Danish Supreme Court denies refund of dividend withholding tax to nonresident investment funds

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EY Global

29 Jun 2021
Subject Tax Alert
Categories Corporate Tax
Jurisdictions Denmark European Union

Executive summary

In June 2018, the Court of Justice of the European Union (CJEU) ruled on a case regarding the Danish withholding tax regime with respect to dividends paid by Danish companies to nonresident investment funds (UCITS) in the United Kingdom (UK) and Luxembourg.1 The case was submitted to the CJEU for a preliminary ruling by the Danish Eastern High Court.

The underlying issue in the case was that dividends paid to resident investment funds that had elected to be subject to minimum taxation under section 16 C of the Tax Assessment Act (TAA) were exempt from withholding tax, whereas dividends paid to nonresident investment funds triggered withholding tax. Under Danish law, exemption from withholding tax required: (1) that an investment fund was tax resident in Denmark; and (2) that the fund had elected to be subject to minimum taxation under section 16 C of the TAA. Minimum taxation requires a fund to calculate and report to the tax authorities an annual minimum income which is subject to tax in the hands of the investors irrespective of whether the income is actually distributed to the investors. The taxpayers asserted that Danish law was in breach of the free movement of capital set forth in Article 63 of the Treaty on the Functioning of the European Union (TFEU) and filed claims for refund of withholding taxes paid.

In its preliminary ruling, the CJEU held that requirement (1) that an investment fund be tax resident in Denmark was in breach of free movement of capital. However, the Court did not specifically address the section 16 C requirement (2) on minimum taxation.

Following the CJEU decision, in April 2019, the case was decided by the Eastern High Court in favor of the tax authorities.

On 24 June 2021, the Eastern High Court’s decision was upheld by the Supreme Court finding that the nonresident investment funds that had not elected taxation under section 16 C were not entitled to a refund of Danish dividend withholding tax.

This Alert summarizes the Supreme Court’s ruling.

Detailed discussion

The case concerned investments funds resident in the UK and Luxembourg, respectively. The investment funds had received dividends from Danish companies in the years 2000 to 2009 and filed claims for refund of the withholding tax paid. The refund claims were refused on the ground that the funds did not meet the requirements for the withholding tax exemption.

The CJEU held that the residence requirement involved a restriction which, in principle, was in breach of Article 63. However, the Court also found that the restriction could be justified based on the need to safeguard the coherence of the Danish tax system as the exemption from withholding tax for a resident investment fund was conditional on an actual or notional minimum distribution to their members who were liable to withholding tax deducted by the investment funds. Regarding the proportionality of the Danish scheme the Court noted that the internal coherence of the tax system could be maintained if nonresident investment funds, which satisfied the conditions of section 16 C of the TAA, were eligible for exemption from withholding tax, provided that the Danish tax authorities ensured, with the full cooperation of such funds, that the latter paid a tax that was equivalent to the tax provided for in section 16 C, as a withholding tax, on the minimum distribution calculated in accordance with that provision.

In summary, the CJEU ruled that: “Article 63 TFEU must be interpreted as precluding legislation of a Member State, such as that at issue in the main proceedings, under which the dividends distributed by a company resident in that Member State to a non-resident UCITS are subject to withholding tax, while dividends distributed to a UCITS resident in that same Member State are exempt from such tax, provided that the undertaking makes a minimum distribution to its members, or technically calculates a minimum distribution, and withholds on that actual or notional distribution the tax payable by its members.”

The CJEU thus found that the residence requirement was in breach of European Union (EU) law assuming that nonresident investment funds, in essence, met the section 16 C requirement. Whether this requirement itself was in breach of EU law was not analyzed by the Court.

Subsequently, the Eastern High Court opined that certain aspects of section 16 C were in breach of EU law, but held that the rule likely was justified in the need for effective tax control. In addition, the taxpayers had not applied withholding tax on distributions to the investors or provided a specification of distributions, and they had not suggested other ways in which they could provide information to the tax authorities to satisfy the tax control purposes. On this basis the Court held that the taxpayers were not entitled to a refund.

The Supreme Court upheld the decision but with different reasoning. The Court found that the fact that the residence requirement was in breach of EU law did not mean that the entire tax scheme was invalid. Instead, nonresident investment funds should be given the same rights as resident funds. This involved that nonresident funds should be exempt from withholding tax provided that they had made an election to be subject to tax under section 16 C of the TAA. However, none of the taxpayers had made such an election and they asserted that section 16 C itself was in breach of Article 63. 

The Court held that section 16 C was justified in the need to ensure the coherence of the Danish tax system and the need to ensure effective tax control, and that the rule was proportional. The Court also found that there was no reasonable doubt regarding the interpretation of EU law in relation to section 16 C for which it refused to request a preliminary ruling from the CJEU on this issue. On this basis, the Supreme Court held that the nonresident investment funds were not entitled to a refund of Danish withholding taxes, because they had not satisfied the requirement to calculate an annual minimum income under section 16 C.


Several nonresident investment funds from EU Member States and third countries have filed EU-law based withholding tax refund claims with the Danish tax authorities and many cases are pending before the National Tax Tribunal and courts. Based on the decision from the Supreme Court it must be expected that a refund of withholding taxes will be denied in the Danish legal system unless an investment fund has elected to be subject to tax under section 16 C of the TAA.

On 3 June 2021, the Danish Parliament passed bill No. L 211 B with the objective to provide equal tax treatment of resident and nonresident investment funds. The new law means that resident funds will be subject to a 15% withholding tax on dividends from Danish companies. This corresponds with the taxation of nonresident investment funds which are subject to a withholding tax of 27% and entitled to refund of 12% bringing the effective taxation down to 15%.


For additional information with respect to this Alert, please contact the following:

Ernst & Young P/S, Copenhagen
  • Jens Wittendorff
  • Jesper Frøkjær
Ernst & Young P/S, Aarhus
  • Søren Næsborg Jensen
Ernst & Young LLP (United States), Nordic Tax Desk, New York
  • Malte Søgaard

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.