Denmark Denies Dividend Withholding Tax Refunds to Foreign Investment Funds Pursuant to Recent Supreme Court Ruling

Overview and Case Outcome

The much-anticipated Danish Supreme Court judgement in respect of the Fidelity Funds Case (Case 59/2019) was finally handed down on 24 June 2021.  The main question posed in the Fidelity Funds case was whether it is in line with EU law that foreign investment funds suffer withholding tax on dividends distributed from Danish shares, while Danish resident investment funds which have elected to be taxed under section 16C of the Tax Assessment Act (TAA) (often referred to as “investment funds with minimum taxation”) are exempt from tax on Danish-sourced dividends.

The Supreme Court judgement dealt a blow to foreign investment funds which were hoping for a favourable outcome. The ruling that foreign investment funds investing in Danish equities, which have not elected to be an investment fund with minimum taxation, are not entitled to a refund of withheld dividend tax based on EU law.

Background on Denmark’s Tax Treatment of Foreign Investment Funds and the Fidelity Funds Case

Danish Undertakings for the Collective Investment of Transferable Securities (UCITS) may qualify for an exemption from withholding tax on dividends distributed from Danish companies if certain conditions are met. In particular:

  1. The fund should qualify as an undertaking covered by Article 1(6) of the Danish Corporation Tax Act – in other words, be a tax resident in Denmark; and
  2. The fund ought to have elected to qualify as an “investment fund with minimum taxation” in terms of section 16C of the TAA.

Section 16C investment funds with minimum taxation, are amongst others , required to calculate, withhold and report tax to the Danish tax authorities on an annual minimum income amount, irrespective of whether the income is actually distributed to investors.Only those collective investment funds which meet the criteria laid down in section 16C would qualify for exemption from withholding tax, failing which the fund would be subject to withholding tax. 

The Court of Justice of the European Union (CJEU)’s ruling in June 2018,  held that: “Article 63 TFEU must be interpreted as precluding legislation of a Member State, such as that at issue in the main proceedings, under which the dividends distributed by a company resident in that Member State to a non-resident UCITS are subject to withholding tax, while dividends distributed to a UCITS resident in that same Member State are exempt from such tax, provided that the undertaking makes a minimum distribution to its members, or technically calculates a minimum distribution, and withholds on that actual or notional distribution the tax payable by its members.” 

As such, the CJEU found that the first requirement, that an investment fund should be resident in Denmark to be exempt from dividend withholding tax was in breach of Article 63 of the Treaty on the Functioning of the European Union (TFEU). However, the CJEU did not specifically address whether the section 16C requirement pertaining to qualification as an investment fund with minimum taxation itself was in breach of EU law. 

The Danish Eastern High Court ruled against the CJEU finding and in favour of the Danish government on the 2nd of April 2019. The Court ruled that the claimant UCITS, domiciled in Luxembourg and the UK, were not entitled to receive dividends exempt from Danish withholding tax as they did not fulfil the requirements of an investment fund with minimum taxation under Section 16C. The claimants appealed the case to the Supreme Court. 

Outcome of The Supreme Court Judgement Delivered on 24 June 2021: Fidelity Funds Case (Case 59/2019)

The Supreme Court upheld the judgement of the Danish Eastern High Court and refused Fidelity Funds’ refund claims. In its findings, the Supreme Court held that, notwithstanding the fact that the residence requirement is unlawful, it does not necessarily mean that non-resident investment funds were entitled to a refund for withheld dividend tax or that Denmark’s entire tax scheme was unlawful. In this regard, the Supreme Court opined that the disputed rulings from the Danish National Tax Tribunal were not merely based on whether the UCITS was a Danish tax resident or not, as the Tribunal had also highlighted that the investment fund did not meet the requirements to be qualified as a section 16C distributing investment fund. 

In response to whether the requirement to be qualified as a distributing fund with minimum taxation is in breach of EU law, the Supreme Court held that the conditions laid down in section 16C for annual minimum distribution calculations can be justified in light of the need to ensure effective tax control, a coherent tax system and that the rule is not a disproportionate restriction on the right to free movement of capital within the EU.  The exemption for Danish-resident investment funds was conditional upon the fund making an actual or notional minimum distribution to their members who were liable to withholding tax deducted by the fund. Applying this reasoning, the Court found that for the relevant years (2000-2009), Fidelity Funds did not elect to be qualified as a distributing investment fund with minimum taxation in terms of section 16C and, as such, Fidelity Funds failed to meet the requirements to qualify for an exemption. The Court, therefore, ruled that Fidelity Funds was not entitled to a refund of the dividend taxes that were withheld.

Lastly, the Supreme Court held that there was no doubt as to the understanding of EU law concerning the refunds of withheld dividend tax in the present instance and that there was accordingly no basis for re-referral to the European Court of Justice for a preliminary ruling. The Danish Supreme Court judgement cannot be appealed to a higher court and is therefore final.

The Impact of the Fidelity Funds Case on Future Withholding Tax Claims 

Non-resident investment funds will only be entitled to a full refund of withheld dividend tax from Danish companies to the extent that the fund has elected to qualify and meet the requirements of an investment fund with minimum taxation in terms of section 16C of the TAA. Furthermore, even if the non-resident investment fund had elected to be an investment fund with minimum taxation status, the fund would still not have benefitted from the exemption due to the Danish domicile criterion. It is doubtful whether any non-resident investment fund meets these requirements and consequently it is highly unlikely that a successful claim could be made against the Danish Tax Authority.

However, as of 1 January 2022, Danish tax legislation will be amended to impose a 15% withholding tax on Danish sourced dividends received by Danish-resident section 16C investment funds. In light thereof, foreign investment funds will no longer be subjected to discrimination as both non-resident and resident funds will suffer 15% withholding tax with effect from 1 January 2022.

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