The Danish “beneficial owner” cases

On 9 January 2023, the Danish Supreme Court issued its first rulings in the Danish “beneficial owner” cases; NetApp vs The Danish Ministry of Taxation (case 69/2021 and 79/2021) and TDC vs. The Danish Ministry of Taxation (case 70/2021).

The Danish Supreme Court’s ruling in the NetApp case largely went against the ruling of the Danish Eastern High Court and concluded that NetApp should have withheld Danish dividend tax in respect of a dividend distribution made in 2005, but not in relation to the distribution made in 2006. The difference in outcome was due to an intermediary company in Bermuda being considered the beneficial owner of part of the dividends instead of the ultimate US parent company. 

At the same time, the Danish Supreme Court found that TDC was obliged to withhold Danish dividend tax on dividend distributions to its parent company.
The Danish Tax Authorities have over the past years paid great attention to “beneficial ownership” issues and, subsequently, raised several cases. These cases are the first ever to be decided by the Danish Supreme Court. 

The Danish Supreme Court’s ruling 

NetApp

The NetApp case concerned two dividend distributions from a Danish subsidiary, NetApp Denmark ApS, to its Cypriot parent company (DKK 566m in 2005 and DKK 92m in 2006, respectively). The Cypriot parent company subsequently paid on the received cash to its Bermuda parent company, NetApp Bermuda, which after a period of approximately 5 months distributed the funds to the ultimate US parent company in the group.

Obligation to withhold tax in relation to the dividend distributed in 2005

In relation to the first dividend distribution of DKK 566m, the Danish Eastern High Court previously found that the Cypriot parent company did not qualify as beneficial owner of the distribution and, as such, could not benefit from the Denmark-Cyprus Double Tax Treaty or the EU Parent- Subsidiary Directive. However, the High Court ruled that the dividend distribution was not liable to Danish dividend tax, as the distributing company had established that the dividend had been re-distributed to the ultimate US parent company. 

The Danish Supreme Court concluded that the ultimate US parent company could not be considered the beneficial owner of the dividend, but instead NetApp Bermuda was the beneficial owner. In its conclusion, the Danish Supreme Court emphasized the fact that the dividend had remained with NetApp Bermuda for approximately 5 months, during which period the company used the funds to invest in bonds, before it was decided to distribute the funds to the ultimate US parent company. As such, NetApp Bermuda could dispose of the funds at any given time and should thus be seen as the beneficial owner of the dividends. 

The Danish Supreme Court also mentioned that there was no information on the background for the prior restructuring of the group. NetApp Cyprus and NetApp Bermuda were in the restructuring included in between the US parent and NetApp DK.  

As such, the Danish taxpayer, NetApp Denmark ApS, was found liable to withhold Danish dividend tax on the distribution to its Cypriot parent company. 

No obligation to withhold tax in respect of the dividend distributed in 2006 

In 2006, it was decided that NetApp Denmark ApS should distribute DKK 92m up the ownership structure to NetApp Bermuda company as part of a larger distribution of USD 550m from NetApp Bermuda to the ultimate US parent company. However, the DKK 92m distributed from NetApp Denmark ApS to the Bermuda company was only paid in full to NetApp Bermuda in 2010. The delay of the payment was due to NetApp Denmark ApS having to finalize the sale of shares in a Dutch subsidiary, to which the purchase price received was used to fund the 2006 distribution. 

The Danish Eastern High Court had previously found that there was not sufficient evidence to support that the DKK 92m was re-distribution to the US parent in 2006; thus, it concluded that the dividend was subject to Danish dividend tax. 

The Danish Supreme Court found that NetApp Denmark ApS had proven that the distribution in fact was included in the 2006-distribution. The Danish Supreme Court stressed the fact that the US parent company’s consolidated financial statements and financial accounts for 2005/06, stated that “as a result of this dividend, there was no significant unremitted earnings held by our foreign subsidiaries”, implying that NetApp Denmark ApS had distributed all its free reserves, i.e. the DKK 92m. Further, the Danish Supreme Court also placed emphasis on the fact that NetApp Bermuda had taken on debt of USD 300m specifically to fund the distribution. Thus, the Danish Supreme Court concluded that the US parent company should be considered as the beneficial owner of the dividend, why no Danish dividend tax should be imposed on the dividend distributed by NetApp Denmark ApS in 2006.

Specific on interestIn addition, the Danish Supreme Court ruled that interest and compounded interest, in accordance with the Danish Act on the Collection of Direct and Indirect taxes (“opkrævningsloven”), should be levied on the claim. This, despite of the fact that NetApp was unable to deposit the disputed claim and thereby avoided accruing interest, due to the National Tax Tribunal’s decision in favor of them and predominantly in the Danish Eastern High Court.

TDC

The TDC case concerned a distribution from a Danish subsidiary to its Luxembourg parent company (partnership limited by shares/SCA, which owned 59.1% of the shares in the Danish subsidiary). The Luxembourg parent company was owned by another Luxembourg company (public limited company/SA), which was owned by Private Equity funds. The Danish Supreme Court decided to uphold the initial ruling given by the Danish Eastern High Court, as the Danish Supreme Court also emphasized TDC’s failure to document i) where the distribution ultimately ended and ii) which country the beneficial owners (ultimate shareholders) of the distribution were resident in for tax purposes.

The lack of disclosure led the Danish Supreme Court to conclude that the Danish subsidiary was liable to Danish dividend tax on the distribution, since no beneficial owner could be properly identified and, as such, it would not be possible to determine where such distribution would end up and whether a double tax treaty or EU directive would apply.

What now?

The rulings will be applied as precedence in the pending and future beneficial ownership cases.

Further, the ruling illustrates that the Supreme Court accepts a look-through approach, but it requires that the beneficial owner can be identified and that no intermediary companies in the Group have been in a position to dispose of the dividend received on the way up. 

You can read the verdict from the Danish Supreme Court in more details (in Danish)