Executive summary

The Danish Parliament passed Bill No. L 28 on 19 December 2024, making various changes to Danish tax law including important changes to the taxation of dividends paid to resident and nonresident companies from 1 January 2025 and thereafter. This Alert discusses key aspects of the new rules on dividends.

Foreign multinational groups with a Danish subsidiary will normally not be affected by the new rules. A dividend paid by the Danish subsidiary to its nonresident parent company should remain exempt from Danish taxation if the parent is resident in the European Union (EU) or a tax-treaty country and it is beneficial owner of the dividend. However, if a Danish subsidiary owns a foreign subsidiary, a dividend received from the foreign subsidiary that is redistributed to a nonresident parent company can be taxable in the hands of the Danish subsidiary under the new rules if the structure leads to a tax savings for the group. It is thus recommendable to carefully review such structures to identify tax savings that could trigger taxation.

Foreign investors that own shares in a Danish-listed portfolio company will normally not be affected by the new rules. However, if a foreign investor is not beneficial owner of a dividend received from a Danish listed company, or if the investor is resident in a non-treaty country outside of the EU and is able to exercise decisive influence over the company (e.g., by acting in concert with other investors), Danish taxation may increase from 15% to 22% under the new rules.

Foreign investors that own shares in a Danish non-listed portfolio company will often be affected by the new rules. For an investor that is resident in the EU or a country that has entered into a tax treaty with Denmark, Danish taxation will be reduced from 15% to 0%, provided the investor is the beneficial owner of the dividend. For an investor that is resident in a non-treaty country outside of the EU, Danish taxation will also be reduced from 15% to 0%. However, in this situation an additional condition applies — specifically, the investor must not be not able to exercise decisive influence on the Danish company (e.g., by acting in concert with other investors). If the new conditions are not satisfied, Danish taxation will increase from 15% to 22%.

Resident companies

Non-listed portfolio company

A dividend received by a Danish resident company from a non-listed portfolio company (ownership below 10%), has so far been subject to corporate tax at an effective rate of 15.4%. On the other hand, capital gains on shares in such a company have been tax exempt. There has thus been a mismatch between the taxation of dividends and capital gains from non-listed portfolio companies.

The new rules eliminate this mismatch, as dividends from non-listed portfolio companies will now be tax-exempt for resident companies, provided that the recipient company is the beneficial owner of the dividend and the distributing company is not entitled to claim a tax deduction for the distribution. Tax exemption will be applicable to dividends received from both resident and nonresident non-listed portfolio companies.

The tax authorities are expected to issue new regulations to ensure that no withholding tax must be applied in portfolio dividends that are tax-exempt for resident companies.

Listed portfolio companies

Dividends and capital gains from listed portfolio companies remain subject to corporate tax at a rate of 22%.

Subsidiaries and group companies

A dividend received by a Danish resident company from a resident or nonresident subsidiary or group company remains tax exempt under the participation regime, but a new condition has been introduced.

The new condition means that the (parent) company must be the beneficial owner of the dividend received. This condition applies to both cross-border (inbound) and domestic dividends. If this condition is not satisfied, a dividend will be subject to tax at a rate of 22% and a withholding tax of 22% must be applied. If a dividend is received from a nonresident subsidiary, the parent company should be entitled to a foreign tax credit for withholding taxes suffered. On the other hand, a parent company should not be entitled to an indirect foreign tax credit for corporate taxes paid the subsidiary.

A parent company should normally be treated as beneficial owner if either:

• The dividend is retained.
• The arrangement is not of an abusive nature.

If, for example, a resident parent company uses a dividend to repay third-party bank debt or to finance new investments, it should normally be treated as the beneficial owner. In this situation the dividend received by the parent company should thus be tax-exempt.

If, on the other hand, a resident parent company redistributes a dividend, whether the arrangement is of an abusive nature will be key. This test involves two separate analyses:

1. Analysis of a tax savings: It must be examined whether the arrangement causes the group to obtain a tax savings. This analysis must be performed by comparing: (a) the taxation of the parent company and the investor(s) that received the redistributed dividend under the actual arrangement, and (b) the taxation that would arise if the investor(s) that received the redistributed dividend directly owned the distributing company (taking into account potential decisive influence over the distributing company). Only taxes paid in the country of residence of the distributing company and Denmark must be considered. Taxation in the hands of the investor(s) should thus not be taken into account.
2. Analysis of abuse: If a tax savings is obtained it must be examined whether the actual arrangement is artificial and has been put in place for the main purpose of avoiding taxation. This analysis resembles the general anti-avoidance rule incorporated into Article 6 of the EU Anti-Tax Avoidance Directive (Council Directive (EU) 2016/1164). In practice, if a tax savings is obtained, a presumption for abuse will arise, which the taxpayer must disprove.

If the actual structure does not give rise to a tax savings, the parent company should normally be deemed the beneficial owner and thus exempt from taxation on the dividend. If, for example, a parent company is owned directly by resident or nonresident individuals, it should be treated as the beneficial owner of dividends received from its subsidiaries, because individuals are subject to Danish taxation on dividends from a resident company. Hence, in this situation, the investors do not realize a tax savings simply because the distributing company is indirectly owned through a resident-parent company.

If, on the other hand, a tax savings is realized under the actual structure, the resident-parent company should be subject to 22% tax on the dividend received, provided that the arrangement is abusive.

For example, there may be abuse if investors who are resident in non-treaty countries outside of the EU have structured an investment in a Danish portfolio company through a Danish holding company. This is illustrated in Example 1, where a Danish company (OpCo) is owned by 20 nonresident investors through two Danish holding companies. Each investor owns 5% of HoldCo 1. The investors are resident in non-treaty countries outside of the EU that have agreements with Denmark on the exchange of information in tax matters. A dividend paid by OpCo is redistributed to the investors.

Example 1

In Example 1, the following Danish tax consequences should arise:

• Dividend 1
• HoldCo 2 should be tax exempt on the dividend received from OpCo, because Danish taxation is triggered at the next level.
• OpCo should not apply withholding tax.
• Dividend 2
• HoldCo 1 should be subject to 22% tax on the dividend received from HoldCo 2, because HoldCo 1 should not be treated as the beneficial owner of the dividend. This result is due to the fact that the dividend is redistributed, and that the actual arrangement gives rise to a tax savings. Hence, the investors would be subject to 22% tax if they owned OpCo directly, because they are resident non-treaty countries outside of the EU and are able to exercise common decisive influence on OpCo.
• HoldCo 2 must apply 22% withholding tax.
• Dividend 3
• The investors should be tax-exempt on the dividend received from HoldCo 1 under the new rules on portfolio dividends; see below in "Nonresident entities."
• HoldCo 1 must apply 27% withholding tax.
• The investors can request a 27% tax refund from the Danish state.

In Example 1, the new rules cause 22% Danish taxation to arise at the level of the HoldCo 1, whereas there should be no Danish taxation at the level of the investors.

The Danish tax consequences will be slightly different if a private equity fund organized as limited partnership is interposed between the investors and HoldCo 1. In this situation, the investors should be deemed to exercise common decisive influence on HoldCo 1 and thus do not meet one of the conditions for being exempt from Danish taxation on the dividends from HoldCo 1; see below "Nonresident entities." This is illustrated in Example 2.

Example 2

In Example 2, the following Danish tax consequences should arise:

• Dividend 1
• HoldCo 2 should be tax-exempt on the dividend received from OpCo, because no Danish tax saving arises.
• OpCo should not apply withholding tax.
• Dividend 2
• HoldCo 1 should be tax-exempt on the dividend received from HoldCo 2, because no Danish tax saving arises.

• HoldCo 2 should not apply withholding tax.
• Dividend 3
• The investors should be subject to 22% Danish taxation, because they are tax resident outside of the EU in non-treaty countries and are able to exercise common decisive influence over OpCo through the private equity fund.
• HoldCo 1 must apply 27% withholding tax in the dividend paid.
• The portfolio investors can request a 5% tax refund from the Danish state.

The effective Danish taxation should be 22% in both Examples 1 and 2. However, the cash flow consequences are more favorable in Example 2 compared to Example 1, since withholding tax must be applied twice in Example 1, whereas withholding tax must be applied only once in Example 2. Another difference is that the investors in Example 2 potentially may be entitled to a claim a foreign tax credit in their home countries, whereas entitlement to a foreign tax credit is less likely in Example 1.

In Example 3, a Danish resident holding company receives a dividend of 100 from a subsidiary in a third country which is redistributed to a parent company in an EU member state. It is assumed that the tax treaty between Denmark and the third country calls for 0% withholding tax, whereas the tax treaty between the other EU member state and the third country calls for a 10% withholding tax. The parent company is assumed to be tax exempt on the dividend received in its country of residence.

Example 3

In Example 3, it must be analyzed whether the Danish holding company is beneficial owner of the dividend received from the subsidiary. Since the dividend is redistributed, whether the arrangement is abusive must be examined. The arrangement gives rise to a tax saving of 10% in the third country. Unless the Danish holding company can substantiate that the arrangement has not been put in place with a main purpose of obtaining this tax saving, the arrangement will be deemed to be abusive. In this situation, the Danish holding company must include 45.45% (10/22 of the dividend) in its taxable income which will be subject to tax at a rate of 22% leading to an effective Danish taxation of 10%.

Nonresident companies

Portfolio companies

Under existing law, nonresident companies are subject to Danish taxation at a rate of 22% on dividends from Danish listed and non-listed portfolio companies. The rate is reduced to 15% under domestic law if the following conditions are met:

1. The nonresident company is resident in a country that exchanges information with Denmark under an international agreement.
2. It owns less than 10% of the capital of the Danish portfolio company.
3. The group it belongs to in total owns less than 10% of the Danish portfolio company (this condition only applies if the nonresident company is resident outside of the EU).

A distributing portfolio company must apply 27% withholding tax, and a nonresident company can request a tax refund of 5% or 12%, respectively, from the Danish state.

Under the new rules, nonresident companies will be exempt from Danish taxation on dividends from Danish non-listed portfolio companies (dividends from listed portfolio companies will remain taxable).

Two new conditions have been introduced that are applicable to dividends from both listed and non-listed portfolio companies. First, a reduction in the tax rate from 22% to 15% and 0%, respectively, requires that the nonresident company is the beneficial owner of the dividend. Second, the nonresident company must not be able to exercise decisive influence on the Danish distributing company. The second condition is not applicable if the nonresident company is resident in the EU or in a tax treaty country.

The new tax rates applicable to nonresident companies that own shares in a Danish non-listed portfolio company are summarized in the following table.

A nonresident company is deemed to be able to exercise decisive influence on a Danish portfolio company if the investment is structured through a private equity fund or a holding company, or if the investor has concluded an agreement with other investors regarding the exercise of common decisive influence on the Danish company.

The new rules are illustrated in the Example 4, where a Danish company (OpCo) is owned by 20 investors that are deemed to be able to exercise common decisive influence on OpCo because the investment is structured through a private equity fund organized as a limited partnership. Twelve of the investors are resident in the EU, whereas eight investors are resident in non-treaty countries that have agreements on the exchange of information with Denmark. A dividend of 100 is paid by OpCo to the private equity fund.

Example 4

In Example 4, the following Danish tax consequences should arise:

• OpCo must apply 27% withholding tax in the full dividend of 100.
• The eight non-treaty investors should be subject to 22% taxation, because they are resident non-treaty countries outside of the EU and are able to exercise decisive influence on OpCo. They can request a 5% tax refund from the Danish state leading to an effective taxation of 22%.
• The 12 EU investors should be exempt from Danish taxation, because it is not required that EU investors lack the ability to exercise decisive influence on a Danish distributing company. They can request a 27% tax refund from the Danish state leading to an effective taxation of 0%.

In Example 5, a Danish company (OpCo) is owned through a Danish holding company rather than a private equity fund.

Example 5

In Example 5, the following Danish tax consequences should arise:

• Dividend 1
• HoldCo should be subject to tax on 40% of the dividend received at a rate of 22%.
• OpCo must apply 22% withholding tax in 40% of the dividend paid.
• Dividend 2
• The investors should be exempt from Danish taxation on the dividend received from HoldCo, assuming they have not concluded an agreement regarding the exercise of common decisive influence over HoldCo.
• HoldCo must apply 27% withholding tax in the full dividend.
• The investors can request a 27% tax refund from the Danish state leading to an effective taxation of 0%.

Subsidiaries and group companies

Nonresident companies that own shares in a Danish subsidiary or group company are normally exempt from Danish taxation on dividends from such investments and no withholding tax must be applied, provided that Danish taxation must be reduced under the EU Parent and Subsidiary Directive or a tax treaty. This condition will require that the nonresident parent company is beneficial owner of the dividend, and that the Danish general anti-avoidance rule (GAAR) is not applicable. There are no changes to this rule.

However, if a nonresident parent company is resident in the EU or a tax treaty country and is owned by portfolio investors that are resident in the EU or treaty countries, the new rules on tax exemption for nonresident investors can have a positive impact on a cross-border parent/subsidiary dividend.

This is illustrated in Example 6, where a Danish company (OpCo) is owned by a holding company in Luxembourg which is owned by 20 investors (5% each) that are resident in EU or treaty countries. A dividend is paid from OpCo which is immediately redistributed by HoldCo to the investors.

Example 6

Under the old rules, OpCo would be required to apply 27% withholding tax and HoldCo could request a 12% tax refund from the Danish state. Hence, in this situation HoldCo would not be treated as beneficial owner of the dividend, because it is redistributed and because the arrangement gives rise to a tax saving.

Under the new rules, OpCo must not apply withholding tax and HoldCo should be exempt from Danish taxation. Hence, under the new rules, the arrangement does not give rise to a tax saving, because the investors could have received the dividend free of Danish taxation if they owned OpCo directly.