The Danish cases: what the latest rulings mean for private funds
These latest rulings relate to the cases involving TDC and NetApp, which were referred back to the Danish courts by the Court of Justice of the European Union (CJEU). They centre on the concept of beneficial ownership, which looks to the "true" owner of a payment when determining access to reduced WHT rates.
The TDC case involves a dividend paid by a Danish company to its Luxembourg parent, which was then distributed through a Luxembourg holding structure to a consortium of private equity funds. In its recent judgment, the Danish Supreme Court found that none of the Luxembourg holding vehicles were the beneficial owner of the dividend. The true beneficiaries were instead the funds, and it was therefore necessary to look through to the underlying fund investors. In the absence of proof that those investors were entitled to treaty relief on a payment from Denmark, it was held that the dividend should have been subject to Danish WHT.
The NetApp case involves two dividends that were paid by a Danish company to its parent in Cyprus, then passed up the ownership chain to a Bermudan company and on to its US parent. The Danish Supreme Court also found in favour of a look-through approach here, with different outcomes for the two dividends in question. The Bermudan company retained the proceeds of the first dividend for five months, during which the cash was invested in bonds. This was deemed sufficient to make the Bermudan company the beneficial owner of that dividend. With no Denmark/Bermuda treaty to rely on, the dividend should therefore have been subject to Danish WHT. For the second dividend, the US company was found to be the beneficial owner, so there was no Danish WHT due under the Denmark/US treaty.
In some ways these rulings are more positive than the judgments of the CJEU. In each case the approach adopted allows for treaty access in principle, but the taxpayers failed on findings of fact. TDC was unable to provide evidence of the treaty position of underlying investors, and for NetApp the terminal factor was the holding of funds in Bermuda. The implication is that, absent these issues, the two claims could have prevailed. Importantly, there was no blanket finding that treaty relief is simply not available on a look-through basis.
That said, the dedicated EU holding company in each structure was not respected as the beneficial owner of the payments it received. This raises questions as to the treatment of traditional holding structures for investments into Denmark. The Danish authorities are focusing on the flow of funds rather than substance alone, so a holding company with material substance may still fall foul of their interpretation of the rules.
In a private funds context, one solution is to rely on the treaty position of underlying investors. The key concern here will be the compliance burden, particularly as the Danish authorities are taking a strict approach to the evidence required. Taxpayers are being asked to prove that cash was distributed to investors and that those investors were treaty resident (with a certificate of residence) when payments were made. This can be challenging, particularly where the constitution of investors has since changed.
Alternatively, a fund holding company may be respected as the beneficial owner of a payment if it reinvests the proceeds received. Whilst that simplifies the position, it does not solve the problem if cash needs to be distributed to investors. As such, there is no easy answer, and in many cases a detailed analysis of potential structuring options will be required.
It remains to be seen what impact the TDC and NetApp rulings will have on the availability of directive and treaty benefits more widely. Following the decisions of the CJEU on these and the other Danish cases, there has been a growing focus across the EU on beneficial ownership and counteracting holding structures that are seen as abusive. For those who have been following the Danish cases, the latest judgments may come as no surprise, but they do serve to reinforce this trend. Whilst the approach in each jurisdiction differs, the direction of travel is clear, and with ATAD III on the horizon the bar for WHT relief looks set to rise.