For more information regarding the Danish initiatives in relation to COVID-19 please visit: https://www.pwc.dk/da/covid-19/government-financial-support-packages.html
New dividend tax regime in Denmark from 2023
The Danish Ministry of Taxation has entered into an agreement with Finance Denmark regarding a new regime for withholding of dividend tax which is intended to be easier to manage and prevent dividend tax fraud in the future.
The new regime means that the dividend tax will in future be reduced to the applicable net rate according to the double taxation agreements, etc., when it is withheld from the dividend. This must be seen in contrast to today, where the excess amount of dividend tax withheld must be recovered by the foreign shareholder through a reclaim procedure.
Currently, 27% dividend tax is included on dividends to foreign shareholders. The foreign shareholders can then reclaim the part of the dividend tax that exceeds the rate according to the double taxation agreements, etc. which is typically 15%. It is an administratively cumbersome solution which involves the risk of errors and fraud.
According to the bill, under the new regime the dividend must be paid to foreign shareholders with a net withholding of dividend tax, i.e. with the applicable net tax rate according to the double taxation agreement. The new regime with net withholding requires that the foreign shareholders are to be registered with the Danish tax authorities prior to the dividend payment in order to be issued a unique identification number, which is used to identify the shareholder's deposit and applicable tax rate.
The bill to introduce the new regime has been postponed several times. The Ministry of Taxation has recently announced that the bill is expected to be put forward in the parliamentary year 2021, why the new regime is expected not to come into effect until 2023.
Further increased deduction for R&D costs
On the 18th December 2020, Bill 30A regarding an increased deduction for R&D costs for income year 2020 and 2021 was adopted.
The bill allows a “super” tax deduction for R&D costs, as it increases the deductions for expenses for R&D in 2020 and 2021 by 27% and 25%, respectively, so the deduction amounts total to 130% of the qualifying R&D costs in both income years. The 130% is maximized for R&D expenses of up to c. DKK 845m in 2020 and up to DKK 910m in 2021 (calculated on a tax group level). R&D expenses exceeding this threshold should be deductible with 103% in 2020 and 105% in 2021.
See the Capital expenditure incentives section for more information about the increased deduction for R&D costs.
Transfer pricing documentation
On 3 December 2020, the Danish Parliament adopted a new Act (L 28) on mandatory submission of transfer pricing documentation to the tax authorities in Denmark.
The Bill was partial a re-introduction of Bill L 48 2019/20, where the only amendment is that the now adopted law only applies to income years beginning on 1 January 2021 or later (the original bill had effect already for FY2020).
This implies that transfer pricing documentation must be submitted within 60 days after the tax return deadline on 30 June 2022 for companies with calendar year financial statements and every year following in the same way, i.e. within 60 days after the tax return deadline. The transfer pricing documentation includes a joint documentation for the group, a master file, and a country specific local file.
Utilization of final tax losses in EU/EEA countries
Bill L 28 also implemented new rules in regard to utilization of final losses subsidiaries and permanent establishments. The bill introduces new rules according to whicha Danish parent company will be able to utilize final tax losses arising in subsidiaries and permanent establishment tax resident/domiciled in EU/EEA countries, the Faroe Islands and Greenland. The bill is the implementation of the European Court of Justice’s ruling in the Bevola Case (C-650/16), where the CJEU concluded that the freedom of establishment in the EU precluded parts of the Danish principle of territorial taxation for companies.
For this reason, a Danish company will now be entitled to claim a tax deduction for a final loss suffered by an EU/EAA subsidiary, PE or real estate subject to a number of conditions. Among other things, the following conditions must be satisfied in order for a loss to be "final":
- It is not possible to utilize the loss under local tax rules in previous years, the loss year or future years and that the loss has actually not been utilized.
- It is not possible to utilize the loss in other countries.
- The loss could not be utilized in previous years, the loss year or future year if the local tax rules had been identical with the Danish rules.
- For losses incurred by subsidiaries it is required that the loss would have been tax deductible under the Danish rules on international tax consolidation.
The rules are applicable for income year 2019 and onwards. The tax authorities are expected to publish a decision that will entitle taxpayers to resume past years’ tax returns to claim a tax deduction for final losses suffered in previous years.
The adoption of Bill L 28 on 3 December 2020 has incorporated a new definition of "permanent establishment" which is aligned with the updated definition of permanent establishment in the OECD Model Convention.
A so-called “anti-fragmentation rule” is introduced in the Danish law with the effect that a PE will be created in Denmark, if the entity or a closely related entity carries on business activities at the same place or at another place in Denmark, and the overall activity resulting from the combination of the activities carried out in Denmark is not of a preparatory or auxiliary character.
In addition, the bill includes an adjustment to the agent rule, now including dependent and independent agents. Until now, if a fixed place permanent establishment did not exist, the activities of a dependent agent could constitute a permanent establishment if the agent habitually exercised authority to conclude agreements on behalf of the foreign company. The legislation is now extended to include situations where the dependent agent plays a principal role leading to concluding agreements that are routinely entered into without being substantially changed by the company on which behalf the agent operates.
On 11 November 2020 the Ministry of Taxation introduced a bill (L 89 2020/21) proposing adjustments to the Danish CFC rules. If adopted, the Danish CFC rules will be adjusted with effect from income years beginning 1 January 2021 or later.
The bill is a re-introduction of Bill L 48 2019/20 regarding the Danish implementation of the minimum requirements under the EU ATAD regarding the CFC rules.
The new bill was set for the first reading on 24 November 2020. It is expected that amendments may be submitted between the first and second reading of the bill, which could lead to significant changes to the proposed rules.
The main proposed changes to the CFC rules in L 89 2020/21 include:
- The threshold in the CFC income test will be reduced from 50% to only 1/3 CFC income.
- The current 10% asset test will be removed
- The definition of CFC income is extended to include other income from intangible assets in certain situations, e.g. where intangible assets have been acquired by a subsidiary from party who is resident in a country other than the country in which the subsidiary is tax resident, or the intangible assets have been developed through activities performed by affiliated parties in a country other than the country in which the subsidiary is tax resident
- It will be possible to choose whether the parent company is to be taxed on the subsidiary’s CFC income or on the subsidiary’s total taxable income as per applicable rules. The decision is binding for a period of 5 years. In both cases a credit for foreign taxes paid on the income is available against the Danish CFC tax.
- When the parent company reduces its ownership in the subsidiary, a fictious disposal at FMV will be deemed to cover of all the subsidiary’s CFC assets – not just the financial assets. This means that deemed capital gains on CFC assets must be included in the CFC income test