Denmark

Corporate - Significant developments

Last reviewed - 19 February 2020

The implementation of the European Union Directive on Administrative Cooperation (DAC6) in Danish law is completed as the bill was approved on 19 December 2019. The executive order setting out the details of the implementation was published 31 December 2019. The Tax Agency has announced they will draft a guidance which is expected to be completed during spring 2020. The Danish implementation is similar to the wording of the Directive (i.e.no significant extensions would be 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 reporting obligation is effective for such cross-border arrangements entered into as of 25 June 2018 with reporting starting on 31 August 2020.

As a part of the financing of the Danish Finance Act for 2019 the interest rate for underpaid tax was increased with a fixed charge of 2%, which increases the interest rate for underpaid tax to 4.7% for income year 2019 (compared to the 2.8% applicable in 2018). This increase also affects the charge on voluntary payments made between 21 November to 1 February, which was increased to 0.9%.

On 28 March 2019 the Danish Parliament approved Bill L160 (2018-19) which allows the use of the Multilateral Instrument (MLI) to implement measures to prevent base erosion and profit shifting (BEPS) directly into Denmark’s double tax treaties (DTTs).

The MLI provides measures to close the gaps in existing international rules by modifying the application of DTTs concluded to eliminate double taxation. It also implements minimum standards to counter treaty abuse and to improve dispute resolution mechanisms.

Bill L28A (2018-19) was adopted 20 December 2018. The bill introduced 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 (see Adopted implementation of the EU Anti-Tax Avoidance Directive (ATAD) in the Group taxation section).

On 6 November 2019 the Danish Ministry of Taxation proposed Bill L48 (2019-20) regarding the remaining implementation of the EU Anti-Tax Avoidance Directives (ATAD). The bill includes the implementation of the controlled foreign company (CFC) rules of the EU ATAD in Danish tax law. Further the bill introduces adjustments to the rules regarding permanent establishment (PE), deduction of losses incurred by foreign subsidiaries, PEs and real estate located abroad, and a requirement to submit the transfer pricing documentation within the deadline for filing the annual corporate income tax return.

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.

Further, Bill L48 proposes a new definition of PE’s by implementing an 'anti-fragmentation rule' into Danish tax law. Under the current law, a PE is deemed to not exist when a place of business is engaged solely in certain activities are preparatory and auxiliary (such as maintenance of stocks of goods for storage, display, delivery or processing, purchasing of goods or merchandise). With the proposed definition, the exclusion will apply only when these activities are preparatory in relation to the business as a whole. The purpose of the proposed rules are to prevent the breakup of an operating business into several small business units in order to benefit from the preparatory and auxiliary exemption.

Furthermore, the bill proposes to expand the scope of the agent-rule. Thus the rule will also include situations in which an agent habitually plays the principal role leading to the conclusion of contracts that are then routinely concluded without material modification by the enterprise. In such situations the agent would create a PE.  

Bill L48 also introduces the possibility for Danish parent companies to deduct “final losses” incurred by subsidiaries or PEs located in an EU/EEC country, in Greenland or at the Faroe Islands or real estate located both within or outside EU/EEC. The proposed change is a result of the Bevola-case (C-650/16) where the Court of Justice of the European Union concluded that the Danish legislation is contrary to the freedom of establishment, when denying the use of final losses incurred by non-resident permanent establishments.

Finally, the bill also includes changes to the requirements for submitting the transfer pricing documentation. As a continuation to the existing provision that stipulates the obligation to have the final transfer pricing documentation in place by the statutory filing date of the tax return, the bill proposes that the documentation must also be submitted (uploaded) to the Tax Agency when filing the corporate income tax return.