The Danish tax authorities lose yet another battle on beneficial ownership

Date 23 nov. 2010



Not many people doubt that the determination of the term “beneficial ownership” is one of the most central issues in international taxation of our time. The issue is particularly relevant because of the acquisition models used by private equity funds, but also because of other acquisition and holding company structures.


The subject of beneficial ownership has attracted a lot of attention in the international financial and tax world. Since 2007, the tax authorities have invested a great number of resources in auditing efforts in relation to certain foreign private equity funds’ acquisition of Danish companies. Consequently, it is estimated that the authorities have made approximately 50 taxable income adjustments in relation to alleged non-withholding of Danish source income on interests and dividends.


The Danish Tax Tribunal issued its first decision on 3 March 2010 in what is expected to become a long list of decisions. On 17 November 2010 the tribunal published another decision regarding the same subject matter.




The issue was whether a Danish company was subject to a withholding requirement in relation to its interest payments to its parent, a Luxembourg S.a.r.l. The company structure was a common private equity acquisition structure used in leveraged buy-outs.


The dispute centered around the joint acquisition of a Danish public limited company by a number of private equity funds through a Luxembourg S.a.r.l. holding company structure consisting of G1 S.a.r.l and G4 S.a.r.l.


First, another public limited company (G2 A/S) owned by the funds acquired the target (G3 A/S), thereby making G2 A/S the holding company of G3 A/S.


Next, the funds established a new Danish company (H1 A/S) by contributing G2 A/S, thereby making G2 A/S a wholly-owned subsidiary of H1 A/S, creating a Danish double holding company structure. This double holding company structure was then contributed to the Luxembourg double holding company structure. The sole purpose of each holding company was to own and finance their respective subsidiary. The Luxembourg companies were registered in Luxembourg and had no employees. The Board of Managers of the two companies were identical, and the day-to-day operations were handled by the private equity funds’ administrative companies.


Once the company structure was in place, H1 A/S submitted its annual report, and the ordinary shareholder’s meeting was held. At the shareholder’s meeting, it was decided to pay out dividends to the parent company, G4 S.a.r.l. Following the dividends payment, G4 S.a.r.l. issued two loans to H1 A/S, a traditional loan and a convertible loan. The total amount of the loans equalled the amount of the dividends G4 S.a.r.l. had received from H1 A/S. The same day as the loans were issued, H1 A/S made a capital increase in G2 A/S through a cash contribution. At the end of the same year, the convertible loan including interests was converted into H1 A/S shares, and the following year, the non-convertible loan with interest was similarly converted into H1 A/S shares.


The company structure may be illustrated as follows:







The Decision of the Tax Authorities 

The tax authorities increased H1 A/S’ taxable income by adding withholding tax on interests. It was determined that G4 S.a.r.l. was not the beneficial owner pursuant to the Danish-Luxembourg tax treaty or the interests and royalties directive, since the company did not conduct any business activity and since the company had no control over the interest payments.


The Decision of the Tax Tribunal

After having outlined the facts and the applicable law, the Tax Tribunal noted that, in a previous decision, the tribunal had sided with the company in concluding that the dividends were not subject to withholding. In so concluding, the tribunal had emphasized the fact that the dividends were not transferred to the parent company, G1 S.a.r.l. or its shareholders, but rather used to issue loans to H1 A/S who in turn had made a cash capital increase in its subsidiary for the purpose of acquiring G3 A/S.


As such, the tribunal concluded in the present decision that since the interest payments  following the debt conversion had similarly not been transferred to G4 S.a.r.l.’s parent company or its shareholders, G4 S.a.r.l. did not constitute a mere conduit in relation to the interest payments, and thus G4 S.a.r.l. was the beneficial owner of those payments.



Bearing in mind that the interest payments were not transferred to the ultimate owners, the decision is absolutely correct. The term ”conduit” makes little sense, unless the entity in fact acts as a mere conduit in channelling payments to the ultimate owners.


In the first decision, the tribunal supports a dynamic interpretation of the tax treaties, in that it referred to OECD’s commentary to Article 10 of the 2003 treaty, even though the case involved the interpretation of a treaty from 1980. Moreover, by referring to the OECD commentary, the tribunal also supports the notion that the term beneficial owner must be interpreted autonomously. This is also the result of this decision.


Regardless of the fact that the decision deals with atypical circumstances in relation to the classic beneficial owner situations, the decision may be relevant for the private equity sector, in that it is common practice in this sector that dividends and interests are not transferred to the ultimate owners, but are instead used to service bank debt in the holding company.


Certain specific questions were raised that were not addressed by the tribunal.


First, the company argued that no withholding requirement could apply if the idea of benificial ownership is followed to a tee. Even though the question did not affect the outcome of the dispute, it is possible that it may be relevant for other disputes with different facts.


Second, the tax authorities argued that the existence of tax arbitrage should result in an increased scrutiny. Even though the tribunal did not address the issue, it would be very surprising if the mere utilization of asymmetries between two countries should result in a more stringent application of the rules.


If the two decisions are indicative of the decisions to come, it is very probable that the legislature will enact a specific rule to address these situations. Until then, it should also be expected that the tribunal will have the opportunity to clarify a number of other situations where the application of the beneficial ownership principle seems more appropriate than in the two present decisions.



If you have any questions or require additional information on the decision, please contact Jakob Bundgaard, Partner, or Kim David Lexner, Junior Associate,

The above does not constitute legal counselling and Moalem Weitemeyer Bendtsen does not warrant the accuracy of the information. With the above text, Moalem Weitemeyer Bendtsen has not assumed responsibility of any kind as a consequence of a reader’s use of the above as a basis for decisions or considerations.