Denmark Tax Alert - 15 June 2012
Parliament passes corporate income tax changes
By Kim Wind Andersen and Birgitte Tabbert
The Danish Parliament passed a bill on 13 June 2012 that contains a number of provisions designed to ensure, in particular, that multinational companies contribute to the financing of Danish welfare and to collect more revenue from such companies. The new law, which generally will increase the burden on Danish businesses, includes the following measures:
- A cap on the carryforward of tax losses;
- The reintroduction of joint and several liability for jointly taxed companies;
- A requirement to obtain an auditor’s report in certain cases;
- The publication of information about a company’s tax matters; and
- Rules affecting the allocation of income to a permanent establishment
The law will be published in the official gazette within the next few days, and as indicated below, some of the measures will become effective as early as 1 July 2012.
Tax loss carryforwards
The new law introduces restrictions on the carryforward of tax losses to ensure that a company pays some tax, although losses still will be able to be carried forward indefinitely. Losses from previous years will be fully deductible up to taxable income that does not exceed a base amount of DKK 7.5 million (to be adjusted annually), with any remaining losses only available to reduce remaining income by 60%. The restriction on the use of losses will take place at the level of joint taxation, i.e. it will apply only if the total income of jointly taxed companies before losses exceeds DKK 7.5 million.
The new law codifies the “unity principle,” under which the losses of a company or its jointly taxed subsidiaries may not be used after a tax-exempt restructuring. In the past, the Danish tax court has overruled the tax authorities’ attempts to apply this principle in connection with tax-exempt restructurings. Non-group-related assets and liabilities or the assets and liabilities of an unrelated company cannot be included in a joint taxation without having consequences for tax losses.
The restrictions on loss carryforwards apply for income years starting on or after 1 July 2012 and the codification of the unity principle applies to restructurings upon on or after that date.
Joint and several liability
Joint and several liability is reintroduced (it was abolished in 2005 in connection with the introduction of mandatory joint taxation (group consolidation)) for income tax, on-account tax, underpaid tax, etc. The administration company of the joint taxation group and jointly taxed companies in which all shares are held directly or indirectly by the ultimate parent company at the end of the income year will be jointly and severally liable for tax. Other companies in which all shares are held directly or indirectly by the debtor company or companies also will be jointly and severally liable. Certain individuals will have to be included in the assessment.
Other companies included in joint taxation (i.e. minority companies) will be liable on a subordinated basis, and the Danish tax authorities will be required to secure the relevant tax from the wholly owned companies before pursuing any claims against minority companies.
Similar principles will apply for withholding tax (i.e. on dividends, interest and royalties) for companies that are jointly taxed.
These provisions will apply from the income year starting on or after 1 July 2012 and for tax payments due on or after that date.
Beginning on 1 January 2013, the Danish tax authorities will be empowered to require certain businesses that are obliged to prepare transfer pricing documentation to obtain an assurance report from an independent auditor. The auditor may not be the same person who audits the company’s annual accounts or who assists in preparing the transfer pricing documentation. The independent auditor will have to certify whether he/she found any evidence that indicates that the company’s controlled transactions do not comply with the arm’s length principle.
The assurance report obligation will apply to companies that have transactions with related parties located outside the EU/EEA and resident in countries that have not concluded a tax treaty with Denmark and to companies that had an average operating deficit for the past four years (according to their annual accounts), measured as the company’s operating income before financing, extraordinary items and taxes. Special rules will apply to banks and insurance companies.
The existing rules allowing the Danish tax authorities to arbitrarily assess taxable income will apply if the assurance report is not submitted within 90 days from the request. Further, the penalties for failure to comply with the transfer pricing documentation rules will be increased.
Publication of company tax information
As from 1 July 2012, the Danish tax authorities will be authorized to publish certain information about a company’s tax matters (applicable to all companies required to file a Danish tax return). Such information includes the taxable income of a company after the deduction of losses for previous years, utilized losses for previous years and tax payable for the year, as well as the rules under which the company is taxed (e.g. Corporate Tax Act, Act on Foundations, Tonnage Tax Act or Hydrocarbon Tax Act).
Allocation of income to a PE
The new law brings Danish law in line with OECD principles, specifically the 2010 revision of the OECD model treaty, which essentially adopts the separate legal entity approach for the allocation of income to a PE (i.e. a PE is to be treated as an entity independent of the entity of which it is a part). The new measures will apply in situations in which there is no tax treaty or where an applicable treaty is based on the amended version of the OECD model treaty. Where the treaty is not based on the OECD model, the allocation will be based on the principles under the relevant treaty.
This provision will apply for income years beginning on or after 1 July 2012, although taxpayers will have the option to apply the new assessment method as from income year 2012.