Entity Management Lessons from the Danish Cases: Insights into Effective Governance and Compliance

In the first half of 2023, the Danish Supreme Court has given final judgments in so-called "Danish Cases," involving reporting of beneficial owners in multinational organizations in the context of applying double taxation treaties. Each of these cases included Danish subsidiaries of multinational organizations, one of which had a US parent company.

These cases have clearly demonstrated how the application of double taxation agreements in the multinational setting is contingent upon the full disclosure of beneficial owners. This report provides insights into the rulings of the Danish Supreme Court, their repercussions for multinational entity structures, and how technology can be instrumental in ensuring transparency and compliance.

Summaries of Danish Supreme Court Rulings on Beneficial Ownership

On January 09, 2023, the Danish Supreme Court made a ruling regarding two beneficial ownership cases (C-116/16-T Danmark and C-117/16, Y Denmark). These cases were concerned with the transfer of dividends by Danish subsidiaries to foreign entities in their respective groups of companies and involved the issue of withholding taxes on such dividends under double tax treaties.

In its ruling, the court held that the Danish subsidiaries were liable for non-withheld taxes. The court based its decision on the notion, inter alia, that it would be against the intent of a double tax treaty to grant a tax exemption if a person other than an agent functions as a mere "conduit" for the actual recipient of the income.

Later, on May 04 of the same year, the Supreme Court gave judgment on two other cases (C-115/16 N Luxembourg and C-118/16 X Denmark) involving withholding taxes on interest paid by Danish subsidiaries to other foreign entities in their organizations. The Supreme Court ruled that Danish subsidiaries were liable for tax payments while the recipients of the payments should be considered as "flow-through entities," in which case tax treaties do not apply.

What Do Danish Cases Entail in the Context of Beneficial Owners?

While the rulings by the Danish Supreme Court were primarily concerned with the Danish withholding tax regime, they had important repercussions for identifying and reporting ultimate beneficial owners in complex multinational entity structures.

The determination of UBOs remains fact specific.

In its ruling, the Supreme Court noted that the double tax treaties do not offer a definition for "beneficial ownership." Meanwhile, since the tax treaties delimit the tax competence of contracting states, the Supreme Court held that the national legislation of such states cannot be relied upon for such a definition.

Instead, the Court suggested to define "beneficial ownership" as provided in the OECD Model Convention, including 1977 commentaries. According to the commentaries, double tax treaties are not meant to aid tax avoidance through "artificial legal constructions."  At the same time, the court held that a group of companies whose structure does not reflect its economic reality and is primarily intended to obtain tax advantage may be regarded as an "artificial arrangement."

So far, the judgments by the Supreme Court provide little further guidance on what is required to qualify as the ultimate beneficial owner. It is expected that the court will provide more guidance on the same in its forthcoming rulings on similar matters. For the moment, the determination of beneficial ownership remains fact specific to each particular case in the context of applying double tax treaties.

The burden of proving beneficial ownership rests with the taxpayer.

In deciding the cases, the court has noted that Danish subsidiaries failed to provide evidence that up-chain companies or their stockholders were actual beneficial owners. The Supreme Court further held that the taxpayer did not disclose the identity of the ultimate investors. 

Specifically, in case C-116/16, T Danmark, the court considered that a statement from the Luxembourg tax authorities according to which the Luxembourg parent company "to the best knowledge … is the beneficial owner of any dividends paid on the shares" does not provide any weight. 

Meanwhile, eliminating withholding taxes under a tax treaty requires full disclosure of the identity of each beneficial owner by the taxpayers.

How Can Entity Management Software Help When Beneficial Ownership is Questioned?

The "Danish cases" have clearly demonstrated that multinational corporate structures need a system in place to identify their UBOs in the context of double taxation agreements. Such a system should outline the types of ownership and connection among the entities and include a centralized database on beneficial owners, providing a full set of details, including their certificates of residence.

Today, many organizations leverage technology and entity management software to facilitate the process of identifying and reporting their ultimate beneficial owners. In particular, companies rely on entity management software to:

• trace complex relationships  among their entities, 
• create a centralized database for all their corporate data, including UBO information
• automate the process of collecting, updating and reporting UBO data,
• ensure access to corporate data from anywhere on any device
• provide for the safety and security of their information.

Specifically, entity management software, like Athennian, offers powerful org charting capabilities allowing businesses to outline all connections among their entities with the high level of detail, including jurisdiction, percentage of ownership, tax structure, and complex connections. 

The automated org charting functionality in entity management software can greatly facilitate tracing upward and downward connections among the entities as well as investigating complex relationships, for example, circular ownership or multi-parent ownership.

Learn More with Athennian

When organizations work across jurisdictions, they need additional capabilities to operate in complex regulatory environment. The rulings of the Danish Supreme Court in the context of withholding taxes by subsidiaries and reporting beneficial owners clearly demonstrate the importance of having such capabilities to ensure compliance.

Entity management software presents multinational business structures with rich functionality required for automating the process of outlining ownership relationships among entities and reporting beneficial owners. For more information about how digital technologies can streamline governance and compliance in complex organizational structures, please don’t hesitate to request a custom demo with the Athennian team.