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Article:

Withholding tax on dividend distributed to a foreign foundation

29 September 2017

Anders Kiærskou , Manager, Tax |

In a recent verdict, the Danish High Court ruled that the founder of a Dutch foundation was liable to Danish tax on dividend distributed to the foundation from a Danish subsidiary.

The case concerned an individual, who owned a large portfolio of securities via a Danish company. The ownership of the Danish company were transferred to a Dutch foundation newly founded by the individual. The board of directors of the foundation consisted of the founder and his parents. The foundation was not liable to corporate tax in the Netherlands.

Years later, the Danish company distributed dividend amounting to DKK 61,000,000 to the Dutch foundation. No tax was withheld at source. At the time of distribution, the founder was resident in the UK for tax purposes according to the double tax treaty between Denmark and the UK.

Subsequently, the Danish tax authorities ruled that the Danish company was liable to pay withholding tax amounting to 15 pct. of the dividend equaling DKK 9,150,000.

The Danish High Court initially concluded that although the Dutch foundation, from a legal standpoint, was the rightful owner of the dividend, the foundation could not be considered a taxable entity.

This was determined according to Danish tax law, after which it is a requirement that the capital of the foundation is effectively and irrevocably separated from the assets of the founder. In this respect, it is a requirement that at least one board member of the foundation is independent of the founder.

The board of the Dutch foundation consisted of the founder and his parents – both at the time the foundation was established and at the time of the dividend distribution. Thus, the requirement for an independent management in relation to the founder was not met, and the foundation was not a taxable entity according to Danish tax law.

The Danish company and the Dutch foundation argued that the foundation was covered by the double tax treaty between Denmark and the Netherlands. Taxation of the dividend should therefore be waved according to Danish domestic tax law.

The High Court ruled that the question whether an entity is liable to tax in a state and therefore, whether an entity in the sense of the double tax treaty is a resident of that state shall be determined under the law of that state. Therefore, if the foundation was a resident of the Netherlands in the sense of the double tax treaty, this should be determined according to Dutch tax law.

It was undisputed that the foundation was exempt from taxation under Dutch tax law. On the basis of the information presented, the High Court took the view that the Netherlands did not consider the foundation to be resident in the Netherlands according to the double tax treaty due to the fact that the foundation was tax exempt in the Netherlands.

Consequently, the foundation was not covered by the double tax treaty between Denmark and the Netherlands, and the conditions set out in domestic Danish tax law in order to wave taxation of the dividend was not fulfilled.

Secondarily, the Danish company and the Dutch foundation argued – unsuccessfully - that taxation of the dividend was against EU law.

As the founder owned all shares in the Danish company before he established the Dutch foundation, for tax purposes, the dividend was deemed by the High Court to be distributed to the founder directly. As the founder was resident in the UK at the time of distribution according to the double tax treaty between Denmark and the UK, Denmark was entitled to tax the dividend at a rate of 15 pct.

At the time of the dividend distribution, the managements of the Danish company and the Dutch foundation respectively were identical. As such, the Danish company was aware of the factual circumstances necessitating withholding of dividend tax. Hence, the Danish company was liable to pay the dividend tax.

The ruling does not seem particularly surprising. Nevertheless, the ruling has been appealed to the Supreme Court.

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. Please sign up here.