June 1, 2023
Denmark expands tax liability scope to include activities carried out in the Exclusive Economic Zone
On 1 June 2023, the Danish Parliament passed Bill No. L 73 of 29 March 2023, expanding the scope of tax liability for nonresident companies and individuals engaged in activities outside of Denmark's sea territory (12 nautical miles) but within Denmark's Exclusive Economic Zone (EEZ). The new rules apply beginning 1 July 2023.
The new rules stem from a political agreement to construct an artificial energy island in the North Sea that will handle and distribute electricity from offshore windfarms clustered around the island. In addition, facilities will be constructed in the North Sea to store CO2 captured by onshore industry (Carbon Capture and Storage, CCS).
So far, Denmark has only levied income tax on nonresidents' activities carried on in the EEZ relating to hydrocarbon activities. The purpose of the new rules is to expand Danish taxation to include nonresidents performing activities in the EEZ relating to the construction, operation and use of artificial islands, installations, and facilities including windfarms.
The new rules expand the scope of tax liability to nonresident companies meeting all of three conditions: (1) the activities are carried out in the EEZ, (2) the activities constitute a permanent establishment (PE), and (3) the activities relate to the construction, operation and use of artificial islands, installations, and facilities including windfarms. Determining whether there is a PE in the EEZ must be based on the general definition of a PE in Danish tax law, which is generally based on Article 5 of the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention on Income and on Capital 2017. Under domestic law, a construction or installation project constitutes a PE from the first working day, whereas a 12-months test applies under the OECD Model. The taxable income must be determined based on the principles embodied in Article 7 of the OECD Model. Special rules apply regarding operating expenses and amortization connected with both CCS activities and hydrocarbon activities, as well as carryback of decommissioning expenses in relation to hydrocarbon taxation. The Danish statutory corporate tax rate is 22%.
Under a carveout provision, activities relating to sea cables and pipelines will not trigger tax liability, unless the cables or pipelines: (1) continue to Denmark's sea or land territory; (2) relate to exploration or extraction of natural resources in the Danish continental shelf; or (3) relate to the operation of artificial islands, installations or facilities in the Danish continental shelf. Hence, sea cables and pipelines that are only used to transit through the Danish EEZ will be remain exempt from Danish taxation. The carveout provision applies irrespective of whether there is a PE in the EEZ.
Nonresident individuals will be subject to Danish tax liabilities if the following conditions are satisfied: (1) the individual is an employee, is subject to a hiring-out of labor arrangement or is self-employed; (2) the work is carried out in the EEZ; (3) the work relate to the construction, operation and use of artificial islands, installations and facilities; (4) the offshore activities constitutes a PE; and (5) the carveout provision does not apply.
For additional information with respect to this Alert, please contact the following:
EY P/S, Copenhagen
EY P/S, Aarhus
Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor