum dividend distribution.
The non-Danish investment funds claimed that section 16 C of the Danish Tax Assessment Act was in conflict with Article 63 in the Treaty on the Functioning of the European Union (TFEU) on the free movement of capital.
Judgment by the Eastern High Court
The Danish Eastern High Court delivered its judgment on 2 April 2019.
The Eastern High Court had requested a preliminary ruling from the Court of Justice of the European Union (CJEU), which found that the condition of Danish residency was in conflict with Article 63 TFEU on the free movement of capital.
In its judgment, the Eastern High Court stated that non-Danish investment funds should generally be treated in the same way as investment funds resident in Denmark, meaning that non-Danish investment funds had to meet the same requirements as investment funds resident in Denmark in order to qualify for exemption from Danish WHT. The Eastern High Court ruled that even though the CJEU had found the residence requirement to be in conflict with EU law, the non-Danish investment funds would not be entitled to refund of WHT as they did not meet the other requirements set out in section 16 C of the Danish Tax Assessment Act.
Judgment by the Supreme Court
The Supreme Court upheld the judgment delivered by the Eastern High Court.
The non-Danish investment funds had stated that as section 16 C of the Danish Tax Assessment Act was in conflict with EU law, they would not be required to meet the second condition of section 16 C including computing an annual minimum dividend distribution.
The Supreme Court upheld the Eastern High Court’s ruling that even though the condition of residency in Denmark was found by CJEU to be in conflict with EU law, it did not in itself result in the non-Danish investment funds being entitled to refund of dividend WHT.
The Supreme Court further found that “…the requirement in Section 16 C to compute minimum dividend distribution comprising e.g., dividends from Danish companies should be considered as being justified by the necessity for correct taxation and coherence of the Danish tax system for investment funds and the requirement was not found to constitute an unproportional restriction conflicting with the free movement of capital under TFEU article 63…”.
The Supreme Court stated that during the years 2000-2009, the non-Danish investment funds had not elected to be qualified as distributing investment funds and to compute an annual minimum dividend distribution and thus the investments funds did not meet the condition to qualify for exemption from WHT. The Supreme Court subsequently ruled that the non-Danish investment funds were not entitled to the refund of WHT on dividends.
The Supreme Court found that there were no doubts about the understanding of the EU law which would warrant a preliminary ruling from the CJEU in relation to repayment in these cases.
New legislation as a result of the Fidelity Funds case
On 3 July, following the CJEU ruling, the Danish Parliament passed a bill (L 211) with the purpose of aligning the Danish rules with EU law. The bill entered into force on 1 July 2021.
Now all investment funds paying minimum taxation will be obligated to levy 15% Danish WHT on Danish dividends. This revision is meant to ensure that non-Danish investment funds are treated in the same way as Danish investment funds receiving dividends on Danish shares.
The way forward
It has to be expected that the Danish tax authorities (and the lower Danish tax courts) will follow the conclusions of the Danish Supreme Court and will therefore reject the refund of the WHT levied on dividends received by the investment funds.
Given that the rules are now aligned, if the rules were to be considered as conflicting with the free movement of capital under TFEU article 63, the CJEU must consider the conditions and requirements in their nature to be so specific to the national market, and thereby find that in fact only the national businesses would be able to meet these conditions and requirements.
Generally, it could be stated that the CJEU rulings vary to some degree regarding the free movement of capital and several relevant questions have not been brought before the CJEU. For now, there is still the pending case “AEVN” (Case C 545/19, Portugal) regarding WHT and this outstanding CJEU judgement could potentially show that the Danish Supreme Court made a wrong judgment.
It is currently considered to bring the judgment of the Danish Supreme Court to the attention of the European Commission. Based on this judgment, it could be argued that Denmark is in breach of the EU treaty and that Denmark in fact is illegally subsidizing the Danish investment funds.
Therefore, it should be considered to keep any current applications or appeals pending, in order to await future developments.
Beneficial ownership – still a hot topic in Denmark
On 3 May 2021, the Danish High Court held two rulings regarding beneficial ownership in the NetApp case and in the TDC case.3 The Danish Ministry for Taxation has now decided to appeal the NetApp case to the Danish Supreme Court. It is deemed likely that it has been an important factor for the Danish Ministry’s decision to file the appeal that a tax haven company is included in the structure. Additionally, TDC A/S has decided to appeal its case as well. We will keep you posted in our upcoming Newsletters.
New rules with respect to tax havens
With effect from 1 July 2021, the Danish Parliament passed new legislation which makes it more expensive to trade with so called “tax havens”.
Specifically, Danish individuals and businesses are no longer entitled to tax deductions for payments to affiliated recipients (being physical individuals or legal entities) in the EU’s blacklisted countries. As an example, a Danish subsidiary will not be entitled to a tax deduction for payments to a parent company in Panama. Such payments could be in relation to purchases of goods or payments of interest etc.
The only exception to the rule is if the taxable entity proves that the beneficial owner of the payment is a tax resident in an EU/EEA member state or a country which has entered into a DTT with Denmark.
Furthermore, taxation on dividends from Denmark to blacklisted countries is doubled. Before the new legislation was introduced, a shareholder receiving dividends from a Danish company was liable for approx. 22-27% WHT on dividends and in most cases with the possibility of receiving a full or partial reclaim. This has been changed to a final 44% WHT on dividends if the shareholder is established in a blacklisted country.
The list of 12 blacklisted countries includes (not limited to): Anguilla, Dominica, Fiji, Panama, Seychelles, and also Trinidad & Tobago (once the DTT with this country will be abolished within the near future).
If you wish to discuss these topics, please contact: Lundgrens, Copenhagen
Read the WTS Global Financial Services Newsletter here.
