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2012.10.10 - Denmark: Tightening of regulations governing taxation of holding companies.

 

Denmark: the privileges that exist in this country for holding companies provide for exemption of dividends received by a Danish company from tax subject to the criterion of Participation Exemption (i.e. a Danish company owns at least 10% of the share capital of its subsidiary for at least 12 months). Also, dividends may be distributed without deduction of the Danish Withholding Tax to the EU or other countries having a Double Tax Treaty with Denmark (if the shareholder of the Danish holding company owns at least 10% of its share capital for at least 12 months).

Recently, it has been found that, after taking into account such benefits, many Danish companies ApS were established for the sole purpose of using them to benefit under Double Tax Treaties (a practice known as Treaty Shopping).

In such cases, Danish tax authorities contest exemption from Withholding Tax and demand that this amount should be returned to the government.

On 3rd October 2012 a new draft legislation Bill L10 was proposed. The purpose of the new legislation was to limit the use of Danish companies as ‘conduit’ tools for obtaining benefits under Double Tax Treaties, and in particular to regulate the following aspects:

  1. Limitations on the use of Danish companies in ‘conduit’ mode.
    Dividends distributed to foreign companies after 1 January 2013 will be subject to Withholding Tax (27%) where:
    • - a Danish company received the incoming dividend from a foreign company,
    • - the dividends received are not taxable, as the Participation Exemption is applied,
    • - the Danish company is not the beneficial owner of the incoming dividends.
    Dividends distributed to an EU country and subject to EC Parent/Subsidiary Directive (90/435 EEC) are exempted from such limitations. The Withholding Tax rate may also be decreased to that specified in the relevant Double Tax Treaty provided that the Danish tax authorities obtain assurance that the foreign company is the beneficial owner of the incoming dividends.
  2. The methods of indirect distribution of dividends without deduction of Withholding Tax have been limited. In particular, cases were identified where shareholders of a Danish company that were not subject to Withholding Tax exemption, appointed another Danish company as a shareholder and received a debt instrument from the latter in return. In such cases dividends shall be transferred without the Withholding Tax because both companies are Danish and then distributed to shareholders as repayment of the debt. To limit such activities, Bill L10 states that in cases where any exchange of shares within a group provides for a different method of consideration than the shares of such other Danish company, the transaction is treated as distribution of dividends.
  3. The term ‘residence’ (and the place of taxation accordingly) of the company has been updated. From 1st January 2013, all companies with their place of registration in Denmark and/or their effective place of management and control in Denmark are proposed to be treated as resident. Previously, a particular company type being the SBME was treated as non-resident, provided that it was confirmed that the place of company management and control was outside of Denmark. An exception from the residence conditions is where the company management and control is effected from an EU country or other country that has a Double Tax Treaty with Denmark.

INTERNATIONAL OVERSEAS SERVICES comments:

The matter of Substance of companies (i.e. having a commercial existence of their own) in EU countries is subject to continuous supervision and control. Specifically, if a company:

  • a) is not directly present (resident) in the country of its registration;
  • b) has no commercial risk of its own, which indicates that this is just a ‘conduit’ company;
  • c) has income in the form of dividends credited to its account and then paid out within the same amount or almost the same amount within a short period of time,
then such a company may be recognised as having no commercial existence of its own (Substance), and the tax benefits may be refused.

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