The present E-Alert intends to inform you about the situation of withholding tax (“WHT”) reclaims in Denmark.
Danish companies subject to Danish Corporate Income Tax (“CIT”) are generally required to withhold tax at a rate of 27 % on all dividends distributed. However, this withholding tax rate may be reduced to 15% on dividends distributed to Danish domiciled investments funds (i.e. investment companies or investment institutes with minimum taxation – “IMBs”).
Additionally, Danish resident investment funds that have elected status as IMB are eligible for an Exemption Certificate, making a Danish IMB holding an exemption certificate effectively tax exempt at fund level (i.e. no WHT applies on dividends distributions to an IMB).
Non-Danish investment funds should generally be regarded as investment companies for Danish purposes if such classification were to be made.
Electing status as IMB for Danish tax purposes is an option that is open to any investment company regardless of domicile, and any foreign fund may therefore elect status as IMB for Danish tax purposes.
However, this election should have an impact on the taxation of Danish individual taxpayers, but not on the Danish taxation of the foreign investment fund.
Indeed, the foreign investment fund should be eligible for neither the reduced rates on withholding under Danish domestic law nor the Danish Exemption Certificate Scheme.
Foreign investment funds should only be eligible for reductions of the WHT rate under applicable treaties.
Thereby, two investment entities that are completely similar for Danish tax purposes are taxed differently on Danish dividends solely on grounds of nationality.
Therefore, in our opinion, the Danish rules constitute discrimination against foreign investment funds, since the eligibility for beneficial rates on withholding tax is based on nationality alone.
Application of EU Cases
The Danish Ministry of Taxation admitted in a response to the European Commission in July 2012 that the Danish rules regarding withholding tax on dividends paid to non–Danish investment funds are in fact discriminatory towards such non–Danish investment funds. However, the Ministry of Taxation claimed that the discrimination was justified based on the need to guarantee the effectiveness of fiscal supervision and the preservation of the coherence of the tax system.
Arguments similar to those made by the Danish Ministry of Taxation were made by the French Authorities in the FIM Santander ruling (Judgment of the Court of Justice of the European Union (“CJEU”) of 10 May 2012 in the joined cases C-338/11 to C-347/11).
The CJEU rejected these arguments (as made by the French Authorities), stating that: “[…] Articles 63 TFEU and 65 THEU must be interpreted as precluding the legislation of a Member State which provided for the taxation, by means of withholding tax, of nationally sourced dividends when they are received by UCITS resident in another State, whereas such dividends are exempt from tax when received by UCITS resident in the Member State in question.”
In the Emerging Markets ruling (Judgment of the CJEU of 10 April 2014 in case C-190/12) the CJEU precludes tax legislation of a Member State (Poland), under which dividends paid by companies established in that Member State to an investment fund situated in a non-Member State cannot qualify for a tax exemption, provided that that Member State and the non-Member State concerned are bound by an obligation under a convention on mutual administrative assistance which enables the national tax authorities to verify any information which may be transmitted by the investment fund.
The ruling rejects an argument made by the Polish Government that is similar to that being made by the Danish Government, namely the “need to guarantee the effectiveness of fiscal supervision and the preservation of the coherence of the tax system”.
In the van Caster and van Caster ruling (Judgement of the CJEU of 9 October 2014 in case C-326/12) the CJEU precludes German legislation on taxation of funds even though resident and non-resident investment funds are treated equally.
The Court states that the German rules are: “[…] Likely to deter a German investor from acquiring holdings in a non-resident investment fund, since such an investment is likely to expose such an investor to a disadvantageous flat-rate tax without offering him the opportunity to produce evidence or information which could demonstrate the actual size of that investor’s income.”
The rules are restricting the free movement of capital because the obligations that must be complied with in order to avoid the flat-rate taxation for the investors are of such a nature that investment funds which are not active in the German market are not likely to choose to comply with them despite the unfavourable tax consequences of non-compliance.
Though the Danish rules allow non-resident funds to elect status as IMB, the administrative burden for non-resident funds means they are less likely to make such election unless they are specifically targeting the Danish market. The investors in a fund that has not elected IMB status cannot themselves provide reporting and information to the tax authorities to obtain the same tax treatment as the investor in an IMB. Consequently, the Danish rules should also be regarded as deterring Danish investors from acquiring holdings in a non-Danish investment fund.
We therefore take the view that Danish rules are contrary to the free movement of capital, which is in our opinion clearly a discrimination against foreign entities that are in a comparable situation.
We would advise our clients to file claims with the Danish Tax Authorities, which should be documented by dividend vouchers stating the tax withheld. WHT reclaims should be filed within 5 years from the due date of payment (on a day-to-day basis).
Should the reclaim be rejected, the next step would be to file a complaint with the Danish National Tax Tribunal.
KPMG can assist you with filing the reclaims with the Danish Tax Authorities and the Danish National Tax Tribunal.
For further information, please do not hesitate to contact us.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.