New Danish guidance on exemption from dividend tax for foreign associations, etc.

On 27 September 2022, the Tax Agency published its guidance (In Danish “styresignal”) (SKM2022.464.SKTST) which means that:

• certain foreign associations, foundations, endowments and independent self-owned institutions (hereinafter referred to as "associations etc.") may receive a refund of the withholding tax on dividends of previous years.
• certain foreign charitable and non-profit associations, etc., can receive a dividend exemption card from the Danish tax authorities to obtain relief-at-source.

The guidance follows a previous amendment to the law, see the section below for further background of the guidance.

Refund of dividend tax for previous years

Certain foreign associations, etc., can reclaim dividend tax withheld in previous years. It is not a requirement that the associations, etc., have charitable and non-profit purposes.

According to the guidance, dividend tax reclaims can be submitted for dividends declared on 14 April 2018 and later. An application for a refund of withholding tax must be submitted no later than six months after the end of the income year 2022. If an application for a refund of withholding tax is submitted after this time, the usual statute of limitations applies.

Due to pending cases in the Danish courts, it is currently not clear whether the general limitation period for a claim for refund of dividend tax is three or five years calculated from the declaration of the dividend. 

In order to avoid statute of limitations, we recommend that an application for refund of dividend tax be submitted as soon as possible and that the application cover dividends distributed within the five-year statute of limitations.

In order for a refund to be granted, the foreign associations, etc., must meet the following criteria:

• The associations, etc., must be domiciled in a foreign country for tax purposes.
• The associations, etc., must be organisationally comparable to Danish associations, etc., and must be considered independent taxpayers according to Danish tax rules. However, the associations etc. must not be comparable to Danish foundations taxable according to the Foundation Tax Act (in Danish "Fondsbeskatningsloven").

Typically, that may be associations, etc,. where the membership is continuously replaced over time, where the members are not liable for the association's obligations and where the members do not have any ownership of the capital. Examples may be sports associations, industry associations, political parties, cooperative housing associations, unemployment funds and foreign investment funds that are fully comparable to Danish account-holding investment associations (in Danish “kontoførende investeringsforeninger”).

Tax exemption card

The Danish tax authorities can, according to the guidance, issue tax exemption cards to foreign associations, etc., so that they can obtain relief-at-source. Tax exemption cards can be issued with effect from the income year 2023. 

In addition to the criteria mentioned above, the association, etc., must have charitable and non-profit purposes as defined in Danish tax legislation. For a purpose to be considered charitable and non-profitable, it is required that the circle of possible recipients considered for the distributions is defined according to objective guidelines. The purpose must also benefit a certain wider circle. An association, etc., can, however, be considered charitable, even if only a single person or institution is compensated by distribution from the association, etc., if the recipient in question is chosen among many possible ones.

Any dividend tax withheld from dividends from Danish shares in the period until the dividend exemption card is issued can be reclaimed from the Danish tax authorities using the usual procedure.

Background - EU adaptation of taxation of Danish and foreign associations (Act No. 1179 of 8 June 2021)

In the beginning of June 2021, a new law was passed in the Danish Parliament that adapted existing taxation of dividends received by Danish associations, etc., to the European Union law. The European Commission was aware that the Danish rules discriminate foreign associations, etc., and that this is incompatible with EU rules on the free movement of capital. To align the taxation of Danish and foreign associations, etc., the bill included among others the following amendments: 

• Certain Danish associations, etc., will be taxable on dividends, interest and capital gains on controlled debt as well as royalties when these are received from sources in Denmark with effect from the income year 2023. According to current rules, dividends and interest income that are not linked to business activities are non-taxable.
• Danish charitable and non-profit associations, etc., will remain tax exempt. At the same time, foreign associations, etc., equated with Danish charitable and non-profit associations, etc., are no longer taxable on dividends received from Danish companies with effect from the income year 2023.