Denmark Tax Alert - 25 April 2012
Corporate income tax bill presented to Parliament
By Lars Nyhegn-Eriksen, Jens Wittendorff, Asger Mosegaard Kelstrup and Birgitte Tabbert
A tax bill presented to the Danish Parliament on 25 April 2012 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 bill, first announced in February, 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 (PE).
The first reading of the bill is expected to take place on 8 May 2012. Although changes to the bill may be made during the legislative process, potentially affected taxpayers should be aware of the proposed measures because some would become effective as early as 1 July 2012.
Tax loss carryforwards
The bill would introduce restrictions on the carryforward of tax losses to ensure that some tax is paid. The indefinite carryforward of losses would remain possible. Losses from previous years would 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 would take place at the level of joint taxation, that is, it would apply only if the total income of jointly taxed companies before losses exceeded DKK 7.5 million.
The bill also would codify the “unity principle,” under which neither losses of the company nor those of its jointly taxed subsidiaries could be utilized after a tax exempt restructuring. In the past, the tax authorities’ attempts to apply this principle in connection with tax-exempt restructurings have been overruled by the Danish tax court. Non-group-related assets and liabilities or an unrelated company could not be included in a joint taxation without having consequences for tax losses.
The restrictions on loss carryforwards would apply for income years starting on or after 1 July 2012.
Joint and several liability for taxes under joint taxation
Abolished in 2005 in connection with the introduction of mandatory joint taxation (group consolidation), joint and several liability would be reintroduced for income tax, on-account tax, underpaid tax, etc. The administration company of the joint taxation group and other wholly owned companies would be jointly and severally liable for tax. The ownership at the end of the income year would determine whether companies are wholly owned. Certain individuals also should be included in the assessment.
Other companies included in the joint taxation (i.e. minority companies) would be liable on a subordinated basis, and the Danish tax authorities would be required to secure the relevant tax from the wholly owned companies before pursuing the claims against minority companies.
Similar principles would apply for withholding tax (i.e. on dividends, interest and royalties) for companies that are jointly taxed.
These provisions would apply from the income year starting on or after 1 July 2012 and for tax payments due on or after that date.
The Danish tax authorities would 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 could not be the same person who audited the company’s annual accounts or who assisted in preparing the transfer pricing documentation and would have to certify whether he/she found any evidence that proves that the company’s controlled transactions do not comply with the arm’s length principle.
The assurance report obligation would be imposed on companies that have transactions with related parties that are located outside the EU/EEA and resident in countries that have not concluded a tax treaty with Denmark and on 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 would apply in the case of banks and insurance companies.
The existing rules allowing the Danish tax authorities arbitrarily to assess the taxable income would apply if the assurance report is not submitted within 90 days from the order. Additionally, the penalties for failure to comply with the transfer pricing documentation rules would be increased.
These provisions would apply as from 1 January 2013.
Publication of company tax information
In an effort to make the payment of corporate tax more transparent, the tax authorities would 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 would include the taxable income of a company after 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).
This provision would apply as from 1 July 2012.
Allocation of income to a PE
The 2010 revision of the OECD model treaty establishes new principles for the allocation of income to a PE. The new OECD principles essentially adopt the separate legal entity approach (i.e. a PE is to be treated as an entity independent of the entity of which it is a part).
The bill would bring Danish law in line with OECD principles and would 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 applicable treaty is not based on the OECD model, the allocation would be based on the principles under the relevant treaty.
This provision would apply for the income year beginning on or after 1 July 2012, although taxpayers would have the option to apply the new assessment method as from income year 2012.