The Danish cases: what the latest rulings mean for private funds
These recent judgments relate to the cases of TDC and NetApp that have been referred back to the Danish courts by the Court of Justice of the European Union (CJEU). They focus on the concept of beneficial ownership, which refers to the ‘true’ owner of a payment when accessing reduced WHT rates.
The TDC case concerns a dividend paid by a Danish company to its Luxembourg parent company, which was then distributed through a Luxembourg holding structure to a consortium of private equity funds. In its most recent ruling, the Danish Supreme Court found that none of the Luxembourg holding vehicles were the beneficiaries of the dividend. Instead, the real beneficiaries were the funds, and it was therefore necessary to look through to the underlying fund investors. In the absence of evidence that these investors were entitled to an exemption from the agreement for a payment from Denmark, it was decided that the dividend should have been subject to the Danish WHT.
The NetApp case concerns two dividends paid by a Danish company to its parent company in Cyprus and then passed through the ownership chain to a Bermuda company and on to its US parent company. The Danish Supreme Court also advocated a look-through approach here, with different results for the two dividends in question. The Bermuda company held the proceeds from its first dividend for five months, during which time the cash was invested in bonds. This was deemed sufficient to make the Bermuda company the beneficial owner of this dividend. As there is no Denmark/Bermuda agreement to rely on, the dividend should therefore have been subject to the Danish WHT. For the second dividend, the US company was found to be the beneficial owner, so no Danish WHT was due under the Denmark-US agreement.
In some respects these judgments are more positive than the judgments of the ECJ. In any case, the chosen approach basically provides for access to agreements, but the taxpayers failed to establish facts. TDC was unable to prove the contractual position of the underlying investors, and for NetApp the final factor was holding funds in Bermuda. The implication is that without these issues, the two claims could have prevailed. Importantly, there was no blanket statement that treaty easements simply aren’t available on a look-through basis.
However, in each structure, the dedicated EU holding company was not considered to be the beneficial owner of the payments received. This raises questions about the treatment of traditional investment holding structures in Denmark. The Danish authorities focus on cash flow and not just substance, so a holding company with substance can still get in trouble with their interpretation of the regulations.
In the context of private funds, one solution is to rely on the contractual position of the underlying investors. The main concern here will be compliance costs, especially as the Danish authorities have a strict approach to the evidence required. Taxpayers are required to provide evidence that cash was distributed to investors and that those investors were residents of the treaty at the time of payment (with a certificate of residency). This can be challenging, especially when the mix of investors has changed since then.
Alternatively, a fund holding company may be considered a beneficial owner of a payment if it reinvests the proceeds received. While that simplifies the position, it doesn’t solve the problem when cash needs to be distributed to investors. Therefore, there is no easy answer and in many cases a detailed analysis of possible structuring options will be required.
It remains to be seen what impact the TDC and NetApp rulings will have on the wider availability of policy and contract benefits. Following the ECJ rulings on these and other Danish cases, the focus across the EU is increasingly on beneficial ownership and fighting holding structures that are seen as abusive. The recent verdicts may not come as a surprise to those who have been following the Danish cases, but they serve to reinforce this trend. While the approach differs in each country, the direction is clear and with ATAD III on the horizon, the bar for WHT relief appears to be rising.