Second Circuit: Revenue Rule Does Not Block Fraud Claims by Danish Tax Authority

“Danish Flag” by DaveLevy is licensed under CC BY-NC-SA 2.0.

Two weeks ago, in Skatteforvaltningen v. Markowitz, the Second Circuit Court of Appeals issued a decision involving one of the less frequently invoked doctrines of transnational litigation: the so-called “revenue rule.” This rule essentially bars courts in one country from enforcing the tax laws of another. As the recent decision indicates, though, it does not prohibit courts from granting relief to foreign tax authorities on claims that don’t trigger the rule’s core objectives.

Background

In 2018, Skatteforvaltningen (“Skat”), the Danish tax authority, filed over one hundred complaints in U.S. federal courts alleging that multiple defendants had defrauded it of hundreds of millions of dollars. These complaints alleged that the defendants—among them, Richard and Jocelyn Markowitz, John and Elizabeth van Merkensteijn, and a number of pension funds under their control—had submitted claims for refunds of tax withholdings to which they were not entitled.

In 2025, a jury concluded that the defendants had committed fraud. Their scheme exploited a provision in the bilateral tax treaty between Denmark and the United States that provides for the full refund of tax withheld by Denmark on dividends paid by Danish companies to shareholders that are U.S. pension plans. In filings submitted to Skat, the defendants stated that the pension funds they controlled were beneficial owners of stock in Danish companies; that they received dividends paid out by those companies; and that they paid taxes on those dividends. They then filed claims with Skat seeking a refund of all amounts withheld on the dividend payments. At the beginning of the 2025 trial, however, the defendants conceded that the funds were never in fact beneficial owners of any Danish shares.

Skat’s claims did not allege that defendants violated Danish tax law; rather, they alleged fraud, aiding and abetting of fraud, and negligent misrepresentation. On appeal, though, the defendants argued that the true purpose of Skat’s lawsuit was to enforce Danish tax law, and that the claims were therefore barred by the revenue rule.

Purpose and Operation of the Revenue Rule

The revenue rule states that courts will neither entertain actions by foreign sovereigns to enforce their tax laws nor enforce foreign judgments based on foreign tax claims. It is related to the prohibition against enforcing foreign penal laws and responds to similar concerns. In Pasquantino v. United States (2005), the Supreme Court laid out three problems the revenue rule was intended to avoid:

• “judicial evaluation of the policy-laden enactments of other sovereigns” (which the Court identified as the “principal evil against which the revenue rule was traditionally thought to guard”);
• “giving domestic effect to politically sensitive and controversial policy decisions embodied in foreign revenue laws;” and
• the complexity of examining “the validity of unfamiliar foreign tax schemes.”

The rule prohibits indirect as well as direct enforcement of foreign tax law. As a result, courts have uniformly focused not on the form of a particular action but on the substance of the relevant claim. In one leading revenue rule case, Attorney General of Canada v. RJ Reynolds, the Second Circuit considered claims brought by the Canadian government against a number of defendants alleged to have smuggled cigarettes into Canada. Although those claims were brought under the Racketeer Influenced and Corrupt Organizations Act, their goal was to recover the revenue that Canada lost due to the defendants’ evasion of applicable taxes and duties. The court held that the claims were barred by the revenue rule.

The Revenue Rule and Separation of Powers

In addition to the core purposes of the rule outlined above, there is one more concern that motivates the rule’s application in the U.S. legal system: separation of powers. Any effort by a foreign nation to enforce its own laws in U.S. courts implicates foreign relations, and therefore risks entangling the judiciary in issues better left to the political branches. In the case of extraterritorial tax enforcement in particular, this concern is particularly acute. As the Second Circuit observed in the RJ Reynolds decision, the political branches have chosen to regulate international tax matters almost exclusively through treaties—and those treaties do not contemplate direct extraterritorial enforcement of foreign tax law.

[T]he usual absence in our negotiated tax conventions of any provision for the extraterritorial enforcement of a sovereign’s tax judgments or claims cannot be accidental, but instead must reflect the considered policy of the political branches of our government… In this area of foreign relations policy where the political branches have primacy, courts must be wary of intruding in a way that undermines carefully conceived and negotiated policy choices.

The majority in Pasquantino (over a strong dissent written by Justice Ginsburg) apparently concluded that this concern was not relevant in the circumstances of that case. That case involved precisely the same type of conduct at issue in RJ Reynolds: the defendants had smuggled liquor into Canada, evading applicable excise taxes. However, it did not involve claims brought by the Canadian government; rather, it was a criminal prosecution initiated by the United States itself under a domestic wire fraud statute. In claims initiated directly by foreign sovereigns and based on violations of their tax laws, the separation of powers concern has greater weight.

Analysis

In Pasquantino, the Court laid out a two-step test for applying the rule. First, the court should consider whether in light of judicial precedent the claims in question are “clearly barred” by the rule—in other words, whether in substance the claims seek to enforce foreign tax law. Second, if the claims are not clearly barred, the court should inquire whether adjudication of the claims would nevertheless undermine the rule’s objectives.

Judge William J. Nardini began by inquiring whether Skat’s claims amounted to an effort to enforce Danish tax law. The defendants argued that because Skat sought to recover refunds “issued in the normal course of administering the Danish tax system,” its claims were necessarily tax claims. In addition, they asserted that the tax treaty between the United States and Denmark treats the “recovery of fraudulent refunds” as a tax claim. For both of these reasons, they contended that Skat’s claims were clearly barred by the revenue rule.

Judge Nardini rejected this characterization of the claims. He noted that Skat’s claims were not based on taxes “unlawfully unpaid” by the defendants. By conceding that they never owned shares in any Danish companies, the defendants had agreed that they were never Danish taxpayers to begin with. He characterized the defendants’ conduct as “garden variety” fraud—perpetrated on the Danish taxing authority, true, but raising no questions at all of Danish tax law. The only issue Skat’s claims raised is whether the defendants were aware that they were not beneficial owners of any shares (and thus had fraudulent intent) when they submitted the applications to reclaim withholding. Furthermore, the tax treaty covers only “taxes that a taxpayer might owe,” not a fraud claim relating to taxes never owed. In sum, he concluded, “fraud claims that happen to involve taxation authorities but that do not involve questions of tax liability” are not barred by the revenue rule.

The court then turned to the second question: whether permitting the suit would undermine the purposes of the revenue rule. Here it simply reiterated the trial court’s key finding: By conceding that they never owned Danish shares, the defendants had “abandoned [the] only argument that would have required the court to interpret and apply Danish law.” As a result, none of the rule’s core purposes were implicated.

Finally, the court considered the separation of powers issue. Having rejected the defendants’ argument that Skat’s claims arose within the framework of the United States-Denmark tax treaty, Judge Nardini likewise rejected the argument that permitting Skat’s claims to proceed would “weake[n] the political branches’ authority over tax treaty negotiations” or endanger foreign relations. To the contrary, he stated, allowing a foreign government to recover for fraud perpetrated by U.S. citizens would arguably further foreign relations.

Conclusion

Among claims initiated by foreign tax authorities in U.S. courts, Skat’s were unusual. As the Second Circuit repeatedly emphasized, they were not about tax evasion and therefore did not require the evaluation or application of Danish tax law. The case therefore provides a good vehicle for examining the purpose and limits of the revenue rule.