Advocate General’s Opinion on Denmark’s withholding tax on dividends paid to foreign investment funds
The case concerns Fidelity Funds and NN (L) SICAV, two investment funds whose registered offices are in the United Kingdom and in Luxembourg respectively.
Both UCITS funds claimed the repayment of the withholding tax levied on dividends received from Danish companies between 2000 and 2009, based on EU law.
Under Danish legislation, dividends distributed by a resident company to a foreign UCITS fund were taxed at a rate of 25% in 2000, rising to 28% between 2001 and 2009. However, dividends paid to a Danish UCITS fund were exempt from withholding tax if that fund benefited from Article 16C fund status by making a minimum distribution to its investors or, as from 1 June 2005, technically calculated such a minimum distribution.
The taxpayers argued that this different treatment was contrary to the free movement of capital and requested a refund of the tax levied. They also argued that the minimum distribution requirement is contrary to the freedom to provide services.
The AG’s Opinion
Following settled case law from the CJEU in this respect, the Attorney General (AG) first noted that the free movement of capital is applicable to the case at hand, taking into account the purpose of the legislation concerned.
He then observed that UCITS funds resident in Denmark with an Article 16C fund status were exempt from tax, whereas non-resident UCITS funds were automatically excluded from the exemption. As this difference in treatment may discourage non-resident UCITS funds from investing in Danish companies and investors resident in Denmark from acquiring shares in foreign UCITS funds, the AG concluded that the Danish tax legislation constitutes a restriction to the free movement of capital.
In light of such a restriction’s existence, the AG further noted that the comparability of the situations at hand must be examined, especially with regard to the aims of the national provisions, i.e. to prevent double taxation and to ensure that dividends distributed by Danish companies are taxed in Denmark at the level of the UCITS investors.
Regarding the objective of preventing double taxation, the AG first held that resident and non-resident UCITS funds are in a comparable situation, since Denmark chose to tax dividend income received not only by resident but also by non-resident shareholders.
Regarding the objective of preserving Denmark’s power to tax, the AG questioned the ability to assess the comparability at the level of the investors. Referring to the two criteria set by the Danish legislation for benefitting from the tax exemption, the AG took the view that the residence criteria takes precedence over the minimum distribution requirement and therefore comparability should be assessed at the level of the UCITS funds.
The AG went on to assess whether the restriction can be justified by the need to safeguard the coherence of the Danish tax system.
In the AG’s opinion, since the Danish rules make the tax exemption conditional on an (actual or technical) minimum distribution to investors, which is subject to Danish withholding tax, the advantage granted to resident UCITS funds in the form of a withholding tax exemption is offset by the subsequent taxation of the dividends distributed onwards, in the hands of their investors.
Therefore, the restriction may be justified. However, the AG further concluded that such a restriction is not proportionate, as a less restrictive measure would be to allow non-resident UCITS to benefit from the withholding tax exemption, provided they pay a tax equivalent to that which Danish funds are liable to levy on the minimum distribution required.
KPMG Luxembourg comment
Worthy of note are the AG’s final remarks that non-resident UCITS funds receiving dividends from Danish companies may voluntarily satisfy the distribution conditions in their own resident state in order to comply with the Danish legislation and receive an exemption from tax at source. This would require that non-resident UCITS funds pay a tax that is equivalent to the tax that Danish Article 16C funds are required to retain on the minimum distribution.
On this basis, the AG seems to suggest that non-resident investment funds should have tried to fulfil conditions of Article 16C to back their claim to a Danish withholding refund. This recommendation, if followed, may lead non-resident claimants to only be able to obtain tax refunds if they fulfilled distribution requirements in their country of residence at the time when the withholding tax was paid.
However, it remains to be seen whether the CJEU will incorporate the AG’s opinion into its final decision.
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