Supreme Court ruling on withholding tax on interest

On 4 May 2023, the Danish Supreme Court ruled in two additional cases regarding the “Danish Cases” on Beneficial ownership. The “Danish Cases” consist of six cases decided by the European Court of Justice (the “CJEU”) in 2019, on the interpretation of the beneficial owner concept under the EU Parent-Subsidiary Directive and under the EU Interest and Royalties Directive. The CJEU concluded that a general prohibition of abuse exists in EU law which 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.

The two cases regarding the interpretation of the beneficial owner concept under the EU Parent-Subsidiary Directive – regarding dividend payments – were decided by the Supreme Court on 9 January 2023. You can read more about this here.

The two cases the Supreme Court jointly ruled on 4 May 2023 is The Takeda Case (C-118/16) and the NTC Case (C-115/116). The cases centre on whether the taxation of interest should be waived or reduced under Directive 2003/49/EC on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States (the Interest/Royalty Directive) or waived under the double taxation treaty for the Nordic countries and with Luxembourg respectively.

Both cases involved Danish subsidiaries which on intragroup loans from their parent companies had made interest payments to the parent company located in Sweden and in Luxembourg respectively. The dispute was whether the two Danish subsidiaries should have withheld tax at source in connection with interest payments to each their parent company, which would be the case if no protection from the directive or the relevant treaty was rendered.

The determining factor in the cases was whether the parent companies located in Sweden and Luxembourg were to be considered as “beneficial owners” of the interest received or whether the parent companies were merely “flow-through companies”. The Supreme Court stated that a beneficial owner is the entity which, from an economic point of view, receives the interest paid and has the power to freely determine its utilisation.

In the Takeda case, the Supreme Court found that the structuring of companies in Sweden followed by several loans, capital increase and group contributions were seen as an organised tax arrangement to provide tax deductions in Denmark without taxation of the interest. This constituted an abuse of EU law and no protection was rendered. Neither of the two Swedish companies in the structure could make decisions over the received interest and they were merely flow-through companies. Furthermore, it was not documented that the SICAR company in Luxembourg, a company above the Swedish companies, was the beneficial owner, and neither was it documented that any investor was the beneficial owner, as the agreements between the companies, the venture capital funds, shareholders and investors involved in the Takeda case had not been provided to the court. Thus, it was not proven who the beneficial owner of the interest was. The Supreme Court found that it was not crucial for the ruling to establish who in fact was the beneficial owner.

In the NTC case, the Supreme Court found that the Luxembourg structure was setup to ensure protection which the venture capital funds did not have neither through the directive, nor through any double taxation treaty. This was merely an organised tax arrangement and constituted an abuse of EU law. Furthermore, the companies in Luxembourg were merely flow-through companies and therefore not the beneficial owners of the interests. It was not clarified what finally happened to the interest after it had flowed through the parent company in Luxembourg and therefore it was not possible to establish who in fact the beneficial owner was. All in all, no protection from the directive or tax treaty was rendered.

Consequently, the Supreme Court ruled in both cases that the Danish subsidiary was obliged to withhold tax at source in connection with the interest payments made. The Danish subsidiaries had no reason to believe that the interest payments were not taxable in Denmark, and therefore the Danish subsidiaries had acted negligently by not withholding tax at source. On these grounds they were found to be liable for payment of the tax on interest. The Supreme court stated that it was not relevant for the ruling whether the interest was in fact paid or if it was just attributed the debt.

The Supreme Court therefore upheld the High Court's decisions, according to which Takeda was liable for the payment of DKK 369 million in taxes on interest and NTC was liable for the payment of DKK 817 million in taxes on interest.