Taxable income is generally calculated as income determined for accounting purposes that is adjusted and modified for several items, as prescribed by the tax laws. Typical timing differences include reserves, work in progress, deprecations, and certain non-deductible cost items.
Inventory is valued at acquisition cost, current market value, or manufacturing cost (if manufactured by the company itself) according to a first in first out (FIFO) principle. The company may opt for different principles for each category of goods and may change principle from income year to income year, provided certain conditions are met.
Gains and losses realised on the sale of tangible and intangible assets, including goodwill, are generally included in taxable income.
Gains realised on the sale of shares are tax-exempt if the shares qualify as either ‘subsidiary shares’, ‘group shares’, or 'tax-exempt portfolio shares'.
‘Subsidiary shares’ are defined as shares held by a corporate shareholder that holds a minimum of 10% of the share capital. With respect to a foreign subsidiary, it is a condition that the foreign subsidiary must be subject to CIT in its domicile state and the applicable CIT rate cannot be 0% or almost 0%. Furthermore, Denmark must hold an agreement to exchange tax information with the domicile state of the subsidiary. Such agreement must be in force at the time of distribution of dividends, etc.
‘Group shares’ are defined as shares in companies with which the shareholder is jointly taxed or could be jointly taxed. The definition of a group is therefore the same as in the joint taxation rules and generally corresponds to the definition of a group for accounting purposes. The location where the companies are registered is irrelevant, as long as the companies are affiliated.
If the shares do not constitute group shares, subsidiary shares, or treasury shares, they constitute portfolio shares. Portfolio shares are divided into two types: tax-exempt portfolio shares and taxable portfolio shares.
‘Tax-exempt portfolio shares' consist of shareholdings less than 10% in unlisted companies.
The residual constitutes taxable portfolio shares unless held by the company that has issued the shares (gains on 'treasury shares' are also tax exempt).
Gains on taxable portfolio shares are fully taxable regardless of holding period, whereas losses on the sale of taxable portfolio shares are generally tax-deductible.
Gains realised on the sale of real estate property are taxable. A loss realised on the sale of land and other buildings may be utilised only against taxable profits on the sale of real estate properties in the same year or may be carried forward infinitely.
A capital gain may, under certain conditions, be deferred if the capital gain is reinvested in properties. Reinvestment must be made no later than the income years following the income year of disposal.
For receivables, capital gains are, in general, taxable and losses are, in general, tax deductible. However, capital losses related to intra-group receivables are non-deductible for companies, and, correspondingly, capital gains on debt are not taxable for the debtor.
Capital gains and capital losses on receivables should be included in the taxable income using the mark-to-market principles. However, if the receivable relates an inter-company receivable or a trade receivable, the realisation principle applies, but the company can choose to apply the mark-to-market principles on exchange rate changes and/or the receivable itself.
As a general rule, capital gains and capital losses on debt should be included in the taxable income using the realisation principle. However, the mark-to-market principle can be applied for exchange rate changes and/or the debt itself if the debt is listed. If the debt is unlisted, the mark-to-market principle can only be applied for exchange rate changes.
Special rules apply in relation to compositions, remission of debt, and conversion of debt. Special rules also apply for financial activities.
Gains and losses on financial instruments are generally included in taxable income, according to the mark-to-market principle, which is required. Special rules apply for losses on certain share-based contracts.
Dividends received by a Danish parent company on ‘subsidiary shares’ or ‘group shares’ are tax exempt, regardless of the length of the ownership period.
Only 70% of the dividends received from unlisted portfolio shares by a Danish company should be included in the taxable income (i.e. an effective tax rate of the dividend of 15.4%), whereas dividends received on listed portfolio shares are fully included in taxable income and subject to a 22% tax rate.
Regardless of whether the shares qualify as ‘subsidiary shares’ or ‘group shares’ or ‘tax-exempt portfolio shares’, dividends are fully taxable if received from a foreign company that can deduct the dividends paid in their taxable income.
Stock dividends may be distributed to shareholders free of tax, provided that the dividends are in proportion to the existing shareholdings (i.e. bonus shares).
Broadened anti-avoidance rule regarding dividends
A technical amendment to a specific anti-avoidance rule will prevent group companies that are internally reorganising from artificially disguising (taxable) dividends as capital gains. The new rules may have an impact on certain corporate transactions.
Interest income is generally included in the determination of taxable income.
Royalty income is generally included in the determination of taxable income.
As a general rule, foreign-sourced income, such as interest and royalty, is included in taxable income. However, income from a PE or real estate outside Denmark is, as a general rule, excluded from taxable income due to the principal of territoriality.
The income of a foreign subsidiary may be taxed in the hands of its Danish parent company in certain specific situations (e.g. if the subsidiary constitutes a CFC). See the Group taxation section for more information.