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May 6, 2021
Danish Government proposes new rules to align dividend taxation with EU law
On 14 April 2021, the Danish Government introduced Bill No. L 211 (the Bill) before Parliament to align Danish taxation of dividends paid to nonresidents with European Union (EU) law.
Under the Bill:
The bill also introduces the possibility for equity-based investment companies to receive the “equity based” classification from the time of establishment. It is currently only possible to receive the “equity based” classification the year after establishment.
This bill is being criticized for increasing the tax burden for Danish investors in Danish investment institutes.
Investment Institutes with Minimum Taxation
In case C-480/16, Fidelity Funds, the CJEU ruled that Article 63 of the Treaty on the Functioning of the European Union (TFEU) must be interpreted as precluding legislation of a Member State, under which the dividends distributed by a company resident in that Member State to a nonresident UCITS are subject to withholding tax, while dividends distributed to a UCITS resident in that same Member State are exempt from such tax, provided that that the UCITS makes a minimum distribution to its members, or technically calculates a minimum distribution, and withholds on that actual or notional distribution the tax payable by its members.
In light of the CJEU judgment, the Danish Ministry of Taxation is required to amend the current legislation that provides investment funds established in Denmark which, either in fact or technically, make a minimum distribution to their members, an exemption from tax at source on dividends distributed by Danish companies, while at the same time a similar exemption is not available for nonresident investment funds.
Generally, Danish investment institutes classified as “investment companies” for Danish tax purposes are, under current rules, subject to a 15% tax on dividends from Danish resident companies, while Danish “Investment Institutes with Minimum Taxation” are tax exempt provided the institute holds a tax exemption certificate. There is no exemption available for nonresident investment funds regardless of their Danish tax status as “Investment Company” or “Investment Institute with Minimum Taxation.” If an “Investment Institute with Minimum Taxation” wants nonresident investors to be exempt from dividend distributions from the fund, they must give up their tax exemption certificate. The purpose of the tax-exempt certificate available under current Danish legislation is to prevent a Danish investor from suffering a series of tax charges on dividends from Danish resident companies. The Bill , if adopted in its current form, will imply that taxation of dividends from a Danish resident company no longer will be neutral for a Danish investor when comparing direct investments and investments through Danish investment institutes.
The Bill proposes that nonresident investors in Danish “Investment Institutes with Minimum Taxation” are exempt from withholding tax on dividends from such investment institutes. Levying a 15% dividend withholding tax on dividends from Danish companies to Danish “Investment Institutes with Minimum Taxation” means that nonresident investors cannot avoid Danish dividend tax by investment in Danish shares through an “Investment Institutes with Minimum Taxation” and the current tax on dividends from “Investment Institutes with Minimum Taxation” may therefore be abolished.
Historically, resident associations and certain other organizations have been exempt from taxation of all income except business income. Tax exemption has normally included dividends, interest and royalties. By contrast, comparable nonresident associations have been subject to Danish taxation on dividends, interest and capital gains from affiliated companies, and royalties. The European Commission has asked Denmark to amend its tax legislation since it is considered to be in breach of the free movement of capital enshrined in Article 63 of the TFEU. Under the Bill, two steps are taken to eliminate the discrimination of nonresidents:
Tax exemption will require that a nonresident taxpayer is comparable to a Danish association and that it has a pure charitable purpose as defined under Danish tax law.
Taxation exemption for nonresident charities will be applicable from 1 January 2023. From 2023, nonresident charities will be able to receive pre-approval from the tax authorities that they qualify for tax exemption, meaning that no withholding tax will be applied. Until 2023, tax exemption will require the filing of a refund claim with the Danish tax authorities. A refund claim can be filed from 2018 and onwards.
Newly established “Equity Based Investment Companies”
Investment funds and exchange traded funds (ETFs) may register with the Danish tax agency for Danish tax status as “Equity Based Investment Companies”. Equity Based Investment Companies are for Danish individuals benefitting from a more favorable taxation compared to a fund that has not registered (called Bond Based Investment Company). In order to be classified as an Equity Based Investment Company, in addition to registration, it is required that at least 50% of the assets are equities.
Under current rules, it is only possible to register with the Danish tax agency for this status by 1 November effective for the following income year. With the proposed changes it will be possible to register a newly established fund with the Danish tax agency with effect in the year of establishment. The registration must be completed before 1 November and no longer than two months after the date of establishment.
For additional information with respect to this Alert, please contact the following:
Ernst & Young P/S, Copenhagen
Ernst & Young LLP (United States), Nordic Tax Desk, New York