Earlier this year, the European Commission (EC) initiated infringement proceeding against Denmark concerning what was asserted to be Denmark’s discriminatory tax treatment of outbound dividend distributions made to foreign investment funds.
The EC challenged the Danish tax treatment of dividends distributed to foreign investment funds on the grounds that Danish domiciled “undertakings for collective investments in transferable securities” (UCITS) benefit from a withholding tax exemption on dividends distributed by a Danish company, whereas, in a comparable situation, a dividend distribution from a Danish company to a non-resident UCITS is subject to withholding tax.
The discrimination, it was asserted, only applied with respect to foreign UCITS that are comparable to the Danish distributing investment funds.
In its July 2012 answer to the EC, the Danish tax authority acknowledged that Danish- and foreign-based UCITS are subject to different tax treatment in respect of dividends distributed from Danish companies. However, this difference in treatment was claimed to be justified based on the need to safeguard the coherence of the tax system and the exercise of fiscal sovereignty.
The matter is pending consideration by the Court of Justice of the European Union (CJEU).
Tax professionals in Luxembourg believe that the unique characteristics of the Danish tax regime are probably not sufficient to prove that the exiting Danish tax regime complies with EU law on dividend distributions to foreign UCITS. Although the Danish tax authorities are now under increasing pressure, they have not shown any indication that they would adopt a more favorable position towards the EC claims.
In the light of the judgment in the Santander case (C-338/11), tax professionals believe it is unlikely that the CJEU would accept the position of the Danish tax authorities—in particular, taking into account that the difference in treatment is based solely on the jurisdiction where the recipient of the dividend distribution is located.
Pending the issuance of a judgment, prudent distributing UCITS may want to conduct a comparability analysis and file protective claims with the Danish tax authorities—possibly as far back as 2009—if the refund claim is filed before 1 May 2013.
Read an October 2012 report [PDF 51 KB] prepared by the KPMG member firm in Luxembourg: EU Commission challenges Danish legislation on outbound dividends to foreign investment funds