The Inward Investment and International Taxation Review: Denmark
During recent years, Denmark has adopted a number of reforms aimed at improvement of the framework conditions for operating a business in Denmark, including the reintroduction of favourable taxation of employee share programmes and a reduction of the corporate income tax rate.2
From a tax perspective, the following highlighted features might be considered attractive for investors seeking business opportunities in Denmark:
- the participation exemption regime, which includes tax-free receipt and distribution of dividends from and to all EU Member States, as well as countries with whom Denmark has formed a tax treaty (however, with certain exceptions);
- the tonnage tax regime under which income from shipping activities and capital gains on vessels are taxed very favourably;
- depreciation rates for tax purposes that are higher than the economic decrease in value;
- the absence of social security contributions in respect of employees;
- the possibility of obtaining binding advance rulings on tax issues;
- the possibility of tax-free reorganisation of businesses without documenting sound commercial reasons; and
- the possibility of awarding employees' shares, options, etc., with a favourable tax treatment.
On the other hand, Denmark has implemented a wide variety of specific anti-avoidance rules (SAAR) aimed at, inter alia, hybrid entities and instruments as well as limitations for interest deductions. Further, Denmark has introduced general anti-avoidance regulation (GAAR). The anti-avoidance regulation makes Denmark unattractive in terms of tax-planning techniques involving excess debt push-down, use of hybrid entities and instruments, and arrangements that are not put into place for valid commercial reasons that reflect economic reality.3
Common forms of business organisation and their tax treatment
Generally, there are two main forms of organising a business in Denmark: entities with limited liability and entities with unlimited liability. Parties are free to choose the business form.4
Common entities with limited liability are the private limited company (ApS) and the public limited company (A/S).
Common entities with unlimited liability are the general partnership (I/S) where the partners are jointly and severally liable, the limited partnership with limited partners and at least one general partner with unlimited liability (K/S), and the limited partnership company (P/S). Other entities include associations, cooperative societies and commercial foundations.
Generally, entities with limited liability are subject to corporate taxation, whereas entities with unlimited liability are transparent for Danish tax purposes (i.e., any income derived from a transparent entity must be recognised by and becomes taxable at the level of the owner).
Due to the limited liability, and the relative tax benefits of deploying such entities, businesses are generally set up as an ApS or an A/S.
In general, companies are only subject to a few formal requirements, such as registration with the Danish Business Authority, preparation of annual accounts and conducting annual general meetings.
The key difference between public limited companies and private limited companies is the required minimum share capital (ApS: 40,000 Danish kroner; A/S: 400,000 Danish kroner). Further, public limited companies are required to operate a two-tier management structure, while private limited companies are only required to have one governing body.
Moreover, the EU law-based societas Europaea is recognised as a limited liability corporation from a Danish tax law perspective.
The most common non-corporate entities are I/S with unlimited personal liability for all participants, and K/S or P/S with limited partners and at least one general partner with unlimited liability. Most K/S and P/S entities are structured with a limited liability entity as the general partner. Except for a requirement to register with the Danish Business Authority, such businesses are not subject to formal requirements upon formation, and no capital requirements apply.
Due to the tax transparency and the limited liability of the limited partners, a limited partnership is generally the preferred investment vehicle for private equity investments, venture capital funds, etc.
Direct taxation of businesses
Companies resident in Denmark for tax purposes are, as a general rule taxed on their worldwide income; excluding income from foreign permanent establishments (PEs) and foreign real estate. Non-resident companies are taxed on income allocable to any PE in Denmark, as well as income deriving from certain sources in Denmark.5
i Tax on profits
Determination of taxable profit
Corporation tax is imposed on taxable net profits consisting of business income, passive income and taxable capital gains. The taxable profits are determined based on the figures reported in the company's annual accounts, adjusted in accordance with Danish tax law, such as deductions and depreciations. The basic principle is that the taxable income comprises gross income less the expenses of acquiring, securing and maintaining that income, whereas expenses necessary to establish or expand income sources are not deductible. Interest and royalty payments are generally deductible, with certain limitations. Dividends should most often not be included in the taxable income. Conversely, the distribution of dividends is not deductible.
Most capital assets are depreciated as a consolidated asset pool, at a rate of up to 25 per cent per year, on a declining balance basis. The taxpayer is free to apply any rate up to 25 per cent, and may change the rate every year. Operating equipment with a long economic life, such as certain vessels, aircraft, drilling platforms and offshore equipment, may only be depreciated at a rate of 15 per cent. Further, depreciation of certain infrastructure facilities may only be depreciated at a rate of 7 per cent.6
Assets with an estimated lifetime of less than three years and assets with a value below 14,100 Danish kroner (2020)7 may be fully deducted in the year of acquisition.
Binding contracts concerning the acquisition of certain commercial equipment and some vessels may be eligible for advance depreciation provided that delivery or completion is within four years and the contract price (i.e., asset value) exceeds 1,608,000 Danish kroner (2020).
Buildings and installations are generally depreciated at a rate of up to 4 per cent, while acquired goodwill and other intangibles may be depreciated on a straight line over seven years.
Recaptured depreciations or losses are recognised as taxable income in the year of realisation.
Capital and income
Capital income is subject to corporate income tax at a rate of 22 per cent.
Tax losses may be carried forward indefinitely. Tax loss carry-forwards (net operating losses (NOLs)) from previous income years may only be fully deducted in taxable income up to a base amount of 8,572,500 Danish kroner (2020). In excess of the base amount, NOLs may only reduce the remaining taxable income up to 60 per cent.
The rules on NOLs apply at a consolidated level for tax groups. Companies parties to a tax group share the threshold of 8,572,500 Danish kroner after offsets against losses of the year internally within the tax group.
Danish companies might consider whether voluntary depreciation and amortisation for tax purposes should be made if this leads to higher NOLs than the company is in a position to utilise. In certain situations, these rules may also lead to a strain on liquidity for companies with large NOLs. To counter such a strain on liquidity, companies can consider trying to convert tax losses into depreciable amounts, as the rules do not set up any restrictions on tax depreciations. One way to convert tax losses would be to make an intra-group transfer of assets leading to a higher depreciable amount in the purchasing entity.
Restrictions apply in the case of direct or indirect changes to more than 50 per cent of the share capital or voting rights during an income year. In addition, a subsidiary's tax loss carry-forward may be restricted if a change of control takes place in the parent company. The restrictions do not apply to listed companies, and special rules exist for financial companies.
Carry-back of tax losses is not permitted under Danish tax law.8
The corporate income tax rate in Denmark is 22 per cent. The rate applies for both income and capital gains.
The Danish Tax Agency is responsible for the administration of all tax legislation, including excise taxes and duties. Information concerning the tax system is available on the Danish Tax Agency's website9 and the Danish Ministry of Taxation's website.10
Complaints against decisions made by the tax authorities may be filed with the Danish Tax Appeals Agency, which will either refer cases to a regional appeals board or the National Tax Tribunal, which decides on cases of a principled nature. Decisions by an appeals board or the National Tax Tribunal may be brought before the courts.
Corporations pay tax on account twice a year, and must file an annual tax return no later than six months following the end of each income year. The actual tax liability for the year is calculated on this basis, and may result in either a tax refund or a claim for payment of remaining tax.
The statute of limitation for a (re)assessment is three years and four months after the end of the income year (five years and four months for transfer pricing adjustments). In addition, an extraordinary (re)assessment may be made in certain specific situations.
There are two types of consolidated tax grouping in Denmark: mandatory joint taxation, which applies to all group-related Danish companies and Danish PEs; and voluntary international joint taxation, under which all group companies and PEs, regardless of tax residency, may opt for joint taxation with Danish entities.11
A parent company and its subsidiaries constitute a group. Further, a company, foundation, trust or association will qualify as a parent company if it directly or indirectly holds the majority of voting rights in another company (the subsidiary) or if it controls the subsidiary in any other way.
Each entity party to a tax group is, as a general rule, treated as a separate entity, and must compute its taxable income at the entity level, while losses in one entity may be offset against income in another group entity. The consolidated income constitutes the sum of taxable income for each company. The income of a subsidiary, which is not wholly owned, will be fully included. Only income relating to the period of consolidation will be included.
The ultimate parent company and wholly owned entities within the group are jointly and severally liable for the payment of income taxes and withholding taxes on dividends, interest and royalties from other companies within the tax group. Other entities within the group are liable on a subordinated, pro rata basis.
ii Other relevant taxes
The most important indirect taxes are value added tax (VAT) and salary withholding tax. The VAT rate in Denmark is 25 per cent. Other indirect taxes are excise duties, real estate taxes and stamp duties. Employees must pay a labour market contribution of 8 per cent of their gross salary.
Tax residence and fiscal domicile
i Corporate residence
A company is considered to be tax resident in Denmark if it is incorporated and registered in Denmark. A foreign company may be considered tax resident in Denmark if the place of effective management is in Denmark. Under Danish law, the 'place of effective management' primarily refers to day-to-day management of the company. Accordingly, a non-domestic company may be regarded tax resident in Denmark if day-to-day management is performed in Denmark.
ii Branch or permanent establishment
Non-resident companies may be subject to (source-)limited tax liability; through having a PE in Denmark,12 income derived from Danish real estate or withholding taxes on income from certain Danish sources.
Tax incentives, special regimes and relief that may encourage inward investment
i Holding company regimes
The taxation of dividend payments and capital gains on shares under Danish participation exemption rules depends on the classification of the shares:
- subsidiary shares: the shareholder owns directly at least 10 per cent of the share capital in a company resident in Denmark or in a country where taxation of dividends must be waived or reduced under Directive 2011/96/EU (PSD)13 or a double tax treaty (DTT);
- group shares: shareholding in a group company (controlling interest whereby the companies are subject to mandatory Danish joint taxation or qualify for voluntary Danish international joint taxation); and
- portfolio shares: shares that do not qualify as subsidiary shares or group shares.
Dividends on subsidiary shares and group shares are tax exempt, whereas dividends on portfolio shares are subject to taxation.14 However, anti-avoidance rules may apply.
Capital gains on subsidiary shares, group shares and unlisted portfolio shares are tax exempt, whereas capital gains on listed portfolio shares are subject to taxation. Losses on subsidiary shares, group shares and unlisted portfolio shares are not deductible, whereas losses on listed portfolio shares are deductible. Deduction of losses on listed portfolio shares are not subject to basket treatment, if the company uses the mark-to-market principle. However, if the company uses the realisation principle, the deduction will be subject to basket treatment. Losses may be carried forward to future income years.
ii IP regimes
No specific regimes concerning the tax treatment of IP exist under Danish tax law.
iii State aid
Denmark has a tonnage tax regime, which has been approved by the European Commission.15 State aid is not available in other sectors.
Eligible shipping companies may elect to apply the Danish tonnage tax regime. Under this regime, tax is computed and levied on the basis of the net tonnage of the vessels operated by the shipping company, regardless of the actual financial performance of the company. Noticeably, the regime includes capital gains on the vessels, which are therefore de facto tax exempt.
The regime is optional, with an election being binding for a period of 10 years and must comprise all eligible vessels and assets.
Withholding and taxation of non-local source income streams
i Withholding on outward-bound payments (domestic law)
Danish companies are generally obliged to withhold tax on outbound dividend payments, royalty payments and interest payments related to controlled debt. However, many exceptions apply as set out below and, in practice, the main rule is that no tax is withheld at source, as Denmark often waives taxation on dividends, royalties and interest paid to a beneficial owner resident in another state that has a DTT with Denmark or is an EU Member State.
ii Domestic law exclusions or exemptions from withholding on outward-bound payments
Outbound dividend payments
Dividend payments from a Danish company to a non-resident shareholder are generally subject to Danish withholding tax at a rate of 22 per cent.
The rate is reduced to 15.4 per cent (or less) where the recipient holds less than 10 per cent of the Danish company and the competent authority of the recipient's domicile state of residence are obliged to exchange information with the Danish Tax Agency under a bilateral tax treaty, an international treaty or an administrative agreement.
However, dividends on subsidiary and group shares are exempt from withholding tax if Denmark is required to reduce16 or waive taxation under the PSD or a DTT. The exemption will not apply if the Danish entity is deemed a conduit, which merely serves to route dividends to a parent company outside the European Union, to achieve a tax benefit.
Similarly, most of Denmark's tax treaties contain a beneficial ownership criterion to qualify for benefits under the treaty. Case law shows that the Danish courts rely heavily in the Organisation for Economic Co-operation and Development (OECD) Commentary when interpreting beneficial ownership as it relates to Danish tax treaties.
Furthermore, the Danish Tax Agency has been engaged in litigation to determine whether a beneficial ownership criterion is embedded in Article 1(4)17 of the PSD. A number of the cases were brought before the Court of Justice of the European Union (CJEU), which rendered its ruling early 2019.18 The CJEU found that while no beneficial ownership requirement per se was embedded in Article 1(4), the provision did contain the general principle of prohibition of abuse of law, which requires Member States to deny any benefits derived from EU law, if those benefits are obtained by way of abusive behaviour. Alongside the transposition19 of the general anti-avoidance rule contained in Article 6 of the ATAD, and a history of aggressive pursuit of perceived aggressive behaviour by the Danish Tax Agency, foreign investors looking to invest in, and especially through, Denmark should be aware that the Danish participation exemption regime, while generous, is not ideal for pure tax-planning structures.
Outbound interest payments
For all practical purposes, no withholding tax is levied on interest payments. However, Danish law provides that a withholding tax at a rate of 22 per cent be withheld on interest payments related to controlled debt if:
- one of the companies directly or indirectly owns more than 50 per cent of the share capital or the voting rights in the other company;
- the same group of shareholders directly or indirectly holds more than 50 per cent of the share capital or the voting rights in the companies; or
- the foreign company exercises joint control over the Danish company together with one or more other shareholders (e.g., by a shareholder agreement between the foreign company and such other shareholders).
Similarly, to dividend taxation, no withholding tax is levied if Denmark must waive or reduce withholding tax under Directive 2003/49/EC (the Interest and Royalty Directive (IRD))20 or under an applicable tax treaty (no tax is levied even if the treaty grants Denmark a reduced right of taxation).21
Outbound royalty payments
Royalty payments from Danish sources to non-resident recipients are subject to Danish withholding tax at a rate of 22 per cent.
However, royalty payments are exempt from withholding tax if Denmark is obliged to waive taxation under the IRD.
For tax purposes, royalty payments are defined as payment received as consideration for the use or the right to use any patent, trademark, design or model, print, secret formula or process of manufacture, or as consideration for information on industrial, commercial or scientific knowledge.22
iii Double taxation treaties
Denmark has concluded a large number of tax treaties, most of which are based on the OECD Model Convention, and contain provisions concerning permanent establishments, tax residency and withholding tax on outbound dividends, interest and royalty payments.
iv Taxation on receipt
Inbound dividends, interest and royalty payments are generally taxed as corporate income. Denmark grants credit for any paid foreign taxes. However, the credit is limited to the amount of Danish tax payable on the foreign net income calculated according to Danish principles.
Furthermore, all income recognised by non-resident subsidiaries and PEs is explicitly outside Danish tax jurisdiction, unless the foreign entities are encompassed by a voluntary election of international joint taxation.
Taxation of funding structures
Danish entities are normally funded partially by way of equity capital and debt. Contributions of equity are generally not a taxable event under Danish tax law.
Interest payments on debt are generally deductible. However, the deductibility of interest expenses may be limited under the following three rules:
- the 'thin capitalisation test' imposes a debt-to-equity ratio of 4:1 on controlled debt;
- the 'asset test' limits the deduction to 2.5 per cent of the operating (non-financial) assets; and
- the 'EBITDA test' limits the deduction to 30 per cent of the earnings before interest, taxes, depreciations and amortisation (EBITDA).
i Thin capitalisation
The thin capitalisation rule is a special anti-avoidance rule aimed towards eliminating excessive debt push-downs within corporate groups. It follows from the rule that, insofar as (1) a Danish debtor has controlled debt; (2) the controlled debt exceeds a minimum threshold of 10 million Danish kroner; and (3) the debtor's debt-to-equity ratio exceeds 4:1, interest expenses and capital losses relating to debt in excess of the 4:1 ratio cannot be deducted (however, only for such part of the excess debt that would need to be qualified as equity for the 4:1 ratio to be complied with). An exemption exists if a Danish debtor can demonstrate that a similar loan could have been obtained from an unrelated third party; as such, the restriction of deductibility may be waived (arm's-length exemption).
Certain sectors, such as the financial services sector, may generally operate with higher debt-to-equity ratios, and such market practices may be used to demonstrate arm's-length compliance.
ii Deduction of finance costs
The general right for companies to deduct finance costs, including interest payments, is subject to several limitations, primarily to prevent foreign equity funds from eroding the tax base by assuming excessive leverage.
Alongside the thin capitalisation rule, which is only applicable to controlled debt, Danish tax law contains the following two interest limitations, which are applicable insofar as the company's net finance costs exceeds a threshold of 21.3 million Danish kroner.23 For companies covered by the Danish joint taxation scheme, the threshold is applied on a (consolidated) group basis.
Under the asset test, net financial costs exceeding a cap calculated as the standard rate of return (2.5 per cent for 2020) multiplied by the tax base of the company's qualifying assets (i.e., on group basis) cannot be deducted.24
Net finance costs reduced according to the rules on thin capitalisation will not be included in the net finance costs when assessing a reduction according to the asset test.
With effect from 1 January 2019, Denmark transposed the EBITDA provision contained in the ATAD I. Under the EBITDA test, net financial costs exceeding 30 per cent of the company's earnings before financial expenses, taxes, depreciations and amortisations cannot be deducted in the tax year, but are eligible for carry-forward to future years.25 Conversely, any excess EBITDA absorption availability may be carried forward for up to five income years.
iii Restrictions on payments
There are no restrictions on payments contained in Danish tax law. However, it follows from company law statutes that dividend distributions are contingent upon the decision of the shareholders' meeting and approval by the board of directors, which is obliged to ensure that the company has sufficient unrestricted reserves at all times.
iv Return of capital
Repayment of equity capital to investors requires a capital reduction or liquidation of the company.
For Danish tax purposes, a capital reduction is considered to be a dividend distribution unless prior permission to consider the payments as capital gains is obtained from the tax authorities.
Liquidation proceeds are generally treated as capital gains of shares if the distributions take place in the income year in which the company is dissolved. As foreign shareholders are normally not subject to taxation on capital gains on shares, such shareholders should not be taxed on liquidation proceeds from a Danish company.
Liquidation proceeds distributed in the income year in which the company is dissolved will, however, be treated as dividends if the recipient owns at least 10 per cent and dividends would be subject to Danish withholding tax, or owns less than 10 per cent of the share capital, but is affiliated with the company being dissolved and is liable to Danish withholding tax on dividends.26
Acquisition structures, restructuring and exit charges
A Danish business may be acquired as an asset transfer or as a share transfer.
If the seller is not resident in Denmark for tax purposes, disposal of shares is not a taxable event in Denmark. Moreover, a valuation of the assets is not necessary.
Capital gains on transfers of shares are exempt from Danish taxation if the seller is a corporate shareholder holding subsidiary shares, group shares or unlisted portfolio shares.27
Asset transfers are for tax purposes regarded as selling assets individually. Accordingly, gains and recaptured depreciations are taxable, and losses are deductible.
Danish corporate law prohibits certain types of financial assistance, meaning that investors cannot finance an acquisition with the target company's capital unless such acquisition is financed with the target company's distributable reserves. Further, investors should be aware of the limitations on thin capitalisation and deduction of financing costs (see Section VII).
Denmark allows for tax-exempt corporate reorganisations if certain conditions are met, and that tax evasion or tax avoidance are not the principal objectives of the reorganisation.
Tax-exempt reorganisations may be executed with or without prior permission. Prior permission requires the reorganisation to be justified by commercial reasons. This is not a requirement if the reorganisation is carried out without obtaining prior permission, but in such a case a three-year holding requirement applies.
A tax-exempt merger between a foreign and a Danish company requires prior permission in certain cases. The merger will be tax exempt at the shareholder level, but Danish exit tax will be levied on the entity level on assets not remaining under Danish taxation.
A partial demerger (e.g., the demerged company continues to exist) made without prior permission is subject to certain restrictions: the transferred assets and liabilities must constitute an operational branch, and the ratio between assets and liabilities must be the same prior to and following the demerger.
The date of the reorganisation must generally coincide with the date of the beginning of the financial year of the receiving company. In this sense, it is possible to give the reorganisation a retroactive effect.
It is generally not possible to relocate an incorporated company without liquidation; however, company migration may be done into another Member State, insofar as the domestic law of the target country allows such migrations. Furthermore, Denmark may be obliged to waive or reduce taxation under a DTT if the management becomes resident in another state.
If a corporation ceases to be resident in Denmark for tax purposes, Danish exit taxation is imposed on taxable assets and gains. Denmark has rules that allow for deferred payment of exit tax assets transferred from Denmark to another Member State.
Assets remaining in Denmark may constitute a PE,28 with the result that no Danish exit taxation is incurred.
Anti-avoidance and other relevant legislation
i General anti-avoidance
Denmark has transposed Article 6 of the ATAD I, with effect from 1 January 2019. Generally, the GAAR seeks to deny taxpayers the benefits of domestic tax rules, as well as benefits under a DTT or an EU Directive, insofar as the taxpayer obtains said benefits through arrangements or series of arrangements that have been put into place, with one of the main purposes being the obtaining of a tax benefit and that are not genuine.29
Besides the GAAR, the most important Danish SAAR are the rules on the mitigation of hybrid mismatches, controlled foreign corporations (CFCs)30 and transfer pricing regulations.
ii Hybrid mismatches
As part of the transposition of the ATAD II, Denmark has made significant alterations to the provisions on hybrid mismatches. Essentially, the rules have been made more transparent, and Denmark has adopted rules similar to those envisioned in the base erosion and profit shifting (BEPS) Action 2.
As such, Denmark generally relies on the classification of the other state whose domestic rules are used to achieve the hybrid mismatch, and makes the necessary adjustments. The primary hybrid mismatches encompassed by the new rules are:
- deduction and no inclusion;
- double deduction;
- double non-inclusion; and
- significant timing arbitrage relative to recognition of income or deductions.
The rules are designed to counter the (intended) mismatch aspect of the hybrid structure or instrument by adapting the Danish tax treatment to effectively mirror that of the other involved country (i.e., a non-inclusion in the domicile country would entail non-deduction in the source country (Denmark being the 'source country') when applying mismatch rules). As such, Denmark has a robust, and very dynamic, set of provisions to counter and mitigate the effect of hybrid mismatches.
iii Controlled foreign corporations
Danish CFC rules apply to foreign subsidiaries and PEs as well as to Danish subsidiaries of Danish companies if:
- the Danish company controls, directly or indirectly, more than 50 per cent of the voting power in the subsidiary;
- more than 50 per cent of the total income of the subsidiary is of a financial nature (taxable interest, taxable gains on securities and foreign currency, etc., certain deductible commissions concerning loans, taxable dividend payments, taxable gains on shares, licence fees relating to intellectual property, taxable income from finance leases and taxable income from insurance business); and
- at least 10 per cent of the subsidiary's assets are of a financial nature as described above.31
If these conditions are met, the entire income of the subsidiary will be included in the parent's taxable income, and the parent is granted credit for taxes paid by the subsidiary in its country of residence.
iv Transfer pricing
Transactions made between affiliated companies must be carried out on arm's-length terms. Companies are generally regarded as affiliated if:
- one of the companies directly or indirectly owns more than 50 per cent of the share capital or the voting rights in the other company;
- the same group of shareholders directly or indirectly owns more than 50 per cent of the share capital or the voting rights in each of the companies; or
- the company exercises joint control over the other company in conjunction with one or more other shareholders (e.g., by a shareholders' agreement on voting rights and management).
A company and its PE are also regarded as related entities.
Related companies must prepare and file transfer pricing documentation showing how the companies have set the prices for inter-company transactions.
If the prices agreed by the companies are different from what would have been negotiated in an arm's-length transaction between independent parties, the tax authorities are authorised to adjust the prices.32 Denmark generally follows the OECD Transfer Pricing Guidelines.
v Tax clearances and rulings
It is possible to obtain binding advance rulings from the tax authorities to obtain certainty as to the possible tax implications of a planned or already undertaken transaction. Such ruling is binding on the tax authorities for a period of up to five years. Denmark has amended the rules on binding advanced rulings in relation to the valuation of assets when exiting Denmark. The amendment reduces the binding effect of such rulings to a maximum of six months.
In general, a tax clearance is not required to acquire a local business.
Year in review
While 2020 from the onset looked to be another year with new measures to counter the tax-planning schemes, the outbreak of the covid-19 pandemic has diverted attention to preserve jobs, restore the economy and help Danish companies. Because of covid-19, the disclosure deadlines were extended (e.g., all tax return and tax disclosure deadlines for the income year 2019 were extended until 1 September 2020).
Furthermore, a proposed Bill, concerning the transposition of the CFC rules contained in Article 7 and Article 8 of the ATAD I, has not yet been passed, even though it was originally proposed at the end of 2019.
However, some of the measures implemented in 2019 have come into force. As of 1 July 2020, taxpayers and intermediaries must report on cross-border arrangements in accordance with European Council Directive 2018/822 (DAC6) and the national incorporation laws. The Danish Tax Agency has, prior to the commencement, published guidance on the reporting obligation, containing both examples to and explanation on the Tax Agency's interpretation of DAC6.
Outlook and conclusions
i CFC rule of the ATAD I
A Bill on the transposition of the CFC rules contained in Article 7 and Article 8 of the ATAD I is still pending. It is scheduled to be proposed at the end of 2020 and is expected be in line with the Bill proposed in 2019, by which means the current scope of Danish CFC rules will expand significantly, not only by lowering the threshold of the tainted income, or CFC income, required to constitute a CFC from half to one-third of all income, but also by widening the scope of the definition of tainted income, in accordance with Article 7(2)(a)(ii), to cover 'other income generated from intellectual property'. Conversely, the asset test of determining CFC status is set to be abolished, as no such test is included in the ATAD I, wherefore the test becomes incompatible with EU law.
The main concern for taxpayers, stakeholders and lawmakers is the exact implication of the widened scope of IP income to cover other income from intangibles; a concept known in US tax law as income from embedded intangibles. As of the public consultation, the introduction of the Bill before Parliament and the first reading of the Bill, no conclusive measures have been taken to mitigate the uncertainty that this expansion of Danish tax jurisdiction related to CFC entities will incur.
This uncertainty is furthered by the lack of a substance requirement in the Bill, which would essentially mean that foreign subsidiaries of Danish entities, even though engaged in significant economic activities in the market jurisdiction, could become liable to Danish CFC taxation, as no concrete mechanisms for computing this other income from IP has been proposed, other than the use of the OECD Transfer Pricing Guidelines. It remains unclear whether a foreign entity of a Danish entity, having in place a compliant arm's-length transfer pricing policy, could still be targeted using the transfer pricing guidelines to impose Danish tax on these arm's-length residual profit allocations.
ii New regime for withholding of dividend tax
A draft proposal on withholding of dividend tax has been submitted to consultation. The proposal is based on an interdepartmental report, composed in the light of several cases on suspected fraud with refund of dividend tax. In the light thereof, a new regime for withholding of dividend tax is introduced. The rules will apply at shares deposited in a central securities depository, and consist of a net withholding model where a depository bank at time of dividend distribution must withhold the tax at a correct rate according to the DTT.
iii Increased deduction for R&D costs
A proposal to increase the deduction for R&D costs to 130 per cent for a maximum tax value of 50 million Danish kroner in 2020 and 2021 is in progress at the time of writing. Adoption of the Bill is expected in December 2020. This was expanded to include 2022, in the Green Tax Reform, but no Bill has yet been introduced.
iv A green taxation reform
The government wishes to carry on the green transition as already stated for 2020. In the autumn of 2020, the government will introduce a green taxation reform including proposals to reintroduce tax on polyvinyl chloride and increase tax on CO2 emisssions.
1 Jakob Skaadstrup Andersen is a partner at Gorrissen Federspiel. The information in this chapter was accurate as at January 2021.
2 The current corporate income tax rate is 22 per cent; gradually decreased as laid out in Section 17 of the Corporate Income Tax Act (CITA). One notable exception is for business covered by the Hydrocarbon Tax Act, which pays corporate income tax at a rate of 25 per cent.
3 Under the new transposition of the GAAR from the Anti-Tax Avoidance Directive (ATAD I), the criterion reads as 'non-genuine arrangements'; at this point it is not known whether this should be construed in accordance with the artificiality test, as set out in C-196/04 Cadbury Schweppes.
4 Certain industries may entail special requirements, such as businesses within the financial services industry.
5 Most types of passive income are generally subject to withholding tax under domestic Danish law. However, under EU law and Denmark's large treaty network, most of these provisions are either waived or applicable at a reduced rate. See Section 2 CITA for further information.
6 Infrastructure assets subject to the 7 per cent depreciation rate are specified in Section 5 C (2) of the Act on Depreciation Allowance. Wind turbine generators are explicitly exempt from the low depreciation rate; see Section 5 C (5) of the Act on Depreciation Allowance.
7 The base value is set to increase to 14,400 Danish kroner in 2021.
8 One exception to this applies in regard of taxpayers covered by the Hydrocarbon Tax Act (HcTA), which explicitly allows for carry-back of losses; see Section 20 E of the HcTA.
11 A voluntary election of international joint taxation is binding for a period of 10 years.
12 The legislative remarks to the Danish PE provisions explicitly states that Denmark relies on the Organisation for Economic Co-operation and Development (OECD) Model Convention and the related Commentary for purposes of determining whether a PE may be deemed to exist. Furthermore, the Authorised OECD Approach forms the basis for the allocation of income to a PE.
13 On the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States.
14 Dividend payments derived from portfolio shares by a corporate shareholder, are generally only taxed at a rate of 15.4 per cent.
15 The European Commission has granted Denmark an extension of duration and scope of the Danish tonnage tax regime (ruling published as SA.45300). As such, the current Danish tonnage tax regime is approved until 31 December 2026.
16 From an investment perspective, this is a key point to observe, as domestic law effectively precludes Denmark from applying withholding tax on dividends, even if an applicable tax treaty grants Denmark a limited right to tax.
17 Formerly Article 1(2), but renumbered as a consequence of the Amendment Directive EU/2015/121.
18 See joined cases C-116/16 and C117/16, ECLI:EU:C:2019:135.
19 See Section 3 of the Danish Tax Assessment Act. Noticeably, Section 3(5) of the Danish Tax Assessment Act contains a provision, similar to the Primary Purpose Test, created by the OECD, and contained in Article 7 of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting. As such, domestic Danish law now contains broad anti-avoidance measures, which deny virtually all benefits applicable to dividend payments from Danish companies.
20 Directive 2003/49/EC on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States.
21 See footnote 16.
22 Noticeably, Danish domestic tax provisions do not include payments related to industrial, commercial and scientific equipment, commonly referred to as ICS equipment, in the definition of royalty payments.
23 With effect from 1 January 2014, the threshold of 21.3 million Danish kroner was frozen. Accordingly, the automatic yearly adjustments are no longer applicable.
24 The computation of the interest deduction limitation under the asset test is a sophisticated technical exercise; an elaboration on which would exceed the scope and length of this contribution. See Section 11 B CITA.
25 Under ATAD I, Article 11(3), the minimum threshold for interest deduction limitation is set at €3 million (converted, and transposed, as a minimum threshold of 22,313,400 Danish kroner). Noticeably, this entails that the asset test and the EBITDA test operate with diverging minimum limitation thresholds.
26 See Section VI.ii.
27 See Section V.i, for an in-depth discussion on share taxation.
28 See Section IV.ii for further discussion on this.
29 The terminology 'non-genuine' is an EU innovation and encompasses arrangements that are not put in place for valid commercial reasons and that reflect economic reality having regard to all the relevant facts and circumstances.
30 A bill transposing the CFC rules of the ATAD I is currently pending before Parliament. One very significant change is the inclusion 'any other income derived from IP' (i.e., the equivalent of income derived from embedded royalties, as known from US tax law). The final language of this Bill is still being debated, but if the current language of the Bill prevails, all taxpayers with either operational structures or holding structures in Denmark will be met with significant uncertainty. Furthermore, the Bill introduces a new concept of 'control', which now also constitutes taxpayers, which are entitled to more than 50 per cent of the profit of the subsidiary's profit.
31 Under the proposed Bill, as mentioned in footnote 30, the asset test will be revoked, as being incompatible with EU law.
32 A Bill currently pending before Parliament would give the Danish Tax Agency additional discretion to fixate the taxable income under the transfer pricing provisions, by disregarding facts and documents that are submitted after the deadline. The deadline for the submission of transfer pricing documentation is furthermore proposed to be mandatory and should be filed no later than the due date for the taxpayer's annual tax return.