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
Defensive measures against European Union (EU) countries and territories on the (black)list of non-cooperating tax jurisdictions
On 20 April 2021, Bill L 150 regarding defensive measures against EU countries and territories on the (black)list of non-cooperating tax jurisdictions was adopted.
The blacklist includes the following countries and territories:
- American Samoa
- Trinidad and Tobago (the current double tax treaty [DTT] between Denmark and Trinidad and Tobago is scheduled to be terminated as of 1 January 2022)
- US Virgin Islands
The following two defensive measures were adopted:
- Refusal of deduction for certain payments, so that individuals and companies, etc. cannot deduct payments to related-party recipients who are resident in countries or territories on the blacklist, just as such payments must not be included in any other way in the statement of the taxable income.
- Persons and companies that are domiciled in countries or territories on the blacklist and that receive dividends from main shareholder shares, subsidiary shares, or group company shares must pay a final gross tax of 44% of such dividends.
The measures came into effect on 1 July 2021.
As a result of the existing DTT between Denmark and Trinidad and Tobago, the defensive measures only apply against this country once the DTT in question has been revoked. The DTT is scheduled to be revoked as of 1 January 2022.
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 be reduced in the future to the applicable net rate according to the DTTs, 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, a 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 DTTs, etc., which is typically 15%. It is an administratively cumbersome solution that 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 DTT. 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, while the new regime is expected not to come into effect until 2023.
Further increased deduction for research and development (R&D) costs
On 18 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 maximised for R&D expenses of up to 845 million Danish kroner (DKK) in 2020 and up to DKK 910 million in 2021 (calculated on a tax group level). R&D expenses exceeding this threshold should be deductible at 103% in 2020 and 105% in 2021.
On 13 April 2021, Bill L 178 regarding an extension on the increased deduction for R&D up to and including the income year 2022 was adopted.
The increased rate of 25% is extended so that it is possible in the income year 2022 to deduct/depreciate R&D expenses by 130% for total expenses of DKK 910 million. Expenditure above the ceiling of DKK 910 million can be deducted at the generally applicable rate for the income year 2022, i.e. by 105%.
Further, Bill L 178 makes it possible for self-employed persons and companies, instead of balance-sheet depreciation and immediate depreciation, to choose to depreciate expenses for the acquisition of new operating assets by 116% if the assets are acquired within the period from 23 November 2020 until the end of the calendar year 2022. 116% of the acquisition cost can thus subsequently be depreciated by up to 25% per year. It is a condition that the equipment is used exclusively for business purposes. Depreciation is made on a separate balance.
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 partially 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 income year 2020).
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.
Utilisation of final tax losses in European Union (EU) / European Economic Area (EEA) countries
Bill L 28 also implemented new rules in regard to utilisation of final tax losses of subsidiaries and permanent establishments (PEs). The bill introduces new rules according to which a Danish parent company will be able to utilise final tax losses arising in subsidiaries and PEs tax resident/domiciled in EU/EEA countries, the Faroe Islands, and Greenland. The bill is the implementation of the Court of Justice of the European Union’s (CJEU's) ruling in the Bevola Case (C-650/16), where the CJEU concluded that the freedom of establishment in the European Union 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 tax 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 utilise the loss under local tax rules in previous years, the loss year, or future years and that the loss has actually not been utilised.
- It is not possible to utilise the loss in other countries.
- The loss could not be utilised in previous years, the loss year, or future years 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 tax losses suffered in previous years.
Permanent establishment (PE)
The adoption of Bill L 28 on 3 December 2020 has incorporated a new definition of 'permanent establishment' that is aligned with the updated definition of 'permanent establishment' in the Organisation for Economic Co-operation and Development (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 PE did not exist, the activities of a dependent agent could constitute a PE 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.
Controlled foreign company (CFC) rules
On 11 November 2020, the Ministry of Taxation introduced a Bill (L 89 2020/21) proposing adjustments to the Danish CFC rules. The Bill was adopted on 3 June 2021 with certain amendments, which entails that the Danish CFC rules are adjusted with effect from income years beginning 1 January 2021 or later.
The main changes to the CFC rules include:
- Adjustment of the control test for determining when a subsidiary is comprised by the CFC rules.
- The threshold in the CFC income test is reduced from 50% to only 1/3 CFC income.
- The current 10% asset test is removed.
- The definition of CFC income is extended to include royalty income received from unrelated parties, as well as other income from intangible assets (‘embedded royalties’) in certain situations (e.g. where intangible assets have been acquired by a subsidiary from a 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).
- Comments in the explanatory notes to the Bill provide some guidance on how to interpret the term ‘embedded royalties’, which is income derived from intellectual property (IP), but which is embedded in the sales price of the goods and services sold.
- A partial substance test is introduced, whereby ‘embedded royalties’ are not included in the calculation of the CFC income if the subsidiary carries on significant operating activities related to the IP, which is supported by personnel, equipment, premises, etc.
- It is 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 five 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 deemed disposal at fair market value (FMV) will occur covering all of 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.
- IP acquired by a subsidiary from an unrelated party may obtain a tax base under the CFC assessment equal to the value of the IP at the point in time when the Danish parent entity obtained control over the subsidiary. The IP can then be amortised for CFC tax purposes and thus reduce the CFC income of the subsidiary. There are both transition rules and general rules that may provide a tax base, but certain requirements must be fulfilled to obtain the tax base.