New model for dividend taxation – relief at source

28 May 2020

On 18 May 2020, the Danish Ministry of Taxation announced that an agreement on a new model for dividend taxation has been concluded. The Agreement was concluded between the Danish Ministry of Taxation, Finans Danmark (The Danish Financial Sector Organization), selected banks and VP Securities (The Danish Central Securities Depository).

The principles of the Agreement include:

• Relief at source of dividend withholding tax at the time of distribution
• Registration of shareholders
• Objective liability for the banks

Current rules

Under the current rules, as a main rule, 27% withholding tax is levied on dividend distributions to foreign shareholders. However, under Denmark’s double tax treaties, most foreign shareholders are eligible for a lower tax rate, typically 15%. Pension funds in some countries are entitled to even lower taxation under Denmark’s double taxation conventions, typically 0%. 

Shareholders entitled to a lower tax rate than 27% can apply for a refund of the excess tax from the Danish tax authorities.

There is currently a backlog of 62,000 refund requests. 

The new model

Relief at source

The new model is based on a relief at source of the withholding tax rather than refund. This implies that dividend withholding tax is withheld applying the registered tax rate already in connection with the distribution of the dividends. 

Registration of shareholders

In order to apply relief at source, foreign shareholders who are entitled to a dividend tax of less than 27% will have to be registered with the Danish Tax Agency with their name and other necessary information.

Registration shall be made by the shareholder’s custodian bank. 

Once the Danish Tax Agency has received the required information, an identification number is issued. 

Shareholders who are eligible for a particularly low tax rate (typically 0%) must be approved in advance by the Danish Tax Agency. These may be foreign pension funds or states.

Based on the registration of shareholders, dividend is paid to the shareholders deducting the registered tax rate. Subsequently, corrections to the dividend tax withheld may be made for a specified period based on adjusted information.

At the expiry of the correction period, the dividend tax withheld shall be paid to the Danish tax authorities, and at the same time, the Danish tax authorities must receive full reporting on the dividends, tax and shareholders.

Spot checks

After payment of the dividend tax, the Danish tax authorities carry out spot checks. If, in this respect, the tax authorities find that too little tax has been paid, the custodian banks shall be liable for the correct dividend tax being paid to the Danish tax authorities.

Objective liability

The withholding of dividend tax takes place before the Danish tax authorities have been able to verify the information forming basis for the tax rate. 

The banks assume an objective liability for paying any additional tax to the Danish tax authorities if the subsequent verification shows that too little dividend tax has been withheld. This ensures that tax due can be charged from banks in Denmark.

Excluded from the objective liability are situations concerning shareholders who are entitled to a particularly low tax rate and who must be approved in advance by the Danish Tax Agency. Any changes in the Danish Tax Agency’s assessment of the status of these shareholders are not covered by the banks’ objective liability. However, the banks will continue to be liable where such shareholders are not the beneficial owner under Danish law.

It is a condition for the Danish banks’ participation in the model that they can recover any losses from the foreign banks. Accordingly, it is a prerequisite that the foreign banks choose to join the model.

In order to clarify the requirements of the model, including for the foreign bank, a "beneficial owner" statement has been prepared, according to the published material, which the shareholder must sign, describing situations in which the immediate recipient of the dividend according to Danish tax law should not be considered the beneficial owner.

Temporary access to refund

The relief at source model is supplemented by a temporary possibility for refund. This implies that during a period subsequent to the payment of the dividends, it will be possible to register with the Danish Tax Agency and obtain an identification number, which may be used as a basis for recovery of overpaid dividend tax. 

Refund requests can only be made through the custodian banks. Unless otherwise agreed in a double taxation convention, the deadline for requesting reimbursement is considerably shorter than today.

Entry into force

There is currently no announcement as to when the new rules are expected to come into force. 

However, the parties to the agreement agree to carry out a consultation process, and a number of technical issues need to be clarified.

It is our assessment that the new system will not come into force until 2023 or 2024.

Find Danish version here.