Danish government proposes new relief mechanism for dividend withholding taxation

The Danish minister of taxation has published a proposal for a so-called ‘net-withholding mechanism’ for the handling of dividend withholding taxation of non-Danish individuals and corporate entities having shares in Danish listed companies.

The key point in the proposed mechanism is the elimination of the need for dividend tax reclaims, as dividend payments from Danish listed companies to non-resident shareholders will be distributed on a net basis and no longer on a gross basis.

From a technical perspective, this requires that non-resident shareholders must disclose certain key information to their respective custodian bank(s), including, inter alia, the characteristics of the entity, domicile state for tax purposes, a statement of beneficial ownership of the shares for Danish tax purposes and a power of attorney granted to the custodian.

Based on this information, the Danish Tax Authority then issues a unique taxpayer identification number, which grants a right to receive dividends net of the rate of withholding tax applicable in the relevant tax treaty, e.g. most often 15% (if applicable).

Non-Danish shareholders eligible for a special tax treatment different from the general tax rate according the relevant tax treaty, e.g. pension funds with a right to 0% in Danish dividend withholding tax, must obtain an advance approval from the Danish Tax Authority to qualify for such special treatment.

Once the non-Danish shareholders have submitted information and received a unique taxpayer identification number, they will receive dividends net of the applicable rate.

Non-Danish shareholders encompassed by the new net-withholding mechanism can no longer request a reclaim under the normal procedure. Instead, there is a 45 days rectification period subsequent to a dividend decision. Furthermore, a relief mechanism in a tax treaty is still available for a non-Danish shareholder.

In order to ensure compliance from both non-Danish shareholders and financial intermediaries, the proposal further contains joint and several liability for any discrepancy between the total tax liability and the actual tax withheld. As such, the custodian bank(s) involved may become liable to remit a payment on behalf of one or more non-Danish shareholders.

We would recommend our clients to get started with the preparation for the new mechanism. In particular, we could assist with the following:

• update of the back-to-back agreements between the financial institutions in respect of, inter alia, the Danish Tax Authority’s request for information of the non-Danish shareholders and the regulation of the joint and several liability for any excess dividend payments
• request the Danish Tax Authority for advance rulings pertaining to a special status under a tax treaty