The Tax Disputes and Litigation Review: Denmark

Introduction

For tax dispute resolution, administrative appeal is the usual starting point. However, a taxpayer has the right to request that a case be tried before the courts, if the relevant appeals board has not issued a preliminary decision. Additionally, a tax dispute resolution may be filed to the Danish Parliamentary Ombudsman (the Ombudsman).

The administrative tax appeal system consists of four separate appeal boards:

  1. the National Tax Tribunal;
  2. the national tax boards of appeal;
  3. the valuation boards of appeal; and
  4. the motor vehicle boards of appeal.

All appeals must be submitted to the Tax Appeals Agency. Submission of an appeal is associated with a fee of 1,100 kroner. The Tax Appeals Agency distributes the cases based on competence. The Tax Appeals Agency functions as secretariat for the boards of appeal and the National Tax Tribunal (the Tribunal). The Tax Appeals Agency may itself make decisions in certain cases. The appeal boards will be described further in Section III.

In Denmark, there is no designated tax court. Therefore, an appeal to the courts will be tried as an ordinary civil case and will be litigated in accordance with civil law procedural rules, with some adjustments. In 2021, the average processing time in civil cases before the district court was 12.3 months and 10.1 months in appeal cases before the high courts. For cases brought before the Supreme Court, the average processing time was 10.6 months in 2021.2

The processing time for cases submitted to the Ombudsman depends on the circumstances of the case, but has an average processing time of about five months.

Submission of a case before the courts is associated with a court fee of 750 kroner if the value of the case is less than 100,000 kroner and 1,500 kroner if the value of the case exceeds 100,000 kroner. In cases of an appeal before the Supreme Court, the court fee is 4,000 kroner. Additionally, a listing fee amounting to 3,000 kroner must be paid prior to the trial proceedings if the value of the case exceeds 100,000 kroner. In cases of an appeal before the Supreme Court, the listing fee is 4,500 kroner.

Commencing disputes

A tax dispute will usually be initiated because of a disagreement between the taxpayer and the tax authorities. The disagreement could, for example, be a contested reassessment of the taxpayer's taxable income or in case the taxpayer wants to challenge an advance tax ruling from the tax authorities.

This section contains the following aspects:

  1. access to amend a former tax assessment;
  2. the process of administrative appeal;
  3. the process of appeal before the courts;
  4. expert survey and valuation; and
  5. the taxpayers' possibility of postponement of contested payable taxes.

i Access to amend a former assessment of taxable income

Taxable individuals and companies have a duty to self-assess their taxable income and submit an annual tax return to the Danish Tax Agency. A tax assessment may be amended; however, a statute of limitation does apply. Generally, a tax assessment may be amended until 1 May in the fourth year following the income year in question. This applies for both the taxpayer and the tax authorities. If the tax authorities intends to amend a taxpayer's assessment, the tax authorities is obliged to notify the taxpayer no later than 1 May in the fourth year after the relevant income year. The notification shall be followed up by a final assessment no later than 1 August in the fourth income year following the relevant income year.

In the case of controlled transactions, the notification period is extended to 1 May in the sixth income year following the relevant income year. Furthermore, other special circumstances can prolong the notification periods to 10 years. Such special circumstances include errors caused by the taxpayer's gross negligence.3

The notification must contain a general description of the basis for the intended amendment, including the facts or circumstances that trigger the amendment. Once the taxpayer receives the notification, the taxpayer will be given a deadline for the submission of remarks.

If the taxpayer wishes to initiate an amendment of a tax assessment, the taxpayer must notify the Danish Tax Agency within the time limit of four years. The request must contain the basis for the requested amendment. The Danish Tax Agency will draft a decision proposal after reviewing the request. Hereinafter, the taxpayer is granted a certain period of time to submit remarks. Once the Danish Tax Agency has received the taxpayer's remarks, if any, the tax authorities will make a decision.

Certain protective mandatory rules apply to taxpayers to strengthen their legal position and to ensure legal certainty. One rule provides the possibility to employ a tax reservation in relation to transactions. The tax reservation serves as a fall-back if the transaction has unintended effects. In this case, the transaction may be terminated or may have a different content (e.g., if the tax authorities does not accept the anticipated tax consequence of the terms in an agreement the parties can, owing to the tax reservation, amend or annul the agreement with retrospective effect). The tax reservation is only valid if certain conditions are fulfilled. For instance, the tax reservation must be clear, in writing and be notified to the tax authorities no later than at the time when the tax authorities was informed about the transaction.

Additionally, a taxpayer can request for an advance tax ruling from the National Tax Board in cases where the taxpayer is unsure about the fiscal consequences of an intended transaction.4 The tax authorities will be bound by their ruling. Consequently, the advance tax ruling can serve as a binding promise from the tax authorities regarding the fiscal consequence of the intended transaction.

In general, the advance tax ruling will be binding for the tax authorities for up to five years. However, if the advance tax ruling concerns a valuation, the ruling will only be binding for a period of six months. Depending on the circumstances, the National Tax Board may determine a shorter period in which the ruling will be binding.

ii The process of administrative appeal

A taxpayer has the right to request that a case be tried before the courts or to submit an administrative complaint. This option entered into force on 1 July 2020, and thus removed a former requirement that the administrative complaint be left unresolved for more than six months.

It is a requirement that the appeal board has not issued a preliminary decision.

Anyone with a significant, direct and individual legal interest in a tax decision may submit a complaint to the Tax Appeals Agency.

Some formal requirements must be met when a case is submitted. For example, an appeal must be submitted no later than three months from the date when the taxpayer received the decision from the tax authorities. The complaint must be in written form and the reason for the appeal must be stated. There are no formal requirements for submission of an administrative appeal. However, the appeal must be submitted electronically on the Tax Appeals Agency's website.5

Submission of a case triggers a fee of 1,100 kroner for the taxpayer. The litigation process is rather informal. Both parties will be granted the opportunity to provide additional remarks during the process.

The taxpayer may request a meeting with the responsible caseworker. Generally, it is advantageous to request a meeting. However, it will likely prolong the processing time. During the meeting, the facts and the legal arguments will be discussed with the caseworker in an informal manner.

Once the preparation of the case is finished, the Tax Appeals Agency will issue a preliminary decision, which will be sent to the parties for review.

The taxpayer can request for a meeting with the members of the relevant appeal board. Following such meeting, the appeal board will issue a decision based on the preliminary opinion, the comments provided by the parties and the information and arguments presented at such meeting with the parties.

iii The process of appeal at the courts

According to the Danish Constitution, all decisions issued by a public authority can be brought before the courts. The court system is based on a two-instance principle. By default, all cases are initiated before the district court. Hereinafter, the decision can be appealed to the High Court. If a case is of fundamental character, it is possible to apply for a third-instance permission. The demand must be filed to the Ministry of Justice. If the request is granted, the taxpayer may bring the case before the Supreme Court.

With permission from the district court, a case may be transferred to the High Court as the first instance. In this situation, the case can be brought before the Supreme Court without special permission.

A case must be brought before the courts no later than three months after a decision has been issued.

Only questions that were originally part of the initial decision can be reviewed by the courts. However, the taxpayer can involve new questions if permission is granted by the court. New questions may be litigated in the dispute if it can be considered as excusable that the question has not been dealt with previously or it will imply a disproportionate legal loss for the individual if the question is not reviewed as a part of the case.

iv Expert survey and valuation

The claimant and the tax authorities have a right to request an expert opinion in tax disputes handled by the appeal boards or the courts. Such a request must be filed to the relevant district court.

An expert opinion is admissible when the parties disagree on factual circumstances (e.g., a disagreement on the valuation of real estate or shares). An expert opinion cannot be provided to clarify legal disagreements. The expert opinion must be submitted to the court.

Neither the courts nor the administrative appeal boards can decide on the procurement of an expert opinion if none of the parties have requested such procurement.

The requesting party must initially bear the expenses; ultimately, the court decides which party has to bear the expenses; usually based on which party the opinion favours. However, the appeal boards can decide that the Danish Tax Agency shall cover all expenses relating to the procurement of the expert opinion.

The court can decide to appoint more than one expert if so requested by one or all the parties and the case at hand requires more than one expert to be fully examined.

Further, the court can allow additional expert opinions to be provided on the same subject, if this is deemed appropriate or necessary because of a party's relevant objections to the first expert opinion.

v Postponement of payment of contested taxes

A taxpayer can apply for a postponement of a contested tax payment. The tax authorities usually grants postponement requests. However, the tax authorities tends to reject the application if there is a reasonable risk of the tax not being paid. Furthermore, the tax authorities can request that collateral be deposited for the contested tax payment as a condition for postponement.

The postponement period can be extended in the event the appeal lasts longer than the original granted postponement. The postponement will always lapse when the appeal board renders its decision. The taxpayer must file a new application for postponement if the administrative decision is brought before a court.

Additionally, a complaint can be filed to the Ombudsman or the courts, in cases where postponement is denied.

The courts and tribunals

Appeals are submitted to the Tax Appeals Agency, which refers the case to an appeal board within the administrative tax appeal system. The administrative tax appeal system consists of four separate appeal boards:

  1. the National Tax Tribunal;
  2. the national tax boards of appeal;
  3. the valuation boards of appeal; and
  4. the motor vehicle boards of appeal.

In addition to the administrative tax appeal system, the Ombudsman handles complaints independently.

i The Tax Appeals Agency

The Tax Appeals Agency is an independent authority and functions as secretariat for the appeal boards. If a taxpayer wishes to contest a decision of the Danish Tax Agency, the appeal must be submitted to the Tax Appeals Agency. After receiving a complaint, the Appeals Agency will gather all relevant information and once the preparation of the case is completed, the agency refers the case to the relevant appeal board.

ii The National Tax Tribunal

The Tribunal is not a court but an administrative appeal board. The Tribunal is organisationally a part of the Ministry of Taxation. However, the board is independent in its case handling. Consequently, the Tribunal cannot be ordered by the Minister of Taxation to issue a specific decision. The Tribunal consists of a leading presiding judge, a number of other judges, 30 ordinary members and four members with specialist knowledge about motor vehicles. The presiding judge shall have a legal degree. The Danish parliament appoints 11 members out of the 30 members and the Minister of Taxation appoints the rest of the members. Each matter will be heard by three or four members of the Tribunal , and at least one of these must be a judge.

The Tribunal rules in the following types of cases:

  1. appeal of a decision issued by the Danish Tax Agency if the appeal has not been decided by any of the other appeal boards;
  2. appeal of a decision issued by the National Tax Board;
  3. appeals brought to the Tribunal by the Ministry of Taxation concerning decisions containing EU law interpretation; and
  4. certain other cases.

iii The national tax boards of appeal

Denmark is divided into 22 local boards, which are located across Denmark. The Minister of Taxation appoints the members. The national tax boards of appeal are competent to rule in the following tax disputes:

  1. disputes concerning taxable income;
  2. property value tax;
  3. advance registrations;
  4. deductibility;
  5. advance tax rulings; and
  6. certain other types of taxable income.

iv The valuation boards of appeal

The valuation boards of appeal are divided into 10 local boards, which are located across Denmark. The Minister of Taxation appoints the members. The valuation boards of appeal make decisions in cases when the dispute concerns valuation of properties and appeal of decisions regarding the taxation of land. However, the valuation boards of appeal may choose to refer the case to the Tribunal if the case has fundamental importance for other taxpayers.

v The motor vehicle boards of appeal

In Denmark, there are four local motor vehicle boards of appeal. The Minister of Taxation appoints the members. However, at least two members must be elected by a central organisation for car owners. One member must be a technical expert and another member must have business knowledge. The remaining members are appointed upon the recommendation of the dealerships organisation for the automobile industry. The boards of appeal can process disputes regarding registration fees and related matters.

vi The Ombudsman

The Danish parliament is obliged to appoint an Ombudsman. The Ombudsman works independently from the Danish parliament. The Ombudsman functions as a 'public watchdog'. The Ombudsman accepts complaints about public authorities, including complaints about the tax authorities.

The task of the Ombudsman is to review maladministration; violation of applicable law in the form of an unlawful administrative decision; unfair decisions; and failure to comply with procedure requirements (e.g., complaints on long processing time).

The Ombudsman is competent to handle complaints concerning all parts of the public administration, with a few exemptions. For instance, the Ombudsman is not competent to handle complaints concerning the courts and consequently the Ombudsman is not competent to handle cases in which the court has issued a ruling. A complaint must be submitted no later than one year after the administrative act or behaviour that gave rise to the complaint.

A taxpayer must have used the administrative appeal system prior to complaining to the Ombudsman.

A complaint to the Ombudsman has suspensory effect if:

  1. the complaint is filed to the Ombudsman within three months after the decision of the relevant appeal board; and
  2. the decision of the relevant appeal board is appealed to the civil courts within one month after the Ombudsman has finished reviewing the case.

Otherwise, the complaint to the Ombudsman will not have suspensive effect.

After reviewing a case, the Ombudsman may state criticism and recommend that a public authority amend the decision. The Ombudsman cannot itself render a decision.

Owing to the complexity of Danish tax law; the Ombudsman has established a special tax office to strengthen the taxpayer's legal position.

Penalties and remedies

Administrative sanctions

In the case of intentional tax evasion or in the case of gross negligence, the Danish tax authorities may impose a fine.

Tax claims

i Recovering overpaid tax

As a starting point, the tax authorities will automatically repay overpaid taxes. Before a repayment, the tax authorities will offset any outstanding amounts in respect of the individual or entity receiving the overpaid taxes.

If repayment of overpaid taxes is granted, the refund cannot be paid before the expiry of the income year to which the claim relates.

Certain taxes (e.g., withholding taxes) require an application to the tax authorities before the overpaid taxes are repaid.6

ii Challenging administrative decisions

A taxpayer may request for an advance tax ruling from the tax authorities. If the matter in question is of general public importance, the Danish Tax Board will render the ruling. The taxpayer requesting for an advance tax ruling must pay a fee of 400 kroner when submitting the application.

A request for an advance tax ruling is relevant when the consequences of a specific transaction are uncertain. A taxpayer may request for an advance tax ruling on the tax consequences of an act that the taxpayer intends to implement or has already implemented.

An advance tax ruling is binding for the tax authorities for a period of five years, but is not binding for the individual applying. The individual can rely on the ruling throughout the whole period. An (unfavourable) advance tax ruling may be appealed using the process described above concerning administrative appeal, including bringing the advance tax ruling before the courts.

The Danish tax authorities biannually publishes a document known as the Legal Guidance.7 The Legal Guidance is an expression of the position of the Danish tax authorities concerning the interpretation of an array of tax provisions. The Legal Guidance is directed at and is binding for the Danish tax authorities. Formally, the Legal Guidance is not binding on taxpayers but they may indirectly rely on it, provided such reliance does not conflict with any superior source of law.

The principle of equality is a fundamental principle in Danish administration law in general and thereby also applies for the administrative decisions in relation to tax. The principle of equality states that a decision must be objective, impartial and must be decided in accordance with similar cases. As a result of the principle of equality, individuals can rely on prevailing administrative practice.

ii Claimants and related parties

Anyone with a significant, direct and individual legal interest in a tax claim may initiate administrative or legal proceedings. An individual or a company that is only affected indirectly by a decision is not entitled to submit a claim. An economic effect may only be an indirect interest.

If an individual or a company is a party of the tax dispute, it triggers applicable legal effects; for instance, a hearing of the involved parties and right of access to documents in accordance with protective mandatory rules.

According to a ruling from the European Court of Justice in case C–94/10 Danfoss and Sauer Danfoss, companies may bring a claim directly against the Ministry of Taxation, irrespective of the fact that it is the taxpayer's suppliers who have paid duties to the tax authorities (i.e., an indirect economic interest may be sufficient basis to grant standing to sue).

Costs

The expenses in connection with an appeal brought before the appeal boards are significantly lower than the expenses in connection with a case before the courts. It is possible to obtain cost reimbursement from the tax authorities if an individual or a company is part of a tax dispute.

Cost reimbursement can be obtained by submitting an electronic application to the Danish Tax Agency. An application must be submitted no later than three years after the date the decision became final.

The reimbursement will be 100 per cent of the costs, if the ruling is fully or predominantly in favour of the taxpayer. If the ruling is in favour of the tax authorities, the cost reimbursement is 50 per cent. Cost reimbursement that emerged after 1 January 2020 is entirely denied in some cases concerning refunds of dividend withholding tax.

Generally, the cost reimbursement covers expenses connected to legal advice, expert valuation and the gathering of evidence, as well as costs awarded to the other party. The cost reimbursement does not cover the submission fee.

Alternative dispute resolution

Currently, there is limited possibility for alternative dispute resolution in tax disputes. Alternative dispute resolution is available in certain transfer pricing matters if the tax authorities consents and agrees. However, there are several remedies to avoid disputes; for example, the possibility of an advance tax ruling, the possibility of using a tax reservation and the access to require an amendment of a previous tax assessment.

Anti-avoidance

The general anti-avoidance rule in Directive 1164/2016/EU (Anti Tax-Avoidance Directive) and the anti-avoidance rule in relation to double taxation treaties as recommended in OECD BEPS Action report No. 6 are both implemented in Danish law.8

The Danish Tax Administration must submit cases on the application of the anti-avoidance rules to the National Tax Board, who will then make a decision on the application of the general anti-avoidance rule. The same obligation does not apply to the National Tax Tribunal if it initiate the application of the general anti-avoidance rules in an appeal case.

The application by the tax authorities, the boards and the courts of the rules on anti-avoidance is not quite clear. The Danish tax authorities often interprets the anti-avoidance rules in a strict manner, often placing a high burden of proof on the taxpayer to show, for example, a tax arrangement is not an artificial construction only constructed to lower the tax payment.

Double taxation treaties

Denmark has concluded double taxation treaties with approximately 85 jurisdictions. Generally, the double taxation treaties concluded by Denmark are based on the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention on Income and on Capital. Most treaties contain provisions that allow taxpayers the right to request a Mutual Agreement Process (MAP) in relation to double taxation.

Interpretation of the Danish double taxation treaties happens in accordance with the Model Tax Convention and the relevant commentaries at the time of agreement.

Areas of focus

In the years 2020-2024 the Danish government seeks to reform and strengthen tax controls. The focus is to strengthen the control of VAT, international tax avoidance, the use of tax havens and money laundering. The initiative is reflected in the work of the tax authorities, who continue to have an increased focus on both international taxation and payment of VAT.

According to the Danish Tax Agency, the improved control of VAT and payment of negative VAT have had an effect and the Tax Agency have stopped wrongful applications on payment of more than 7 billion kroner since the implementation of a new digital system.9

In recent years, three transfer pricing cases have been brought before the Supreme Court. Common to all three cases are that the formal requirements have been subject for interpretation, including the requirements regarding transfer pricing documentation, burden of proof and the Danish Tax Agency's possibility to make an assessment on a discretionary basis.

Applicable from the FY2021, taxpayers must file transfer pricing documentation no later than 60 days after the tax filing date. The Danish Tax Agency may assess the transaction value on a discretionary basis if the transfer pricing documentation is not filed within this date. With this new regulation of the assessment on a discretionary basis, it is expected that some uncertainty has been avoided.

As of 1 January 2021 a definition of the term 'permanent establishment' was adopted in the Danish Company Tax Act and the Tax at Source Act. The adoption is solely a codification of present law and an implementation of the Model Tax Convention as revised in 2017; hence, the adoption has not entailed any material changes. Although, the term has been subject to a number of advance tax rulings, this in light of the increased use of home offices – most likely as an effect of the covid-19 pandemic.

The National Tax Board interprets the term in accordance with the comments to the Model Tax Convention and the OECD's updated guidance on tax treaties and the impact of the covid-19 pandemic, just as they have laid down some general principles for the assessment of whether a home office constitute a permanent establishment.

The advance tax rulings are decided upon request from the taxpayer, thus the area of permanent establishment is not necessarily an area of focus of the tax authorities; although, following the development will be interesting.

Outlook and conclusions

The rules on the procedures regarding the tax authorities's case handling are expected to be subject to continued modernisation in 2022. The scope of the modernisation is to strengthen the administrative procedures and to lower the lengthy review time in the administrative complaint system.

There have been major complications with the digital collection of tax in Denmark. In 2020 a new debt collection system was fully developed leading to an increase in debt collection. However, numbers shows that debt continues to increase, due to new debt being taken on and existing debt accruing interest.

Through the implementation of bills changing the Danish Act on Debt Collection, Denmark sought to improve the digital collection of tax. In June 2021, another bill was adopted changing this law. The aim of the bill is to simplify the set-off process and support the automatic set-off process in the Danish Debt Collection Agency and ease the transfer of old data files concerning tax debt stored in the old collection system to the new system.

In 2021, the first new property assessments that have been awaited since 2013 were carried out. As the new rules on property taxes are postponed until 2024, nominal increases in land value tax have been frozen until 2024 as well. However, from May 2021 the temporary freezing scheme is voluntary.

Footnotes

1 Jakob Skaadstrup Andersen is a partner and head of tax at Gorrissen Federspiel.

2 Report – key performance indicators for the Danish courts Q1–3 2021.

3 See Section 27 of the Danish Tax Administration Act.

4 The taxpayer is required to pay a submission fee of 400 kroner (2021) to obtain an advance tax ruling.

6 Until further notice, the processing of dividend reclaims have been suspended, awaiting new legislation.

7 Den Juridiske Vejledning 2021-2: https://skat.dk/skat.aspx?oid=124.

8 See the Danish Tax Assessment Act, Section 3

9 The system was implemented in 2014.

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