The issue in these two cases is whether withholding tax was payable on interest paid to foreign group companies considered “beneficial owners” via conduit companies covered by the EU Interest/Royalties Directive and DTA’s exempting the payments from withholding taxes.
The first case concerned interest accruals totalling approximately DKK 1,476 million made by a Danish company in the period 2007-2009 in favour of its parent company in Sweden in connection with an intra-group loan. The Danish Tax Authorities (SKAT) subsequently ruled that the recipients of the interest were subject to the tax liability in Section 2(1)(d) of the Corporation Tax Act and that the Danish company was therefore obliged to withhold and pay withholding tax on a total of approximately DKK 369 million. The Danish company brought the case before the courts, claiming principally that it was not obliged to withhold the amount collected by SKAT, as it disputed the tax liability of the recipients of the interest attributions.
The second case concerned interest payments/accruals totalling approximately DKK 3,158 million made by a Danish company in the period 2006-2008 in favour of its parent company in Luxembourg in respect of an intra-group loan. SKAT also ruled in this case that the interest payments/write-ups were taxable for the recipients and levied withholding tax on them from the Danish company totalling approximately DKK 817 million. The Danish company appealed to the courts, claiming principally that the interest was not taxable.
The Eastern High Court, as first instance, dealt with the two cases together. The European Court of Justice has ruled on a number of preliminary questions in the cases, see Joined Cases C-115/16, C-118/16, C119/16 and C-299/16.
In both cases, the Ministry of Taxation argued in general terms that the parent companies in question were so-called “flow-through” companies, which were not the “beneficial owners” of the interest, and that the real “beneficial owners” of the interest were not covered by the rules on tax exemption, i.e. the EU Interest/Royalties Directive and the double taxation conventions applicable between the Nordic countries and between Denmark and Luxembourg respectively.
Judgement of the Eastern High Court
In both cases, the Court held that the parent companies in question could not be regarded as the “beneficial owners” of the interest, since the companies were interposed between the Danish companies and the holding company/capital funds which had granted the loans, and that the corporate structure had been established as part of a single, pre-organised arrangement without any commercial justification but with the main aim of obtaining tax exemption for the interest. As a result, the two Danish companies could not claim tax exemption under either the Directive or the Double Taxation Conventions and the interest was therefore not exempt.
On 3 May 2021, the High Court ruled on two cases in the Danish beneficial owner case complex concerning the issue of taxation of dividends. The judgment of the Regional Court in Denmark vs NETAPP ApS and TDC A/S can be read here.
Click here for English translation
Click here for other translation