On 20 December 2017, the European Union (EU) Advocate General (AG) issued his opinion on whether the Danish rules on withholding tax on dividends to nonresident mutual investment funds are in breach with the EU principles of free movement of capital (56 TEF/63 TEUF) and free movement of services (49 TEF/56 TEUF).

Danish collective investment funds may be eligible for zero-percent withholding on dividends distributed from Danish companies, while nonresident collective investment funds are subject to a Danish withholding tax of 27%.¹ A large number of nonresident investment funds have filed EU-law based reclaim applications, with the Danish Tax Authorities rejecting all such claims, arguing that the Danish withholding tax rules are not discriminatory as they may be justified by the need to ensure a balanced allocation of taxation powers and to safeguard the coherence of the tax system.

A nonresident mutual investment fund has brought a claim for refund of Danish dividend withholding tax before the Danish national courts claiming that the Danish rules are in breach of EU law. The nonresident mutual investment fund and The Danish Ministry of Taxation have agreed to request a preliminary ruling from the Court of Justice of the European Union (CJEU) and the Danish Eastern National Court has in a ruling of 8 June 2016 referred the case to the CJEU.²

In his opinion of 20 December 2017, the AG held that the Danish withholding tax rules is in breach of the free movement of capital (article 56TEF/63 TEUF). At the same time the AG notes, that the claimants "[…] cannot in all likelihood, succeed [….]" in its proceedings with the Danish High Court, as the claimant did not attempt, even as a precautionary measure, to meet the Danish minimum distribution requirements in the tax years at issue.

Implications

The AG concluding that the Danish withholding tax rules are in breach of the fundamental EU rights of freedom is generally a positive step towards nonresident mutual investment funds obtaining successful refunds in the Danish market. The AG statement that a refund should be granted only if a fund has met the Danish minimum distribution requirements may, if upheld by the CJEU and the Danish High Court, on the other hand imply, that several nonresident funds may not be entitled to refunds despite of the Danish rules being discriminatory. This latter part of the AG opinion is questionable as a nonresident fund would not have been eligible for zero-percent Danish withholding tax even if the minimum distributing requirement had been satisfied.

EU and third country investment funds and investment fund managers should consider filing protective claims for refund of Danish dividend withholding tax.

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ENDNOTES

¹ Typically, the withholding tax rate may be reduced to 15% in accordance with a tax treaty or Danish domestic legislation.

² See EY Global Tax Alert, Danish court refers question of discriminatory withholding tax treatment of dividends distributed to foreign investment funds to CJEU, dated 22 June 2016.

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CONTACTS

For additional information with respect to this Alert, please contact the following:

Ernst & Young P/S, Copenhagen

• Jesper Frøkjær
  jesper.froekjaer@dk.ey.com
• Jens Wittendorff
  jens.wittendorff@dk.ey.com

Ernst & Young LLP, Nordic Tax Desk, New York

• Antoine Van Horen
  antoine.vanhoren@ey.com
• Susanne Hamre Skoglund
  susanne.skoglund@ey.com

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ATTACHMENT

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