The implementation of the European Union Directive on Administrative Cooperation (EU DAC6) in Danish law is moving forward as a draft bill has been published. Based on the draft bill, it is expected that the Danish rules will be similar to the wording of the Directive (i.e. no significant extensions are expected).
DAC6 imposes mandatory disclosure requirements for certain arrangements with a cross-border element that meet certain criteria (so-called hallmarks) that are seen to present a potential risk of tax avoidance.
The Danish Ministry of Taxation divided the proposed Bill L28 (2018-19) regarding the implementation of the EU Anti-Tax Avoidance Directives (ATAD) 1 and 2 in Danish tax law into Bills L28A and L28B.
Bill L28A (2018-19) was adopted 20 December 2018. The bill introduces new corporate tax rules on hybrid mismatches, a new general anti-avoidance rule (GAAR), and implements changes to the exit taxation rules and the interest limitation rules.
The most important changes under the bill are, among others, the new rules that address hybrid mismatches. The rules apply when hybrid mismatches arise in situations where a risk of tax avoidance exists due to different treatment of entities in different jurisdictions (e.g. between an entity and its permanent establishment [PE], between associated entities).
Further, the earnings before interest and taxes (EBIT) rule that might restrict the deduction of financial expenses is substituted by a new earnings before interest, taxes, depreciation, and amortisation (EBITDA) rule under which the deduction of net financial expenses exceeding 22.3 million Danish kroner (DKK) is limited to a maximum of 30% of the company’s EBITDA.
The proposed Bill L28B (2018-19) regarding the implementation of the controlled foreign company (CFC) rules of the EU ATAD in Danish tax law has been postponed with no expected adoption date, as certain technical points in the proposed rules need to be clarified in order for the rules apply as intended.
The proposed new CFC rules may have a significant impact on taxation of Danish-based multinational companies.
The most important changes to the CFC rules are the following:
- Adjustment of the control test for determining when a subsidiary is comprised by the CFC rules.
- Reduction of the threshold under the income test from 50% to 1/3 CFC income in order for the income of a controlled company to be comprised by CFC taxation.
- Abolishment of the asset test.
- Expansion of the CFC-income definition to include, for example, 'embedded royalties' and royalty income received from unrelated parties.