Corporate Tax Implications of Denmark's Unilateral Termination Of
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Bulletin_07_Final.qxp:BIT 01-07-2009 14:18 Pagina 295 Tax Treaty Monitor Jakob Bundgaard and Katja Joo Dyppel* Corporate Tax Implications of Denmark’s Unilateral Termination of its Tax Treaties with France and Spain Denmark terminated its tax treaties with France 2. Danish Companies with Activities in or and Spain effective 1 January 2009. This means, Payments from France or Spain among other things, that each country will tax the income in question according to its domestic 2.1. Dividends tax rules, which could result in a higher effective In France, the standard withholding tax rate on div - tax rate or double taxation in some cases. This idends is 25%; in Spain, the rate is 18%. Following Den - article examines the corporate tax consequences mark’s termination of its tax treaties with these countries, of the terminations for Danish companies with the treaty reduced rates are not available with respect to activities in or payments from France or Spain the dividends received by a Danish parent company and for French and Spanish companies with from a French or Spanish subsidiary. If, however, the activities in or payments from Denmark. requirements of the Parent-Subsidiary Directive are met, the dividends may be exempt from the French or Span - 1. Background ish withholding tax on dividends. In accordance with Act No. 85 of 20 February 2008, Den - The Directive applies where the parent holds at least 10% mark terminated its double taxation treaties with France of the shares of the subsidiary for a period of at least two and Spain with effect from 1 January 2009. The Danish years (one year in Spain) within which the dividends are Ministry of Finance announced the terminations in June distributed. The two-year holding period does not have 2008 and said that the main reason for doing so was to to elapse before the distribution, provided the holding safeguard the Danish taxation of pensioners. According requirement is later satisfied. In addition, the Directive to the explanatory notes to the Act, termination of these applies only if the relevant companies fulfil three addi - treaties has no economic or administrative conse - tional conditions, namely: quences of importance for the business community. (a) the companies take one of the forms listed in the Annex to the Directive; This is not a correct picture of the situation because (b) according to the tax law of each Member State, the there are general and perhaps unforeseen consequences companies are considered resident in that state for for companies engaged in cross-border activities in or tax purposes and are not considered residents for tax deriving income from Denmark, France and Spain. This purposes outside the European Union under a tax article identifies and discusses several scenarios in which treaty concluded with a third state; and termination of these treaties results in a higher effective (c) the companies are, without the possibility of an tax rate and, in some cases, actual double taxation. option or of being exempt, subject to one of the taxes In the absence of a treaty, each country will tax the mentioned in the Directive – selskabsskat in Den - income in question according to its domestic tax rules. For Denmark, France and Spain, however, the domestic tax rules on dividends, interest and royalties are gov - * © Jakob Bundgaard and Katja Joo Dyppel, 2009. erned by the EC Parent-Subsidiary and Interest and Roy - Jakob Bundgaard, PhD, Partner, Deloitte; and Associate Professor, alties Directives. Copenhagen Research Group on International Taxation (CORIT) and Copenhagen Business School. This article focuses on the tax consequences for Katja Joo Dyppel, PhD Scholar, Deloitte; Copenhagen Research Group on International Taxation (CORIT) and Copenhagen Business companies. Additional issues and unforeseen conse - School. quences also apply in relation to individuals. 1 It should 1. For example, salaries, wages and other similar remuneration for govern - be noted that certain beneficial provisions in Spain’s ment services are no longer tax exempt, i.e. payments for such services to indi - domestic legislation are tied to the existence of a tax viduals in Denmark are taxed in Denmark. Examples of such payments are treaty with an exchange of information clause. These salaries to employees at the embassy and teachers at the French/Spanish school. In addition, individuals resident in Denmark who work in France and provisions are no longer applicable with respect to Den - vice versa are subject to taxation at source on their salaries, etc. This may result mark. in a higher effective tax rate or actual double taxation since there are no domestic relief provisions in France’s domestic tax legislation. Further, Danish resident individuals who work in Spain are subject to tax in Spain on the income earned from the work carried out in Spain. If a Danish resident com - pany employs such an individual and the company is found to “operate” in Spain (even without a permanent establishment), the company is obliged to register with the Spanish tax authorities and withhold tax on the payments to the employee for the work carried out in Spain. © IBFD BULLETIN FOR INTERNATIONAL TAXATION JULY 2009 295 Bulletin_07_Final.qxp:BIT 01-07-2009 14:18 Pagina 296 Tax Treaty Monitor mark, impôt sur les sociétés in France and impuesto are not residents of the European Union. However, this sobre sociedades in Spain. limitation only applies if: (a) the EU parent company does not carry on a business Even if the requirements of the Parent-Subsidiary Dir - activity that is directly related to that of the Spanish ective are met, the laws of France and Spain contain a affiliate; special anti-abuse rule (implementing Art. 1(2) of the (b) the purpose of the EU parent is not to manage the Directive) whose conditions must also be satisfied for affiliate through an adequate organization of human the tax exemption to apply. and material resources; or (c) it can be proved that the EU parent company is 2.1.1. French anti-abuse rule incorporated for invalid economic reasons and ben - The French anti-abuse rule in relation to the Parent-Sub - efits unduly from the Directive. sidiary Directive, i.e. Art. 119 CGI ( Code général des In February 2002, the Central Economic and Adminis - impôts or General tax code), applies if the Danish parent trative Tribunal of Spain issued a resolution regarding a company is controlled directly or indirectly by Dutch BV holding company controlled by US share - companies outside the European Union, e.g. the United holders. The resolution modified a tax ruling issued by States, unless the French taxpayer can demonstrate that the Spanish tax authorities in July 1992 and stated (con - the main purpose for interposing EU companies in the trary to the 1992 ruling) that, since the Dutch holding shareholding chain was not to obtain the exemption. The company acquired the Spanish affiliate during the 1980s taxpayer’s burden of proof is satisfied if the total with - (before the Parent-Subsidiary Directive was imple - holding taxes in the entire chain of companies are at least mented), the EU parent company was incorporated for the amount of the French withholding tax that would valid economic reasons. Thus, the fact that the Spanish have been levied on the dividends paid to the non-EU affiliate was acquired before the Directive was imple - company. mented qualifies as proof under (c). Notwithstanding In November 2007, the Administrative Tribunal of Lyon that the resolution amended and clarified the scope of rendered a decision in the McKechnie case (No. 0504128) the anti-abuse rule in relation to (c), this result is not sur - regarding the scope of the French anti-abuse rule. The prising. case involved a French subsidiary that paid dividends to Like the French rule, the Spanish anti-abuse rule must its UK parent company which was indirectly controlled also be compatible with the principle of proportionality by two companies based in Jersey (Channel Islands). As laid down by the ECJ. the French company was already a subsidiary of the EU parent company (i.e. the UK company) when it was 2.1.3. Alternative French withholding tax exemption acquired by the Jersey shareholders, the main objective of the chain of shareholdings was not tax avoidance. In If the Parent-Subsidiary Directive does not apply, a Dan - other words, the Tribunal found that the facts of the case ish parent company receiving dividends from a French were sufficient to overcome a presumption of abuse. subsidiary may claim a specific withholding tax exemp - tion under French law. This exemption was originally The European Court of Justice (ECJ) has not yet defined intended to apply only to French parent companies the scope of the anti-abuse provision in Art. 1(2) of the holding at least 5% of the shares of a subsidiary for a Parent-Subsidiary Directive. It may be assumed, how - minimum period of two years. ever, that the ECJ will interpret the provision pursuant to the case law regarding fraud or abuse. Thus, according to In December 2006, the ECJ rendered its judgement in Para. 43 et seq. of the ECJ’s 1997 decision in Leur-Bloem Denkavit (Case C-170/05), an important decision (Case C-27/95) regarding Art. 11 of the Merger Dir - regarding the withholding taxes on dividends paid to ective, the implementation of Art. 1(2) of the Parent- non-resident parent companies. The case concerned a Subsidiary Directive in domestic legislation must be Dutch company, Denkavit Internationaal BV, which consistent with the ECJ’s principle of proportionality. It owned almost 100% of Agro Finance SARL and is uncertain therefore whether the anti-avoidance provi - Denkavit France SARL, both resident in France.