The Supreme Court finds in favour of the Ministry of Taxation in another "beneficial owner" case
30 June 2023
Today, the Danish Supreme Court upheld the judgment given by the Danish High Court in March 2022 in yet another case in the so-called "beneficial owner" group of cases. The Supreme Court finds that Heavy Transport Denmark Holding should have withheld tax at source in respect of a dividend distribution made in 2007 and that the Danish company is liable for the tax due. With today's judgment and the Supreme Court's judgments in the four first test cases earlier this year, a clearer picture of the state of the law in this particular area of the law is emerging. Plesner represented Heavy Transport Denmark Holding before the Supreme Court as well as before the lower courts.
The main issue in 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 residents of states outside of the EU or states without a double taxation agreement with Denmark, and that the Danish subsidiaries should therefore have withheld tax at source in connection with the payments. Because they did not make such withholding, the Ministry of Taxation is of the opinion that the Danish companies have acted "negligently" and is therefore liable for the tax.
Over the past years, the Danish tax authorities have brough around 150 cases concerning "beneficial ownership" with tax claims totalling several billions of Danish kroner.
Multiple "beneficial owner" cases are pending before both the National Tax Tribunal and the ordinary courts, and, in 2016, the High Court referred a large number of preliminary questions to the Court of Justice of the European Union ("CJEU") in six test cases. These questions concerned the interpretation of EU law, in particular in relation to the Interest and Royalties Directive and the Parent-Subsidiary Directive and the implementation of these Directives into Danish law, and the interpretation of the provision on free movement of capital in the EU Treaty. The Advocate General of the CJEU held in her opinion (supported by the European Commission) that judgment should be given in favour of the taxpayers in the cases. However, on 26 February 2019 the CJEU gave judgments in the cases that were clearly - in the eyes of most observers - in favour of the tax authorities.
In the case, in which the Supreme Court has now given its judgment, the
tax authorities have raised a considerable claim regarding non-withheld tax at
source in connection with a dividend distribution made by Heavy Transport Holding Denmark to its Luxembourg parent company back in 2007.
Heavy Transport Holding Denmark's case was brought in 2010 by the Danish Tax Authorities. Heavy Transport Holding Denmark appealed the decision to the National Tax Tribunal. In 2012, the National Tax Tribunal ruled in favour of Heavy Transport Holding Denmark, stating that there the company was not under an obligation to levy Danish withholding tax on the dividend in question. The Ministry of Taxation then brought the National Tax Tribunal's ruling before the ordinary courts.
The High Court gave its judgment in the case in March 2022. The High Court found that Heavy Transport Holding Denmark was obliged to withhold tax at source in connection with the dividend distribution made to its Luxembourg parent company in 2007, as the parent company was considered to be a so-called "conduit" company (and therefore not the "beneficial owner" of dividend) since the funds received were immediately passed on to the parent company's shareholders in Panama. The High Court held, among other things, that it made no difference that the group, as an alternative, could have liquidated the Danish company and that distribution of liquidation proceeds to the Panamanian owners would have been exempt from Danish withholding tax. The High Court further found that the company had acted negligently by not withholding tax and was therefore liable for the tax claim.
Before the High Court, the case also involved the question of interest on late payment of a potential withholding tax claim. This question has attracted increasing attention over the years since interest now amounts to almost twice as much as the withholding tax claim itself due to the long-running proceedings, the fact that compound interest applies, and, not least, due to the fact that it has not been possible for the companies to pay the claims to avoid interest, since they were successful in the National Tax Tribunal.
As for the interest issue, the High Court found that it was in conflict with general principles of law, including the right to have a fair trial, to charge interest on late payment after the time when the company had offered to pay the withholding tax claim to the tax authorities.
In the Supreme Court's first judgment in these cases - the NetApp case from January 2023 - the Supreme Court found that there was an abuse of rights - and consequently an obligation to withhold tax - as far as one of the two dividend distributions was concerned. In the NetApp case, the Supreme Court also considered the important question about interest on late payment in respect of the dividend withholding tax at issue. During the case, NetApp argued that it was in conflict with the right to a fair trial under the European Human Rights Convention and the EU Charter on Fundamental Rights to charge such exorbitant interest on late payment, which can only be avoided by giving up the case.
The Supreme Court did not find in favour of NetApp on this point, but the Supreme Court did - highly unusually - urge the Danish Parliament to review the rules on the "very high interest" and assess whether such rules were desirable.
In today's judgment the Supreme Court upheld the High Court's judgment on the question whether Heavy Transport Holding Denmark was obliged to withhold tax at source in connection with the dividend distribution in question. Accordingly, the Supreme Court fully agrees with the High Court's judgment in this respect, including that the existence of a tax-exempt alternative was irrelevant when considering whether there was an abuse.
In the present case, Heavy Transport Denmark Holding also requested the Supreme Court to make a reference to the CJEU about the compatibility of the interest rules with the EU Charter, but this was dismissed by the Supreme Court.
In a brief statement to the judgment, the counsel arguing the case before the Supreme Court, Søren Lehmann Nielsen, Plesner, says:
"It goes without saying that we and Heavy Transport Holding Denmark are disappointed with the outcome, but we have to accept it, as it is final. We will now review the judgment together with our client, and on that basis, management must identify the actions that need to be taken."
Read about the beneficial owner cases in more detail
Read the Supreme Court's judgment (in Danish)
Plesner's team conducting the cases consists of attorneys Lasse Esbjerg Christensen, Søren Lehmann Nielsen, Anders Endicott Pedersen, Hans Severin Hansen and Mathias Kjærsgaard Larsen.
Over the past years, the Danish tax authorities have brough around 150 cases concerning "beneficial ownership" with tax claims totalling several billions of Danish kroner.
Multiple "beneficial owner" cases are pending before both the National Tax Tribunal and the ordinary courts, and, in 2016, the High Court referred a large number of preliminary questions to the Court of Justice of the European Union ("CJEU") in six test cases. These questions concerned the interpretation of EU law, in particular in relation to the Interest and Royalties Directive and the Parent-Subsidiary Directive and the implementation of these Directives into Danish law, and the interpretation of the provision on free movement of capital in the EU Treaty. The Advocate General of the CJEU held in her opinion (supported by the European Commission) that judgment should be given in favour of the taxpayers in the cases. However, on 26 February 2019 the CJEU gave judgments in the cases that were clearly - in the eyes of most observers - in favour of the tax authorities.
In the case, in which the Supreme Court has now given its judgment, the
tax authorities have raised a considerable claim regarding non-withheld tax at
source in connection with a dividend distribution made by Heavy Transport Holding Denmark to its Luxembourg parent company back in 2007.
Heavy Transport Holding Denmark's case was brought in 2010 by the Danish Tax Authorities. Heavy Transport Holding Denmark appealed the decision to the National Tax Tribunal. In 2012, the National Tax Tribunal ruled in favour of Heavy Transport Holding Denmark, stating that there the company was not under an obligation to levy Danish withholding tax on the dividend in question. The Ministry of Taxation then brought the National Tax Tribunal's ruling before the ordinary courts.
The High Court gave its judgment in the case in March 2022. The High Court found that Heavy Transport Holding Denmark was obliged to withhold tax at source in connection with the dividend distribution made to its Luxembourg parent company in 2007, as the parent company was considered to be a so-called "conduit" company (and therefore not the "beneficial owner" of dividend) since the funds received were immediately passed on to the parent company's shareholders in Panama. The High Court held, among other things, that it made no difference that the group, as an alternative, could have liquidated the Danish company and that distribution of liquidation proceeds to the Panamanian owners would have been exempt from Danish withholding tax. The High Court further found that the company had acted negligently by not withholding tax and was therefore liable for the tax claim.
Before the High Court, the case also involved the question of interest on late payment of a potential withholding tax claim. This question has attracted increasing attention over the years since interest now amounts to almost twice as much as the withholding tax claim itself due to the long-running proceedings, the fact that compound interest applies, and, not least, due to the fact that it has not been possible for the companies to pay the claims to avoid interest, since they were successful in the National Tax Tribunal.
As for the interest issue, the High Court found that it was in conflict with general principles of law, including the right to have a fair trial, to charge interest on late payment after the time when the company had offered to pay the withholding tax claim to the tax authorities.
In the Supreme Court's first judgment in these cases - the NetApp case from January 2023 - the Supreme Court found that there was an abuse of rights - and consequently an obligation to withhold tax - as far as one of the two dividend distributions was concerned. In the NetApp case, the Supreme Court also considered the important question about interest on late payment in respect of the dividend withholding tax at issue. During the case, NetApp argued that it was in conflict with the right to a fair trial under the European Human Rights Convention and the EU Charter on Fundamental Rights to charge such exorbitant interest on late payment, which can only be avoided by giving up the case.
The Supreme Court did not find in favour of NetApp on this point, but the Supreme Court did - highly unusually - urge the Danish Parliament to review the rules on the "very high interest" and assess whether such rules were desirable.
In today's judgment the Supreme Court upheld the High Court's judgment on the question whether Heavy Transport Holding Denmark was obliged to withhold tax at source in connection with the dividend distribution in question. Accordingly, the Supreme Court fully agrees with the High Court's judgment in this respect, including that the existence of a tax-exempt alternative was irrelevant when considering whether there was an abuse.
In the present case, Heavy Transport Denmark Holding also requested the Supreme Court to make a reference to the CJEU about the compatibility of the interest rules with the EU Charter, but this was dismissed by the Supreme Court.
In a brief statement to the judgment, the counsel arguing the case before the Supreme Court, Søren Lehmann Nielsen, Plesner, says:
"It goes without saying that we and Heavy Transport Holding Denmark are disappointed with the outcome, but we have to accept it, as it is final. We will now review the judgment together with our client, and on that basis, management must identify the actions that need to be taken."
Read about the beneficial owner cases in more detail
Read the Supreme Court's judgment (in Danish)
Plesner's team conducting the cases consists of attorneys Lasse Esbjerg Christensen, Søren Lehmann Nielsen, Anders Endicott Pedersen, Hans Severin Hansen and Mathias Kjærsgaard Larsen.
