The European Court of Justice has concluded that a general principle of anti-abuse exists within EU law obligating the member states to deny benefits in cases of abuse, even if national or collective provisions on abuse do not exist.
The consequence is that the cases are to be heard based on an analysis of whether the ownership structures applied - where the Danish companies are owned via holding companies in member states and/or countries having concluded a double taxation treaty with Denmark - constitute abuse.
For the purpose of such analysis, the European Court of Justice has contributed with a number of guidelines. First of all, the analysis contains an objective element and a subjective element. The objective element is that there must be a structure in order to achieve an unlawful tax advantage under the directive. The subjective element is that achievement of the unlawful tax advantage must be one of the main purposes of the structure.
The European Court of Justice states the following in this respect:
"A group of companies may be regarded as being an artificial arrangement where it is not set up for reasons that reflect economic reality, its structure is purely one of form and its principal objective or one of its principal objectives is to obtain a tax advantage running counter to the aim or purpose of the applicable tax law. That is so inter alia where, on account of a conduit entity interposed in the structure of the group between the company that pays dividends and the company in the group which is their beneficial owner, payment of tax on the dividends is avoided."
"The fact that a company acts as a conduit company may be established where its sole activity is the receipt of dividends and their transmission to the beneficial owner or to other conduit companies. The absence of actual economic activity must, in the light of the specific features of the economic activity in question, be inferred from an analysis of all the relevant factors relating, in particular, to the management of the company, to its balance sheet, to the structure of its costs and to expenditure actually incurred, to the staff that it employs and to the premises and equipment that it has."
Set of rules
Under the Corporation Tax Act, a foreign company is generally subject to limited tax liability on dividend and interest from a Danish group company. However, the limited tax liability does not apply to a foreign parent if taxation of the dividend/intercompany interest is to be eliminated or reduced under a double taxation treaty or under the Parent/Subsidiary Directive or the Interest/Royalty Directive.
It also applies to dividend tax and interest tax that if the tax is simply to be eliminated based on one of the two legal percepts - the double taxation treaty or the relevant directive - Danish taxation will not be imposed.
The Danish double taxation treaties contain general provisions stating that taxation of dividend and interest from Danish companies must be eliminated if the recipient is a beneficial owner. If the parent is a beneficial owner, there is no limited tax liability, and the Danish company paying dividend or interest is therefore not to pay withholding tax either.
The Interest/Royalty Directive contains - as opposed to the Parent/Subsidiary Directive - a requirement that the receiving company must be the beneficial owner of the interest received.
General abuse provision
In relation to the assessment of the cases under EU law, it is the tax authorities’ opinion that the parents are prevented from claiming the benefits (tax exemption) under the Interest/Royalty Directive and the Parent/Subsidiary Directive and the double taxation treaties because the parents are not considered the beneficial owners of the amounts.
Consequently, the tax authorities find, based on a specific assessment of each case, that the parents have simply acted as conduit companies for the companies domiciled in countries that are not members of the EU, and with which Denmark has not concluded a double taxation treaty. It is therefore the tax authorities' opinion that the parents are prevented from relying on the Directives and the double taxation treaties because of abuse.
On the contrary, the Danish companies claim that the parents may rely on the Directives and the double taxation treaties.
What happens now?
After the judgments from the European Court of Justice, the cases will continue before the Eastern and Western High Courts which will have to decide whether the construction in each case constitutes abuse and may set aside payment of withholding tax.
The judgments from the European Court of Justice confirm that it is still very important to make a careful assessment as to whether withholding tax is to be paid on interest and dividend paid by Danish companies to foreign parents. Unfortunately, the judgments from the European Court of Justice only bring very limited clarity as to when this kind of withholding tax is to be paid to Denmark. And it should thus be expected that it will be necessary to make very detailed investigations in many situations for the purpose of determining whether withholding tax is to be paid.