Reduced tax rate on dividends paid to foreign companies

24 juni 2016

According to a bill recently adopted by the Danish Parliament, the tax rate applicable to dividends paid to foreign companies is reduced from 27 pct. to 22 pct.

The reason for reducing the tax rate on dividends paid to foreign companies from 27 pct. to 22 pct. is the current rules’ lack of compliance with EU law.

A company resident in the EU/EEA owning at least 10 pct. of the share capital in a Danish dividend-paying company may be taxed at a rate of 27 pct. on dividends from the Danish company.

This will be the case if the tax liability should not be waived or reduced according to the Parent/Subsidiary Directive or according to a double taxation agreement based on the fact that the immediate recipient is not the beneficial owner of the dividend.

However, the immediate recipient, which is the company liable to Danish tax, could rely on the rules concerning freedom of establishment under EU law.

It is considered disproportionate in relation to EU law to tax the dividend recipient at a rate that is higher than the Danish corporation tax rate of 22 pct. applicable to Danish dividend receiving companies.

In principle, the tax rate of 27 pct. could be upheld in relation to companies established outside the EU/EEA, where the rate should not be reduced or waived according to a double taxation treaty.

However, in practical terms, investors could obtain a tax rate of 22 pct. by channeling investments through a company in the EU/EEA. Hence, the rate reduction is generalised.

The reduced tax rate applies to dividends distributed from 1 January 2007 or later if the dividend recipient is a company resident in the EU or the EEA and from 1 July 2016 or later, if the recipient is a company resident outside the EU and the EEA.

Due to the changed corporation tax rate over the years, the tax rate is set to 25 pct. for the calendar years 2007 to 2013, 24.5 pct. for the calendar year 2014 and 23.5 pct. for the calendar year 2015.

The above article is taken from tax:watch, our electronic English newsletter on Danish Tax and VAT matters. tax:watch is issued on the last Friday of each month and is free of charge.