Fidelity Funds vs The Danish Ministry – CJEU Rules In Favour Of Taxpayers

Yesterday, the European Court ruled in favour of a Fidelity investment fund that had suffered Danish withholding tax at a higher rate than a comparable Danish investment fund. The ruling is of importance for all foreign funds investing in Denmark and also has implications for cases against other EU states, notably the Netherlands.

On 21 June 2018, the Court of Justice of the European Union ("CJEU") rendered its decision in the case of Fidelity Funds v. Skatteministeriet (Case C-480/16).

The case concerned the difference in tax treatment between the distribution of dividends from Danish companies to Danish resident undertakings for collective investment in transferable securities ("UCITS") and the same distribution to non-resident UCITS. The case involved portfolio investments that did not exceed 10% of the capital in a given company.

The preliminary question raised to the CJEU was:

"Is a tax regime, such as that in the main proceedings, under which non-Danish [UCITS] covered by Directive [85/611] ... are taxed at source on dividends from Danish companies, contrary to Article 56 EC (Article 63 TFEU) on free movement of capital or Article 49 EC (Article 56 TFEU) on freedom to provide services, where equivalent Danish [UCITS] can obtain an exemption for tax at source, either because they in fact make a minimum distribution to their members in return for retention of tax at source, or technically a minimum distribution is calculated, on which tax at source is retained in relation to the undertakings' members?"

Danish internal law provides that UCITS may be exempt from withholding tax on dividends distributed by Danish resident companies subject to two conditions being met:

i) The UCITS is resident in Denmark; and

ii) The UCITS has the status of Article 16C of the law on the assessment of income tax ("Article 16C fund"). In order to be an Article 16C fund, the fund would need to make/calculate a minimum distribution annually.

Following the conditions listed above, a non-resident UCITS would never be able to qualify for an exemption from withholding tax (condition i)). Therefore, it would be difficult for the condition ii) to be met as there would be no incentive to do so given that the non-resident UCITS would never be able to benefit from the exemption due to their residency status.

The CJEU reconfirmed that the tax treatment of dividends received by UCITS falls primarily within the scope of the free movement of capital (Article 63 TFEU) and in...