In a significant update for pension funds investing across borders, Denmark and the United States recently signed a Competent Authority Arrangement (CAA) that clarifies the definition of “pension fund” under the existing Double Taxation Agreement (DTA). This clarification significantly impacts withholding tax reclaims on dividends, providing substantial refund opportunities for pension entities.

Background 

Effective from dividends paid on or after February 1, 2008, this arrangement confirms that qualifying US and Danish pension funds investing indirectly—through account-holding investment associations or similar pooled investment vehicles—can benefit from a zero-percent dividend withholding tax rate.

Who Qualifies?

To qualify for exemption, pension funds must meet the “more than 50% beneficiaries” residency rule:

  • Danish Pension Funds: Entities governed by Denmark’s Pension Investment Return Tax Act and certain account-based investment associations, investing solely or predominantly for qualifying pension entities.
  • US Pension Funds: Specific retirement plans including 401(a), 401(k), 403(a), 403(b), IRAs (including Roth and Simple accounts), 457(b) plans, Thrift Savings Funds, and certain qualified group trusts.

Funds not explicitly listed can seek recognition through the mutual agreement procedure provided by the treaty.

Reclaiming Withholding Taxes

US and Danish pension funds previously subjected to withholding taxes on dividends may reclaim these taxes under certain conditions:

  1. Within the standard time frame (generally 3 years):
  • Pension funds can directly reclaim from the Danish or US tax authorities.
  • Claims initially refunded only partially (e.g., from 27% down to 15%) can request an additional reclaim down to 0%
  • Pending or previously rejected cases can be refiled or reopened with appropriate documentation.

2. Outside the standard time frame:

  • Initiate a Mutual Agreement Procedure (MAP) through the respective US or Danish tax authorities.
  • Although typically more challenging, this remains an avenue for reclaim.

Documentation Requirements

When submitting claims, ensure you clearly state:

  • Original dividend details and withholding tax applied.
  • Receipt numbers and prior case references.
  • Proof of meeting the residency conditions (50% rule).

Why This Matters Now

Given this guidance is currently in draft and subject to potential changes before October 1, 2025, funds should act promptly to secure their rights to reclaim past withholding taxes. The ongoing Danish High Court case on statute-of-limitations (3-year vs. 5-year) further emphasizes the importance of timely filing and diligent monitoring.

How Global Tax Recovery Can Help

Navigating cross-border withholding tax reclaims can be complex. At Global Tax Recovery, we specialize in guiding pension funds through these processes, maximizing recovery of withheld taxes efficiently and compliantly.

Contact our team today to explore reclaim opportunities for your pension fund under this new US-Denmark arrangement.