Two recent Danish Supreme Court (‘SC’) rulings wherein it was held that interposed entities cannot be considered as ‘beneficial owners’ for the purpose of tax treaty.

Brief facts

• In the first case, a Danish entity distributed dividends to its holding company, which is incorporated in Cyprus. The Cyprus entity was held by a Bermuda entity, which was held by the ultimate holding company incorporated in the USA. The Danish entity made two dividend payments in 2005 and 2006;
• In the second case, dividends were distributed by a Danish entity to an intermediate entity in Luxembourg for onward distribution to the Cayman Islands entity;

Key excerpts from the judgement

• The Supreme Court held in the first case that Cyprus entity in relation to its Danish subsidiary and Bermuda parent company must be considered as a pass-through / flow-through entity;
• In relation to dividend payments made in 2005, the payments made to the Bermuda entity were held for approximately five months before a decision to declare dividend to the US parent company was made, and thus SC held that the beneficial owner in this case would be the Bermuda entity and the Danish entity is liable to withhold taxes on such dividend payment;
• In relation to dividend payments in 2006, SC held that the dividend was included in the amount repatriated by the Bermuda entity to the USA entity and therefore, the USA entity would be considered as the ultimate beneficial owner. Considering the exemption under Danish-USA DTAA for dividend payments, it was held that the Danish entity is not liable to withhold any taxes on such dividend;
• In the second case, the Supreme Court directed the Danish entity to pay withholding dividend taxes as it is unable to provide documentation that the rightful owners of the dividend are domiciled in countries which Denmark has concluded DTAA with and that these owners would be exempt from given tax liability.

Relevance of the judgement from Indian Tax perspective

• Considering the recent developments by way of introduction of Multilateral instruments (‘MLIs’) and amendment of tax treaties from principal purpose test (‘PPT’) standpoint, it is critical to evaluate and maintain proper documentation in relation to identification of beneficial owner for any payments made, where the Indian entity deducts TDS by invoking applicable tax treaty;
• The beneficial ownership conditions are required to be evaluated for all kind of international payments made i.e., dividend, fees for technical services, royalty etc., where the provisions of DTAA is adopted;
• Given that the added responsibility is on the Indian entity (‘payor’) from TDS deduction standpoint, it is imperative to have this aspect checked.