KPMG Luxembourg, KPMG Acor Tax and the EU Tax Centre are closely monitoring a judgement issued by Østre Landsret (High Court of Eastern Denmark) on 2 April, after the court ruled the country's tax authority could levy witholding tax on non resident investment funds, seemingly contradicting an earlier ruling by the Court of Justice of the European Union (CJEU).
The case centres on the 21 June 2018 ruling by the CJEU on the so called Fidelity Funds case (C-480/16). The European level court had concluded the the levy of a witholding tax by Denmark on dividends distributed by a Danish company to a non resident investment fund - Ucits - was contrary to the EU rules on free movement of capital.
The case involved Fidelity Funds and NN (L) Sicav - two investment funds with registered offices in the UK and Luxembourg respectively. Danish tax law had previously, under Article 16C of the Danish Tax Assessment Act, not subjected Danish investment funds to the witholding tax, but did apply it to foreign Ucits funds, even if they fulfilled the requirements of Article 16C (which required funds redistribute income to shareholders, either actually or by a notional minimum taxed at the level of the investor).
The Østre Landsret had referred the case to the CJEU for a preliminary ruling, and on 20 December 2017, advocate general Mengozzi issued conclusions, which were subsequently rendered by the CJEU on 21 June 2018.
The CJEU decision rested on key findings, including that treating Ucits differently depending on their residence constituted a restriction on the free movement of capital within the EU - for example, discouraging non resident Ucits from investing in Danish companies and discouraging investors resident in Denmark from investing in foreign Ucits; it also said there was nothing in the balance of tax powers between member states of the EU that would support Denmark's position; and it rejected the argument that Denmark had a right to protect the coherence of its tax system in this case, as the restrictions were deemed not proportionate given other solutions that could be applied in regards to Article 16C status.
However, KPMG Luxembourg said at the time following the CJEU ruling that it remained "uncertain how the CJEU's decision will be applied to non resident funds."
"Indeed, the Eastern High Court could construe the case as follows:
- Only grant the refund if non resident investment funds are comparable to Danish funds and have applied for and complied with the Article 16C regime (worst-case scenario, which we do not believe would be in line with EU law).
- Provide a refund if the foreign fund is comparable to a Danish fund, ie an (actually or notionally) distributing fund (purely capitalizing funds would, thus, not be entitled to a refund).
- Provide a refund for all non resident distributing and capitalizing funds (this is, in our view, unlikely).
"Depending on the ruling from the Eastern High Court, the Danish tax authorities may require evidence that the fund's investors have effectively been subject to tax on the (actual or notional) distribution.
"For Luxembourg funds, it would nevertheless be almost impossible to demonstrate for each individual investment that it has been taxed, since funds do not always know the identity of investors. For example, funds which are widely held are normally distributed via nominee accounts and therefore it isn't clear who the investors are. Also, the nominees/distributors are bound by the EU General Data Privacy Regulations and are, therefore, not permitted to disclose the information. We, therefore, believe that such requirement would go too far and not be compatible with EU law.
"In addition, investment funds in Luxembourg are often umbrella funds with several sub funds/share classes, which can be a mix of capitalizing and distributing sub funds/share classes.
"In this case, if option 2 is applied by the Danish Court, it would be necessary to compute a ratio of capitalization and distribution parts within the umbrella fund taking into account the investment policy of the different sub-funds/share classes.
"Given the above, we would recommend filing reclaims for distributing funds and mixed funds for which it is possible to make a split between the distributing and capitalizing parts.
"For purely capitalizing funds (having no distributing sub funds/share classes), we would recommend waiting until a decision from the Danish Eastern High Court is rendered to see whether the said Court also grants capitalizing funds the opportunity to reclaim the taxes based on the CJEU decision.
"Finally, it is expected that Denmark will amend its domestic law to allow foreign funds, which are subject to conditions in line with the conditions currently applicable to domestic funds under Article 16C, to benefit from WHT exemption in the future."
KPMG Luxembourg described the latest court ruling as "negative". Effectively, it has rejected the request for a refund of Danish witholding tax and sided with the local tax authority.
What remains to be seen is the full justification of the ruling, hence further updates are expected once the full text is published by the court, KPMG Luxembourg noted.
Commenting on the latest ruling, Storebrand Asset Management said: "This is well known issue in many countries. Withholding tax will of course have an influence on the return of capital, which we will have to take into consideration."
The manager has announced that it is entering the Danish market with five equity funds. (https://www.investmenteurope.net/news/4001682/headline )