Denmark proposes a dividend withholding tax for foreign governments (in a multi-facetted tax bill on September 23rd, 2022). Whereas foreign government and foreign government body investors are currently eligible for a full exemption (or refund) of Danish dividend withholding tax under Danish domestic tax law, they would become subject to a gross dividend tax at a rate of 22%. This rate would be reduced under applicable double tax treaties, in most cases to 15%. The proposed new tax would enter into effect on October 15^th, 2023.

It is debatable whether this new tax would be “allowed” under the free movement of capital as laid down in article 63 of the EU Treaty. If Denmark continues to exempt its own government and government bodies from the dividend tax while subjecting foreign governments and government bodies to a dividend tax (regardless of the rate), this may constitute a discrimination and with that, a prohibited restriction of the free movement of capital. Established case law from the European Court of Justice on cross border withholding taxes and the free movement of capital is quite strict, leaving little room for member states to differentiate between domestic and foreign taxpayers.

The proposed new tax is also somewhat surprising in light of Denmark’s decision to exempt foreign charities from Danish dividend withholding tax, at the end of 2021 (for more information click here to see our news article on this matter). The reason for exempting foreign charities was that the European Commission had “asked” Denmark to stop discriminating foreign charities from a withholding tax perspective by exempting Danish charities while taxing foreign charities.

Source: website of the Danish ministry of Finance.

https://www.skm.dk/love/lovforslag/lovforslag-2021-22/l-214-forslag-til-lov-om-aendring-af-lov-om-afgift-af-elektricitet-lov-om-en-boerne-og-ungeydelse-pensionsbeskatningsloven-og-selskabsskatteloven