Mandatory Danish tax consolidation
A mandatory tax consolidation regime obligates all Danish resident companies and Danish branches that are members of the same Danish or international group to file a joint group tax return. The definition of a group generally corresponds with the definition of a group for accounting purposes. The tax consolidated income is equal to the sum of the taxable income of each individual Danish company and Danish branches of foreign companies that are a member of the consolidated group.
The top parent company participating in the Danish tax consolidation group will be appointed the role of a so-called ‘management company’; this company is responsible for settling tax on account and final corporate tax payments of all group members.
Companies included in a mandatory tax consolidation are jointly and severally liable for payment of corporate taxes. Withholding taxes (WHTs) on dividends, interest, and royalty payments are also covered by the joint and several liability. For companies with external minority shareholders, the company has a reduced liability and is merely liable if none of the other jointly taxed companies are able to pay the taxes.
Elective cross-border tax consolidation
A non-Danish subsidiary may be included as a member to a Danish tax grouping, provided that the group includes all group companies and branches in the Danish tax grouping. In effect, this all-or-nothing provision rules out the possibility for major international groups to have their Danish subgroup file a Danish group tax return that includes only certain hand-picked (typically loss-making) foreign group members. Losses deducted in an elective cross-border tax consolidation will be recaptured either fully or to a limited extent.
If a general cross-border tax consolidation is established, it will be binding for ten years; however, there are certain possibilities of ‘breaking’ the ten-year period (e.g. in connection with takeovers). ‘Breaking’ the ten-year period will result in a full recapture of previously deducted tax losses.
The comments under Mandatory Danish tax consolidation with respect to the calculation of the tax consolidation income, ‘management company’, etc. generally also apply to international tax consolidation.
A group must prepare detailed and extensive transfer pricing documentation to substantiate that intra-group transactions are conducted in accordance with the arm’s-length principle if it employs 250 or more employees (calculated as the average number of full-time employees during the income year).
If the group employs less than 250 employees, it will qualify for the small business exemption if it meets either of the following criteria: (i) has revenue under DKK 250 million or (ii) has a balance sheet sum under DKK 125 million.
However, an enterprise that is generally exempted from preparing transfer pricing documentation based on the above criteria must prepare transfer pricing documentation for transactions with group companies resident in countries outside the European Union / European Economic Area with which Denmark does not have a DTT.
The overall purpose of the transfer pricing documentation is to give the Danish tax authorities an opportunity to assess the prices and conditions used in order to determine whether inter-company transactions are conducted in accordance with the arm’s-length principle.
With the Executive Order on Documentation from 2016 and updated in 2018, Denmark has implemented the updated transfer guidelines (July 2017) from the OECD under which the following documentation must be prepared:
- Master file.
- Local file.
The master file must contain standardised information relevant for the entire group, whereas the local file(s) must contain specific information on the local affiliate(s). It follows from the Executive Order on Documentation that a local file must be prepared for each legal entity even though the group has several entities in the same country.
A bill (Bill L 28) on 3 December 2020 has been adopted, which applies to income years beginning on 1 January 2021 or later, requiring companies to submit the transfer pricing documentation no later than 60 days after the deadline for filing the tax return (the first time on 30 June 2022).
The Danish tax authorities may also impose a penalty of DKK 250,000 per year, per company where transfer pricing documentation is missing or is declared inadequate by the Danish tax authorities. If adequate documentation is subsequently submitted, the penalty may be reduced by 50%.
Furthermore, if an upward income adjustment is issued (i.e. on the basis that inter-company prices were not at arm’s length), the penalty may be increased by an amount equal to 10% of such adjustment. In addition, a surcharge and interest will be levied on underpaid tax related to any income increase.
The size of the penalty will be determined ultimately by the courts. However, recent case law has confirmed the penalty of DKK 250,000 per year, per company where the documentation is missing, declared inadequate, or has not been prepared on a contemporaneous basis. Trial cases are currently running at the courts regarding the penalty amounting to 10% of the income adjustment imposed by the tax authorities.
The Danish tax authorities may request the taxpayer to obtain an independent auditor’s report. The Danish tax authorities can request the statement seven days after receiving the transfer pricing documentation. The circumstances for requesting an auditor’s statement are:
- The group has controlled transactions with entities in countries outside the European Union / European Economic Area or in countries without a DTT with Denmark.
- The group has had a negative average operating profit/EBIT over the past four years.
The auditor’s statement must conclude on awareness of facts that suggest that the group’s transfer pricing documentation does not give an accurate portrayal of the actual terms and conditions of the controlled transactions. The deadline for submitting the statement to the Danish tax authorities is at least 90 days after the request. The Danish tax authorities are not bound by the conclusion of the statement.
Country-by-country (CbC) reporting
Groups with a consolidated turnover of DKK 5.6 billion or more, based on previous year's turnover, must additionally prepare a CbC report. The CbC report must contain a range of information for each country in which the group operates, including revenue, profit, tax, capital structure, assets, and employees. Furthermore, the group has to identify each entity within the group and specify the entities’ tax residencies and the activities of each entity.
The deadline for submission of the CbC report is 12 months after the end of the income year (i.e. for the financial year 2020, the deadline is the end of 2021). The rules apply for income years starting on 1 January 2016 or later. A Danish subsidiary, which is part of a multinational group, but is not the ultimate parent entity, will have to file the CbC report if certain requirements are met. However, this is only applicable for income years starting 1 January 2017 or later.
Additionally, Danish taxpayers must notify the Danish tax authorities about which group entity is obligated to file the CbC report. To notify the Danish tax authorities, the taxpayer submits the notification through the Danish online filing system (TastSelv) at the company’s tax folder (skattemappe). The notification should be submitted before the year-end of the year covering the CbC report (e.g. if the CbC report will include information for the financial year ending 31 December 2021, the notification must be submitted no later than 31 December 2021).
Thin capitalisation and interest relief limitations
Danish resident companies and Danish branches of foreign companies are subject to three sets of restrictions, each of which may seriously limit or disallow Danish tax deductions for financing costs.
Firstly, there is the thin capitalisation rule. This rule works to disallow gross interest costs and capital losses on related company debt to the extent the overall debt-to-equity ratio based on market values exceeds 4:1. Related company debt includes external bank debt if group member companies have provided guarantees to the bank. This rule only applies if the controlled debt exceeds DKK 10 million. When calculating the 4:1 ratio, a special consolidation rule applies if two or more companies are considered affiliated (note that the definition of affiliated companies differs from the definition under the Danish rules on joint taxation). There is no recharacterisation of interest as dividends.
Secondly, there is an asset-based rule that applies in relation to financing costs that remain after the thin capitalisation limitation. To the extent a Danish company on a stand-alone basis or, if part of a joint tax group, together with group companies has net financing costs in excess of DKK 21.3 million, the deductibility of the remaining financing costs can be limited to an amount equal to 2.3% for tax year 2021 (2.5% in 2020) of the tax basis of certain assets of the group. Net financing costs consist of, among other things, interest income/expenses, taxable gains/losses on debt, receivables and financial contracts, taxable gains/losses on shares, and taxable dividends.
Thirdly, there is an EBITDA-based rule that works to limit the deductibility of financing costs that remain after the thin capitalisation test and the asset-based rule to an amount equal to 30% of the Danish company’s/tax group’s taxable EBITDA income. This rule applies the same definition of net financing costs as the asset-based rule, and it allows for a minimum deduction of DKK 22.3 million. Exceeding borrowing costs that are disallowed by the EBITDA rule can indefinitely be carried forward for potential use, and unutilised interest deduction capacity can be carried forward for the five following income years.
If a Danish resident company has a debt to a non-Danish resident creditor (person or company) that considers the payments as dividends on a contributed capital (hybrid financing), the debt will also, in accordance with Danish rule, be requalified as equity. The Danish debtor company is then cut off from deducting the interest cost and/or capital losses on the requalified debt.
Controlled foreign companies (CFCs)
According to the Danish CFC rules, a Danish company has to include in its taxable income either the total taxable income of a subsidiary or the CFC income of the subsidiary, foreign or Danish, if such subsidiary qualifies as a CFC. A subsidiary qualifies as a CFC if all of the following criteria are met:
- The Danish company itself, or together with other associated entities (e.g. group-related companies), directly or indirectly owns more than 50% of the capital or controls more than 50% of the voting rights in the subsidiary or is entitled to receive more than 50% of the profits of the subsidiary.
- More than 1/3 of the subsidiary’s taxable profits, as hypothetically assessed under Danish tax laws, are predefined CFC income types (mainly interest, royalty, capital gains, etc.). Effective for income years beginning on 1 January 2021 and later, the definition of CFC income is expanded to include 'embedded royalties', which is the part of sales income that is attributable to certain types of intangible assets owned by the subsidiary. Certain exceptions apply to the inclusion of embedded royalty as CFC income, including a partial substance test under which embedded royalties may not be included in the CFC income calculation where the subsidiary has a sufficient level of substance related to the relevant intangible assets.
- The group has not opted for international joint taxation.
- The parent company's shares in the subsidiary are not shares or investment certificates, etc. in investment companies.
- The parent company's shares in the subsidiary (CFC company) are not owned through an investment company and the parent company or the direct owner of the investment certificates, etc. is taxed in accordance with section 19A of the Capital Gains Tax Act (e.g. on gains and losses on shares and investment certificates, etc. issued by an investment company).
- The parent company's shares in the subsidiary are not owned through a legal entity that is taxed under the rules of the Company Taxation Act article 13 F (e.g. certain life-insurance companies).
- The parent company's shares in the subsidiary are not owned through a labour market-related life insurance limited company, which is taxed in accordance with the Pension Returns Taxation Act.
There is no black or white list that exempts subsidiaries resident in certain countries.
See the Significant developments section for further details on the Bill.
Adopted implementation of the EU Anti-Tax Avoidance Directive (ATAD)
General anti-avoidance rule (GAAR)
One of the main components of the adopted rules is the introduction of a GAAR, which applies not only to cross-border transactions, but also to domestic Danish transactions, where benefits may be denied if tax avoidance is a key purpose of the transactions and the transactions do not have real substance.
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 PE or between associated entities). The new hybrid mismatch rules are effective from 1 January 2020. The definition of an associated person is, as a starting point, a person that has an influence over another person of at least 25% voting rights, profits, and share capital, but can range to a requirement of 50% ownership for specific hybrid mismatches.
The scope of the thin capitalisation rule, as mentioned above, regarding tax exemption for the creditor to cover the circumstance when a foreign subsidiary’s interest deductions are limited under other EU/EEA member states’ thin capitalisation rules, is expanded.
Exemption cannot exceed the interest deduction restriction in the case where both companies would have been Danish tax residents.
Earnings before interest, taxes, depreciation, and amortisation (EBITDA)
See Thin capitalisation and interest relief limitations above for more information.
The new rules regarding exit taxation apply for income years starting 1 January 2020 and thereafter. The new rules imply that the maximum period of deferral of exit taxes is reduced from seven years to five years. Furthermore, with the new rules, assets that are brought under Danish tax jurisdiction will, as a general rule, obtain a fair market value basis for tax purposes.