What determines if one must pay withholding tax on dividends distributed from companies in Denmark is whether a shareholder is a natural person or a company.
If a shareholder is a natural person, no. 6 of subsection 1 of section 2 of the Danish Withholding Tax Act (a.k.a. the Danish Tax at Source Act – in Danish Kildeskatteloven) states that withholding tax on dividends distributed to a shareholder abroad must be withheld. According to subsection 11 of section 2 of the Danish Withholding Tax Act the withholding percentage is 27 %. The obligation for the company distributing dividend to withhold tax applies no matter what type of shares are owned, that is no matter how many shares are owned in the company and no matter whether it is a company listed on the stock exchange or an unlisted company. Some transactions by way of transfer of shares may be considered dividend and thus must be taxed as dividend.
Whether Denmark has the final right to tax dividend distributed by Danish companies, that is governed by the double taxation treaties which Denmark has entered into. In most cases, Denmark will, however, have the right of taxation.
The dividend taxation is progressive in two steps. Amounts of up to 57,200 DKK are taxed with 27 % and amounts beyond this are taxed with 42 %. Regardless that the rate of taxation is 42 %, only a withholding tax of 27 % must be withheld.
If the capital owner is a company, the obligation to withhold tax at source on dividends distributed depends on the type of shares in question. In the case of parent company shares, cf. section 4 A of the Danish Capital Gains Tax Act (in Danish Aktieavancebeskatningsloven), or group company shares, cf. section 4 B of the same Act, no withholding tax must be withheld, as this dividend is tax-free. The definition of the securities in question is closely related to the fact that there must be an ownership of at least 10 % in the case of subsidiary company shares or one must have a controlling majority in the case of group company shares.
Dividends from tax-free portfolio shares, cf. section 9 C of the Danish Capital Gains Tax Act i.e., unlisted capital shares, are included at 70 % in the taxable income.
The dividend distributing company must be a Danish joint-stock or private limited company. Furthermore, the dividend recipient must be the rightful owner of the dividend that is collected.
For other types of shares, such as taxable portfolio shares (listed securities), there is a withholding tax on dividend distributions from companies to companies abroad. The withholding tax amounts to 27 %. The withholding of tax at source is general, but also applies to parent company shares and subsidiary company shares, where dividends can be received tax-free. If you have had withholding tax unlawfully withheld, you may subsequently reclaim the withholding tax.
The taxation of the limited tax liability on dividends to companies is 22 %. Although the taxation rate is only 22 %, the withholding obligation will still be 27 %. In other words, the various companies must all reclaim the excessive withheld 5 %. It is, of course, an annoying rule for a foreign shareholder, but that is how the Danish law is.
If you need any advice on withholding tax on dividend distributions from Danish companies, DAHL Law Firm is ready to assist.