Denmark vs Heavy Transport Holding Denmark ApS, March 2021, High Court, Cases B-721-13

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Heavy Transport Holding Denmark ApS, a subsidiary in the Heerema group, paid dividends to a parent company in Luxembourg which in turn paid the dividends to two group companies in Panama.

The tax authorities found that the company in Luxembourg was not the beneficial owner of the dividends and thus the dividends were not covered by the tax exemption rules of the EU Parent/Subsidiary Directive or the Double Taxation Convention between Denmark and Luxembourg. On that basis an assessment was issued regarding payment of withholding tax on the dividends.

An appeal was filed by Heavy Transport Holding Denmark ApS with the High Court.

Judgement of the Eastern High Court

The court dismissed the appeal of Heavy Transport Holding Denmark ApS and decided in favor of the tax authorities.

The parent company in Luxembourg was a so-called “flow-through” company which was not the beneficial owner of the dividend and thus not covered by the tax exemption rules of the Parent/Subsidiary Directive and the Double Taxation Convention between Denmark and Luxembourg. The Danish subsidiary was held liable for the non-payment of dividend tax.

Excerpt
“The actual distribution
On 23 May 2007, Heavy Transport Holding Denmark ApS distributed USD 325 million, corresponding to DKK 1,799,298,000, to its parent company Heavy Transport Finance (Luxembourg) SA.
The amount was set off by the Danish company against a claim on the Luxembourg parent company arising from a loan of the same amount taken out by Heavy Transport Finance (Luxembourg) SA in Heavy Transport Holding Denmark ApS on 22 January 2007 to pay the purchase price for the company. Heavy Transport Finance (Luxembourg) SA acquired Heavy Transport Holding Denmark ApS from the two companies, Heavy Transport Group Inc. and Incomara Holdings SA, both resident in Panama and owners of both the Danish and Luxembourg companies. The purchase price was transferred from Heavy Transport Finance (Luxembourg) SA to the Panamanian companies on 24 January 2007.
The loan from Heavy Transport Holding Denmark ApS to Heavy Transport Finance (Luxembourg) SA of USD 325 million is referred to in the loan agreement between the parties of 22 January 2007 as an ‘interim dividend’ and states that the amount will be paid as a ‘short term loan’ until such time as a resolution is passed at a future general meeting of Heavy Transport Holding Denmark ApS to distribute a dividend to the parent company in the same amount. The loan agreement also provides that the loan is to be repaid on demand or immediately after the dividend payment has been declared by offsetting it.
It is undisputed that the company Heavy Transport Finance (Luxembourg) SA was set up as an intermediate holding company between the Panamanian companies and Heavy Transport Holding Denmark ApS with the aim of ensuring that no Danish withholding tax was triggered by the dividend distribution.
Moreover, as regards the activities of Heavy Transport Finance (Luxembourg) SA, it appears that the company, which was apparently set up in 2004 to provide the financing for Heavy Transport Holding Denmark ApS and, after 22 January 2007, as the parent company of the company, did not have (and does not have) any employees, the administration of the company being outsourced to a group company in Luxembourg, Heerema Group Service SA. It is undisputed that the parent company had no other activity when it took over the Danish company. Heavy Transport Finance (Luxembourg) SA’s annual accounts for 2007 show that its assets as at 31 December 2007 consisted of cash of USD 148 551 and financial assets of USD 1 255 355 in its subsidiary Heavy Transport Holding Denmark ApS.
In the light of the foregoing, the Court finds that Heavy Transport Finance (Luxembourg) SA was obliged and, moreover, was only able to repay the loan of USD 325 million to Heavy Transport Holding Denmark ApS by offsetting the dividend received and thus had no real power of disposal over the dividend. Consequently, and since the purpose of the transactions was undoubtedly to avoid Danish taxation of the dividends in connection with the repatriation of the funds to the shareholders in Panama, Heavy Transport Finance (Luxembourg) SA cannot be regarded as the beneficial owner of the dividends within the meaning of Article 10(2) of the Double Taxation Convention and, as a general rule, the tax should not be reduced in accordance with the rules of the Convention. Heavy Transport Finance (Luxembourg) SA is also not entitled to the tax exemption under the Parent/Subsidiary Directive, as it must be considered as a flow-through company with no independent economic and commercial justification, and must therefore be characterised as an artificial arrangement whose sole purpose was to obtain the tax exemption under the Directive, see the judgment of 26 February 2019 in Joined Cases C-116/16 and C-117/16.

Significance of the possibility of liquidation under Article 59 of the current law on limited liability companies
However, Heavy Transport Holding Denmark ApS claims that there is no abuse of the Parent/Subsidiary Directive, since the two shareholders in Panama, Heavy Transport Group Inc. and Incomara Holdings SA, instead of contributing the company Heavy Transport Finance (Luxembourg) SA to receive and distribute the ordinary dividends of Heavy Transport Holding Denmark ApS to the Panamanian companies, could have chosen to liquidate the Danish company pursuant to Article 59 of the current Anartsselskabslov, whereby any liquidation proceeds distributed by the parent company in Luxembourg would have been tax-free for the two shareholders.
In its judgment of 26 February 2019, paragraphs 108-110, the CJEU has ruled on the situation where there is a double taxation convention concluded between the source State and the third State in which the beneficial owners of the dividends transferred by the flow-through company are resident for tax purposes. The Court held that such circumstances cannot in themselves preclude the existence of an abuse of rights. The Court stated that if it is duly established on the basis of all the facts that the traders have carried out purely formal or artificial transactions, devoid of any economic or commercial justification, with the principal aim of taking unfair advantage of the exemption from withholding tax granted by the parent company/subsidiary, such an agreement cannot call into question the existence of an abuse of rights. The Court further stated that, where there is a situation in which the dividend would have been exempt from tax if it had been distributed directly to the company established in a third country, it cannot be excluded that the objective of the group structure does not constitute an abuse of rights.
The Court notes that liquidation under the current Article 59 of the Law on limited liability companies is a fundamentally different commercial transaction from the payment of dividends and entails correspondingly different legal consequences, including the requirement in that provision that the shareholders be personally, jointly and severally liable for all debts, including unpaid and disputed debts. The fact that the beneficial owners of the dividends could allegedly have opted to wind up the Danish company pursuant to Paragraph 59 of the current Law on limited liability companies and thereby have obtained tax exemption on the proceeds of the winding-up cannot therefore lead to the absence of any abuse of the legal right to tax exemption under the Parent-Subsidiary Directive in a situation such as the present.
Moreover, in view of the civil dispute with the purchasers of Dockwise Transport N.V. arising from a shipwreck, there is no basis for assuming that such liquidation was a real alternative to the payment of dividends at the time of the distribution.
As a result, Heavy Transport Finance (Luxembourg) SA is liable to tax on the dividend in the amount of DKK 449 824 500.

Article 69(1) of the Withholding Tax Act
It follows from Article 65(1) of the Danish Withholding Tax Act that Heavy Transport Holding Denmark ApS is liable for withholding tax of DKK 449 824 500.
Since Heavy Transport Holding Denmark ApS has not fulfilled this withholding obligation, Heavy Transport Holding Denmark ApS is, pursuant to Section 69(1) of the Danish Withholding Tax Act, directly liable to the public authorities for payment of the shortfall, unless Heavy Transport Holding Denmark ApS proves that there has been no negligence on its part in complying with the provisions of the Danish Withholding Tax Act.
According to the information available, Heavy Transport Holding Denmark ApS was aware of the facts surrounding the dividend payment, including the fact that the purpose of the contribution of the Luxembourg parent company as an intermediary was solely to avoid Danish withholding tax as indicated above.
In these circumstances, the fact that at the beginning of 2007 there was no final clarification of the legal question whether there was sufficient legal basis to counter such abuse of rights cannot lead to Heavy Transport Holding Denmark ApS being exempted from liability under Article 69(1) of the Danish Withholding Tax Act. The same applies to the advice which the company received from KPMG in the summer of 2006.

Heavy Transport Holding Denmark ApS is therefore liable for the payment of DKK 449 824 500 in dividend tax.”

 
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DK vs Heavy Transport OLD c nr b-721-13

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