September 16, 2019
Denmark publishes draft bill on international taxation for public comment
On 12 September 2019, the Danish Minister of Taxation published a significant draft bill on international taxation. The draft bill will be subject to a public hearing until 10 October 2019, where after it will be presented in the Danish Parliament.
The main rules addressed by the draft bill are:
The draft bill intends to implement the CFC rules of the European Union’s (EU’s) Anti-tax Avoidance directive (Council directives (EU) 2016/1164 and (EU) 2017/952) (the ATAD) into Danish law.
The ATAD provides Member States with two options for CFC taxation:
Existing Danish CFC taxation is based on model A although the entire income of the CFC is subject to taxation. CFC taxation requires that more than 50% of the income is of a financial nature and that more than 10% of the assets are of a financial nature. The existing rule is applicable irrespective of the level of taxation for the CFC.
The proposal retains model A. The following main changes are proposed:
The proposal does not call for the introduction of the exception outlined in the ATAD under which no CFC taxation should occur where the CFC carries on a substantive economic activity supported by staff, equipment, assets and premises, as evidenced by relevant facts and circumstances.
The new rules would be applicable for income years starting 1 January 2020 and thereafter.
The draft bill will significantly strengthen the Danish transfer pricing rules as follows:
The new rules would be applicable already for income years starting 1 January 2020 and thereafter.
The permanent establishment (PE) concept of domestic Danish law is linked to the definition thereof in Article 5 of the Organisation for Economic Co-operation and Development (OECD) Model Income Tax Convention as it read before the 2017 update. In 2017, the PE definition in Article 5 was amended to accommodate the recommendation of the Base Erosion and Profit Shifting (BEPS) work. Most of the Danish tax treaties will also be amended as Denmark has signed the OECD’s multilateral convention. On this basis Denmark’s taxing rights under its tax treaties will be expanded compared to its taxing rights under domestic law. For this reason, it is proposed that the domestic PE definition be amended in order to align with the new definition in Article 5. However, two Danish special rules will be upheld: (1) a building site or construction or installation project work constitutes a PE from the first day, and (2) investments in shares, receivables and financial instruments only give rise to a PE if the activity amounts to a trading activity.
Deduction for final losses in foreign entities
Danish companies are taxed on a territorial basis meaning that income or loss from foreign subsidiaries, PEs and real estate is not included in the taxable income.
The Court of Justice of the European Union (CJEU) on 12 June 2018 (case C-650/16, Bevola) held that Danish law was incompatible with EU law because a Danish company could not claim a tax deduction for a final loss in a foreign PE.
For this reason, it is proposed that a Danish company will be entitled to claim a tax deduction for a final loss suffered by a foreign subsidiary, PE or real estate subject to a number of conditions. Among other things, the following conditions must be satisfied in order for a loss to be “final”:
The rule would be applicable for income year 2019 and onwards. The tax authorities are expected to publish a decision that will entitle taxpayers to open past years tax returns to claim a tax deduction for final losses suffered in previous years.
For additional information with respect to this Alert, please contact the following:
Ernst & Young P/S, Copenhagen
Ernst & Young P/S, Aarhus
Ernst & Young LLP (United States), Nordic Tax Desk, New York