Denmark proposes new dividend withholding tax regime

Thursday, 28 May 2020
The Danish government has announced a new dividend withholding tax (WHT) regime based on relief at source, in an effort to prevent reclaim fraud.

Reform of the system has been inevitable since 2015, when the tax authorities discovered a DKK12.7 billion (USD2 billion) tax fraud perpetrated by companies that reclaimed dividend withholding tax on Danish shares that they never owned. They used double taxation agreements to claim tax credits on dividends received from bogus foreign firms that had supposedly paid dividend tax in their own country.

The Danish authorities had to suspend the processing of all refund claims with immediate effect, followed by hundreds of civil recovery cases against firms or individuals in several countries. It subsequently emerged that the tax authorities had unlawfully delegated the administration of rebate claims to three banks without ensuring that the banks carried out any checks on beneficial ownership.

The current system imposes a 27 per cent statutory withholding tax on dividends distributed to shareholders. Non-residents entitled to a lower tax rate, typically zero to 15 per cent under a double taxation treaty or Danish domestic law, can claim back the excess withholding tax by filing a refund application with the Danish tax authorities, accompanied by relevant documentation after the dividend distribution.

Under the new system, relief at source will be granted instead. To get it, non-resident shareholders must have proved and registered their beneficial ownership to the Danish tax authorities in advance of the dividend distribution. The registration must be carried out by the investor's custodian bank, which will provide the investor with a withholding tax identification number identifying their custody account and the correct withholding rate.

Custodian banks will thus take on the liability for bogus withholding reclaims. The announcement does not mention liability of non-Danish banks participating as custodians or in a chain of custodians, but the new regime's rules make it clear that it is dependant on non-Danish custodians also signing up.

The Danish Ministry of Taxation and Finance has agreed the proposed new model with the country's national banking association, but it is not yet clear when it will come into force. Meantime there are still 62,000 applications on the refund of excess withholding tax pending with the Danish Tax Agency.


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