Recently proposed amendments to Denmark’s tax laws are expected to rectify the discriminatory withholding tax treatment of certain comparable Danish and foreign entities.
On 14 April 2021, the Danish Government presented a bill proposal to Parliament suggesting changes to Danish tax law to align the taxation of dividends of non-residents with EU law. The bill is largely as a result of the decision of the Court of Justice of the European Union (CJEU) in case C- 480/16, Fidelity Funds. Under the bill (Bill No. L 211), the Danish tax treatment of certain domestic and foreign entities is expected to become more equitable, which will positively impact non-resident charities which hold Danish shares.
Current Danish tax rules dictate that investment institutes classified as “investment companies” are subject to a 15% withholding tax on dividends received from Danish companies, whether resident in Denmark or not. Investment institutes which qualify as “Investment Institutes with Minimum Taxation” are, however, presently exempt from the aforementioned withholding tax. Significantly, this exemption does not apply to non-resident investment funds.
Similarly, Danish associations and organizations whose purposes are purely charitable enjoy an exemption from dividend withholding tax (as well as other forms of income tax) according to Denmark’s current tax regime, while non-resident charities and non-profit associations do not. These non-resident charities are currently subject to 27% withholding tax. This is reduced to 15% withholding tax if, amongst other requirements, the recipient is resident in a jurisdiction that has signed a tax treaty or a tax information exchange agreement with Denmark.
In order to align the tax treatment of comparable Danish and foreign entities, the bill proposes a combination of imposing withholding tax on some previously exempt Danish entities, while extending exemptions enjoyed by other domestic entities to foreign investors.
Specifically, “Investment Institutes with Minimum Taxation” resident in Denmark will become liable for the same rate of withholding tax (15%) currently suffered by similarly classified non-resident investment funds, as opposed to being exempt from this tax. In this way, the treatment of these comparable Danish and foreign entities will align. The bill has, however, been criticized for increasing the tax burden for Danish investors investing via Danish “investment institutes”.
To rectify the disparate treatment of resident and non-resident charities, the latter will be granted the same withholding tax exemption currently enjoyed by the former. By extending the exemption in this way, non-resident charities and qualifying associations which receive dividends from Danish companies will become eligible to receive a full refund on withholding taxes. This is a significant development for non-resident charities invested in Danish assets as these are currently liable to either 27% or 15% withholding tax, depending on their country of residence.
If the bill is enacted into statute, the changes are expected to be effective as of 1 July 2021.
EU law includes the doctrine of the Free Movement of Capital, as per Article 63 of the Treaty on the Functioning of the European Union (TFEU), which calls for the fair and equitable taxation of comparable investment entities, regardless of their place of domicile. As such, when a member state treats comparable entities differently depending on whether they are domestic or foreign, they may violate this principle.
Many EU states are currently rectifying such discriminatory treatment. Italy, for instance, recently extended their withholding tax exemption which was previously applicable to Italian funds only, to include certain qualifying EU/EEA funds, effective as of January 2021.
This trend has, in part, been accelerated by infringement proceedings that have been brought forward by the CJEU. When countries, such as Denmark in this case, bring their domestic law in line with these EU principles, it can be considered akin to a tacit acknowledgement of discrimination having occurred prior to the rectification. Applications for refunds of taxes withheld prior to the expected change in domestic legislation, which are made on the basis of the aforementioned CJEU principles, should therefore have a stronger case.
For non-resident charities investing Danish equities, WTax can undertake to secure full refunds of withholding tax once the proposed changes are implemented. As these changes are also expected to bolster the likelihood of success for retrospective refund applications, as they represent Denmark’s implicit acknowledgement that previous withholding tax suffered by non-resident charities and investments funds was discriminatory, WTax encourages all eligible investors to urgently file their claims.
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