Denmark Told To End Tax Discrimination Against Foreign Funds

by Ulrika Lomas, Tax-News.com, Brussels

27 June 2008

The European Commission has formally requested Denmark to change certain tax provisions that are considered to give domestic funds advantageous tax treatment over foreign-based funds.

The Commission considers the provisions incompatible with the freedom to provide services and the free movement of capital as guaranteed by Articles 49 and 56 of the EC Treaty and Articles 36 and 40 of the EEA Agreement.

The request takes the form of a reasoned opinion, which is the second step of the infringement procedure provided for in Article 226 of the EC Treaty. If there is no satisfactory reaction to the reasoned opinion within two months, the Commission may decide to refer the matter to the European Court of Justice.

Under Danish law, income from investment funds can be taxed as capital gains or as income from shares. The taxation of capital gains is heavier than the taxation of income from shares, but, according to these rules, the funds respecting the prescribed requirements are allowed to benefit from the more advantageous tax treatment in the hands of the investor. However, the EC argues that those requirements are so strict, that only Danish investment funds are in practice capable of fulfilling them.

As a result, these provisions discourage Danish investors from investing in investment funds based in other EU or EEA/EFTA states, since they will not be able to benefit from the more advantageous tax treatment, and these provisions thus impede the free provision of services and the free movement of capital as guaranteed by EU law.

The Commission's opinion is based on the EC Treaty as interpreted by ECJ in several cases.

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