First Danish court decision on beneficial ownership regarding dividends from Danish target companies

Date 17 aug. 2010

It has long been common practice for foreign companies to acquire Danish companies through a controlled holding company in countries such as Luxembourg. This has led the Danish Tax and Customs Administration (“SKAT”) to commence a number of proceedings, arguing that the Danish target company is required to withhold taxes on interests and dividends made to the foreign holding company. The idea is that the controlled holding company is not considered the beneficial owner of the payments in question and thus, the payments are subject to Danish taxation.


The first cases addressing this precise issue have been highly anticipated. The High Court has now made a determination as to the withholding in connection with a Danish company’s payments in such an equity fond structure. The majority of the High Court (3-1) concluded that the foreign parent (Luxembourg Sarl.) was the beneficial owner of the payments. Thus, no withholding requirement applied to the payments from the Danish company.



A Danish company, D1, paid dividends to its foreign parent, P1. Subsequently, the parent, P1, lent a larger part of the dividends back to the Danish company, D1. Concurrently, D1 effected a capital increase in one of its Danish subsidiaries, D2, by contributing the money borrowed from P1. D2 then used that money to acquire D3, a third Danish company. At the conclusion of the accounting year, the loan from P1 to D1 was converted into D1 stock.


P1 was structurally a subsidiary of another foreign parent, P2, that was ultimately owned by a number of investors.


The issue was a matter of whether P1 was a mere conduit, whose sole purpose was to avoid withholding, or whether it was the beneficial owner of the money received from the Danish company.


The company structure and the relevant cash flow may generally be illustrated as follows:






The Legal Basis

Danish companies are required to withhold taxes when deciding to pay dividends to foreign shareholders. One exception to this rule is that withholding is not required if a foreign company receives dividends from a Danish company, and the dividends are not subject to taxation under the Danish Companies Tax Act.


Pursuant to the Danish Companies Tax Act effective at the time, foreign companies are generally subject to taxation, with the exception of companies that own at least 20 pct. of the share capital in the dividends-paying company for a concurrent period of at least one year. All of this is conditioned upon the taxation being decreased or eliminated according to EU’s parent/subsidiary Directive, or the applicable tax treaty.


The High Court’s Decision

The High Court first noted that the OECD’s model tax treaty commentary explained that the term beneficial owner should be interpreted in accordance with the purpose of the treaty, including the avoidance of double taxation and its counterpart, double non-taxation.


The determinative factor as to whether the entity in question is a mere conduit is whether it only enjoys very limited powers which, regardless of its formal ownership, acts on the behalf of others. The High Court emphasized, however, that having limited powers does not, in and of itself, provide a sufficient basis to conclude that the entity in question is a mere conduit. 


Thus, the High Court concluded that since P1 did not forward the dividends received to its parent, but instead used the funds to provide D1 with a loan, P1 was not a mere conduit. Consequently, P1 was the beneficial owner of the dividends, and no withholding requirement applied.


The Decision’s Consequences

With the first verdict in this area, we have come a little step further to a clarification as to the withholding requirement regarding cross-border payments of dividends, interests and royalties. Not until an anticipated final verdict from the Supreme Court on the matter, however, will we have absolute clarification. The High Court’s verdict itself also raises a number of interpretation issues.


The specific outcome of the case must be considered correct, in as much as the dividends were not forwarded to the ultimate owners. The term “conduit” makes little sense if no money actually runs through it. One may wonder then, why the Danish Tax and Customs Administration (“SKAT”) chose this case to be the first to be presented to the courts. 


The High Court notes that limited powers is a requisite for finding that the entity is a conduit which in relation to the dividends makes it a nullity or administrator. Concurrently, it is noted that limited powers, in and of itself, is an insufficient basis to conclude that the entity is not the beneficial owner. Thus, something more is required. The verdict does therefore not disqualify regular holding companies from being beneficial owners.


With this statement, it is far from given that the High Court will reach the opposite conclusion than the one in the case at bar in circumstances where the entity is in fact a mere conduit.


The High Court evidently supports a dynamic interpretation of the tax treaties, in that it refers to OECD’s commentary to Article 10 of the 2003 treaty, even though the case involved the interpretation of a treaty from 1980. Moreover, by referring to the OECD commentary, the High Court seems to support the notion that the term beneficial owner must be interpreted autonomously.


It remains unclear what relevance the verdict has for payments other than dividends, such as interests and royalties. The verdict’s central message that the forwarding of the payments is a requisite should, however, apply equally to these types of payments for the exact same reasons.


Regardless of the fact that the verdict deals with atypical circumstances in relation to the classic beneficial owner situations, the verdict may be relevant for the private equity sector, in that it is common practice in this sector, that dividends (or interests) are not forwarded to the ultimate owners, but are instead used to service bank debt in the holding company. For this reason, the verdict may prove to be of practical importance.


If the High Court’s determination is any indication as to the verdicts to come, it is very probable that the legislature will enact a specific rule to address these situations.



If you have any questions or require additional information on the verdict, please contact Partner, Honorary Professor Jakob Bundgaard ( or Senior Associate Henning Hedegaard Thomsen (  


The above does not constitute legal counselling and Moalem Weitemeyer Bendtsen does not warrant the accuracy of the information. With the above text, Moalem Weitemeyer Bendtsen has not assumed responsibility of any kind as a consequence of a reader’s use of the above as a basis for decisions or considerations.