Beneficial ownership: Supreme Court decision in "danish cases" on dividends

by Ebba Perman Borg and Malene Overgaard


Business man standing by pillars

The Danish Cases consist of six cases decided on by the European Court of Justice (the “CJEU”) in 2019, on the interpretation of the beneficial owner concept under the EU Parent-Subsidiary Directive (joined cases T Danmark (C-116/16) and Y Denmark (C-117/16)) and under the EU Interest and Royalties Directive (joined cases N Luxembourg 1 (C-115/16), X Denmark (C-118/16) and C Danmark 1 (C-119/16) and Z Denmark case (C-299/16)). The CJEU concluded that a general prohibition of abuse exists in EU law and as such must be applied by all Member States. The CJEU then referred the cases back to Danish courts to assess whether the specific structures constituted abuse under EU law.

On 9 January 2023, the Danish Supreme Court gave final judgements in the first two cases to reach the Supreme Court Directive (the TDC Case (C-116/16) and the NetApp Case (C-117/16), relating the concept of beneficial ownership under the EU Parent-Subsidiary Directive.

Both cases deal with the withholding tax exemption, with the distributing Danish companies requesting exemption from withholding tax on dividend distributed to the EU parent companies. The Danish tax authorities denied exemption, arguing in each case that the parent company receiving the dividend was part of a conduit structure and could not be considered the beneficial owner of the payment.

In the TDC Case (C-116/16), dividends were paid from a Danish subsidiary to its Luxembourg parent. The Supreme Court held that dividends paid to the Luxembourg parent had been passed on to the private equity funds, and potentially to the ultimate investors, and that the Luxembourg parent had no separate functions. The structure was said to represent an abuse of the Parent-Subsidiary Directive, as well as the Denmark-Luxembourg double tax treaty, entailing that neither one could be applied. The dividends were thus subject to Danish withholding tax.

In the NetApp Case (C-117/16), two dividend distributions were made from a Danish subsidiary to its Cyprus parent. The Cyprus parent used the dividends received to repay loans and interest owed to its Bermuda parent. The Bermuda parent, in turn, used the payments received to pay dividends to its US parent. The Supreme Court held that the first dividend payment was subject to withholding tax, as the Bermudan company was deemed to be the beneficial owner of the dividend. For the second dividend, however, the US parent was considered to be the beneficial owner and, as a result, the Denmark-US double tax treaty should be applied. The difference between the two dividend payments was that the first payment remained in the Bermuda company for five of months, during which time it was invested in bonds, and was therefore considered to be at the free disposal of the Bermuda company, while the second payment was merely passed on. For the second dividend, the Supreme Court accepted the look-through approach, where a withholding tax exemption may apply under a double tax treaty with the resident country of the beneficial owner, even if an intermediary holding company (not being the beneficial owner) is unprotected.

The rulings further demonstration that the tax authorities are not obliged to determine who is in fact the beneficial owner as it is sufficient to determine that the relevant company that could be protected by the Parent-Subsidiary Directive or relevant double tax treaty is not the beneficial owner.

The Supreme Court's judgements in the other four Danish Cases on interest withholding taxes (joined cases N Luxembourg 1 (C-115/16), X Denmark (C-118/16) and C Denmark 1 (C-119/16) and Z Denmark case (C-299/16)) are expected later this year, and Schjødt’s tax lawyers will follow up with a new article at such time.

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