Taxation of investment funds in Denmark
On 21 June 2018, the Court of Justice of the European Union (CJEU) ruled that the Danish rules exempting Danish investment funds from withholding tax on certain dividends constitute a restriction on the principle of free movement of capital. Now, almost three years later, a Bill amending these rules has been passed by the Danish Parliament.
The Danish Minister of Taxation submitted in April a new Bill which aims to bring the Danish rules on taxation of dividends received by investment funds from Danish companies in line with EU law. In the Bill it was proposed that Danish investment funds with status as a so-called "minimum taxation investment fund" (in Danish "investeringsinstitutter med minimumsbeskatning") must pay a dividend tax of 15 per cent on dividends from Danish companies. This will ensure equality between Danish and non-resident investment funds, as non-resident investment funds are typically subject to a dividend tax of 15 per cent on dividends received from Danish companies.
The Bill is a result of the CJEU decision in the so-called Fidelity Fund case (C-480/16). You can read more about the decision here: The Court of Justice of the European Union rules against Danish tax legislation (kromannreumert.com)
On 3 June 2021 the Bill was passed by the Danish Parliament.
The existing rules
In general, Danish companies subject to Danish corporate income tax must withhold tax on all dividends.
Under the existing rules, the withholding tax rate may in practice be lowered to 0 per cent in respect of dividends paid to most Danish-domiciled investment funds, provided that they are subject to a Danish tax scheme, which basically entails that a so-called “minimum income” is taxed at the level of the investors in the investment funds.
Thus, Danish-domiciled investment funds with status as so-called "minimum taxation investment fund" can choose either to receive dividends from Danish companies free of Danish withholding tax or to be taxed on such dividends at a rate of 15 per cent. If a Danish investment fund with status as a so-called "minimum taxation investment fund" does not pay tax on dividends from Danish companies, then the investment fund must - if it invests in shares in Danish companies - withhold tax on distributions made to non-Danish investors. On the other hand, if the investment fund chooses to pay a 15 per cent tax on dividends from Danish companies, then it is not obliged to withhold tax on distributions to non-Danish investors.
Non-resident investment funds are treated differently from Danish investment funds in terms of dividend distributions, because non-resident investment funds do not have such choice.
The new rules
According to the passed Bill, all Danish investment funds with status as "minimum taxation investment fund" will no longer be able to receive dividends from Danish companies tax-exempt.
Whereas Danish investment funds previously had the option of choosing whether or not they would pay tax on dividends received from Danish companies, the new rules remove this option. This means that going forward Danish investment funds will have to pay a withholding tax on dividend distributions from Danish companies in the same manner as non-resident investment funds.
The new rules mean that the effective taxation of Danish investors in Danish-domiciled investment funds, will increase, to the extent the investment fund in question receive dividends from Danish companies.
The new rules will have effect from 1 January 2022.
Kromann Reumert has followed the work with the Bill closely and is, of course, available for a discussion of what consequences the Bill can have for you.