Danish Supreme Court ruling regarding beneficial ownership on interest

In a recent ruling by the Danish Supreme Court in the latter half of 2024, an interest payment involving a rather complex company structure was once again put under the microscope. The case underscores the strict stance of the Danish Tax Agency when beneficial ownership is in question.

Under Danish law, companies are required to withhold tax at a rate of 22% on interest payments to foreign entities. This obligation is waived or reduced if:

• The receiving entity is protected under the EU Directive 2003/49/EC on interest and royalties' taxation between associated EU companies.
   
• The interest is exempt or subject to reduced taxation under a Double Taxation Treaty (DTT) with the country of the recipient.
   

However, these exemptions are voided if the corporate structure is assessed to be primarily established for tax avoidance. In this case the Directive and the DDT's do not offer protection. If the receiving entity is merely a conduit for another party, the withholding tax obligation remains in effect unless the actual beneficial owner is protected by the Directive or a DTT.

In this Supreme Court case, Cook Denmark International Holdings ApS failed to withhold tax on an interest payment of EUR 58.9 million to its parent company, Cook Sweden Finance AB.

A restructuring of the Cook Group was completed involving the establishment of three new entities between Cook Denmark International ApS and its former parent, Cook International Finance Ltd. (Cayman Islands). Several loans were issued during the restructuring. Post-restructuring, the chain included two Swedish holding companies: Cook Sweden Holding AB and Cook Sweden Finance AB. These companies had no employees, turnover, or business activities in 2005-2007 beyond transactions related to loan arrangements and the transfer of dividends. The Supreme Court noted that these Swedish entities had zero net taxable income in Sweden. 

The interest payments were tied to loans of EUR 900 million within the group established during the restructuring. Cook Denmark International Holdings ApS had borrowed from Cook Sweden Finance AB, which, in turn, had secured loans from Cook International Finance Ltd. 

The Court highlighted that the Swedish companies were created to receive and transfer the interest payments to the Cayman Islands entity as part of a pre-arranged plan. Their sole purpose was to facilitate the movement of funds out of Denmark, thereby avoiding Danish withholding tax obligations.

The Danish company argued that if the Swedish entities were not the beneficial owners, then the ultimate parent, Cook Group (USA), should be recognised as such, which would allow the interest payments to be exempt under the DTT between the US and Denmark. However, the Supreme Court rejected this argument. It pointed out that Cook Group (USA) neither provided loans during the restructuring nor acquired the loan notes related to the restructuring. Instead, payments from the Cayman Islands entity to Cook Group (USA) were classified as dividends, not interest, confirming that Cook International Finance Ltd. (Cayman) was the beneficial owner. Consequently, since no DTT was entered with Cayman Island, Cook Denmark International Holdings ApS was liable to withhold tax on the interest payments to Cook Sweden Finance AB.

In contrast, the Supreme Court reached a different conclusion in the 2023 case involving NetApp Denmark ApS. In that case, NetApp was acquitted of withholding tax on a USD 18.6 million dividend payment to NetApp Cyprus, later passed on to NetApp Bermuda. The Court found that NetApp USA was the beneficial owner, as the financial records indicated that the original distribution from Denmark was included in the larger USD 550 million dividend distribution to NetApp USA. The documentation was key to establishing the beneficial ownership of the dividend.

These cases illustrate the Danish Tax Agency's strict and confident approach to beneficial ownership assessments. Danish companies must meticulously evaluate if the receiving company is in fact the beneficial owner and evaluate the risk of distributing funds without withholding tax. Non-compliance can lead to significant financial consequences as they are liable of the payable tax and may face fines. Clear documentation and an understanding of the legal framework are essential for managing these risks.