Denmark Tax Alert - 23 May 2012
Authorities rule EU parent is beneficial owner of deemed dividends
By Kim Wind Andersen and Birgitte Tabbert
The Danish National Board published a binding ruling on 2 May 2012 dealing with the beneficial ownership of deemed dividend distributions from a Danish company to a nonresident company (SKM2012.246.SR). The National Board ruled in favor of the taxpayer, with the result that the deemed dividend distribution could be distributed from Denmark free from Danish withholding tax.
This is the first case in which the National Board has found that an EU parent company was the beneficial owner of a deemed dividend distribution.
Under Danish tax law, dividends paid to a nonresident company are subject to withholding tax unless certain conditions are satisfied. The withholding tax is 27% (28% before 1 January 2012) on dividends paid to a parent company, but may be reduced or eliminated if a taxpayer is entitled to invoke the benefits of a tax treaty or the EU Parent Subsidiary Directive (PSD). To benefit from treaty protection, the taxpayer normally must be the beneficial owner of the dividend income.
Facts of the case
In the case before the board, a Danish company that owned two Polish companies wanted to undertake a reorganization. The legal structure before the reorganization was as follows:
The group considered transferring – through three exchanges of shares and one sale of shares – the two Polish companies to a Polish fund owned by Z B.V. (Netherlands).
The two Polish companies were transferred to a Polish fund owned by Z B.V. (Netherlands) for EUR 1, even though the market value of the Polish companies was approximately EUR 100 million. The approximate EUR 100 million value transferred was considered a deemed dividend distribution from F A/S to E A/S and thereby distributed out of Denmark.
A deemed dividend distribution from E ApS to D Holding Limited up through the chain to C N.V. Netherlands would not trigger Danish withholding tax, whereas a deemed dividend distribution all the way up to A Ltd. Jersey would trigger Danish withholding tax of 27%.
Decision of National Board
The National Board found that C N.V. (Netherlands) should be considered the beneficial owner of the deemed dividends, because the dividends were subsequently not passed on to A Ltd. Jersey or B Coöperatief U.A. (Netherlands). Accordingly, since C N.V. (Netherlands) was considered the beneficial owner of the dividends, no Danish withholding taxes should be imposed.
The legal structure after the reorganization was as follows:
Over the past few years, the Danish tax authorities have scrutinized the beneficial ownership of dividends distributed from Danish companies, which has resulted in a number of cases where the tax authorities have asserted that nonresident holding companies located in the EU or in tax treaty countries are not the beneficial owners of dividends and interest paid by Danish companies. The tax authorities have taken the position that the payments were subject to withholding tax and charged the Danish companies for failing to meet their withholding tax obligations.
Despite these cases, the new ruling by the National Board means it may be possible to avoid withholding tax, so taxpayers should request a binding ruling.