The Eastern High Court reduces the Ministry of Taxation's interest claim significantly in beneficial owner case

The issue of the "beneficial owner" cases is whether Danish companies paying interest or dividends should have withheld tax with regard to payments that are typically made to parent companies resident in other EU Member States. In the cases, the Ministry of Taxation claims that the parent companies are not the "beneficial owners" of the received interest or dividends and that the "beneficial owners" are resident outside of the EU and the Danish treaty network why the Danish subsidiaries should have withheld tax at source in connection with the payments. Because the companies did not make such withholding, the Ministry of Taxation is of the opinion that the Danish companies have acted "negligently" and therefore are liable for the tax.

Over the past years, the Danish tax authorities have raised around 150 cases concerning "beneficial ownership" with tax claims totaling several billions of Danish kroner.

As far back in time as in 2011, the Eastern High Court gave its first judgment in the beneficial owner cases, in the ISS case, in which Plesner's client, ISS, prevailed. Almost 10 years later - in May 2021 - the Eastern High Court then gave two judgments in the two first and more recent pilot cases - two dividend withholding tax cases. In one of them, the High Court found in favour of the taxpayer (NetApp) - represented by Plesner - whereas it ruled against the taxpayer (TDC) in the other case. Both judgments have been appealed to the Supreme Court where the hearing will take place over 5 court days in December 2022.

In November 2021, the Eastern High Court gave its ruling in two cases about withholding tax on interest payments. In these cases, both Danish companies were found liable to pay withholding tax in relation to interest on debt to group companies. In one of the cases (Takeda), in which Plesner represented the Danish company, the High Court accepted that the beneficial owner of the interest was a company in an EU member state (Luxembourg). However, the High Court disagreed with Takeda's interpretation of the treaty between Denmark and Luxembourg on avoidance of double taxation. These two cases have been appealed to the Supreme Court as well and the hearing will take place in April 2023.

In this new case, the funds from the Danish company had been distributed to a parent company in Luxembourg and paid on out of the EU. It was undisputed that Heavy Transport Holding Denmark was not liable to pay dividend tax under the rules in force at the time if the company had instead paid the amounts as liquidation proceeds. Although there was no tax benefit in a dividend distribution compared to a liquidation, the High Court found that the Luxembourg parent company could not receive the dividend tax exempt when the company in the opinion of the High Court was not the beneficial owner of the dividend.

However, in relation to interest on late payment of the withholding tax claim, the High Court ruled in favour of the Danish company and held that the company was not obliged to pay interest on late payment of the dividend tax as from January 2016 when the Tax Agency declined in writing to accept a payment of the claim by company (subject to the final outcome of the litigation) in order to stop (further) interest from accruing. It was the ministry's view that the company could only be allowed to pay the amount by ceasing litigation against the ministry, i.e. by giving in.

The same question was an issue in the NetApp ruling from 2021, in which 1 out of 3 judges wanted to dismiss the interest. In the ruling from today, all 3 judges of the High Court agreed with the minority judge in the NetApp ruling and added that this result was in accordance with principles of due process and the right of a fair trial.

The nullified interest claim amounts to several hundred millions DKK, in fact an amount that is larger than the withholding tax claim itself.

On numerous occasions, the Ministry of Taxation has had to acknowledge that the calculation of the claims in the beneficial owner cases has been wrong. Thus, over the years, it has turned out that the ministry's views - both in terms of the tax rate and the starting date of the interest accrual and now regarding the effects of rejecting payments in dividend cases - have not been in accordance with the law.

Attorney-at-Law Lasse Esbjerg Christensen, who is part of the team of attorneys that represent Plesner's clients in the beneficial owner cases, says:

"It is clear that it will be for the Supreme Court to make the final decision in these cases, but it is satisfying to see that the High Court in this case has found that it is not fair that the Ministry of Taxation raises claims on payment of substantial interests and at the same time rejects to receive payment of the claim for which it has sued the taxpayer. We believe it is important that the taxpayers are not under an unfair pressure when they conduct cases against the state on the interpretation of the tax legislation."

Read about the beneficial owner cases in more detail.

Plesner's team conducting the cases consists of attorneys Lasse Esbjerg Christensen, Hans Severin Hansen, Søren Lehmann Nielsen, Anders Endicott Pedersen and Mathias Kjærsgaard Larsen.