Companies are subject to tax on all income and are only allowed deductions on expenses that are related to the operations of the company.
According to Danish tax law, a territoriality principle prevails with respect to PEs and real estate located abroad. Hence, a Danish company is not taxed on its worldwide income. Instead, income from a PE outside Denmark or from real estate located abroad is excluded from taxable income. Non-resident companies are taxed only on profits from income sourced in Denmark. The corporate income tax (CIT) rate is 22%.
Hydrocarbon income tax
The ordinary CIT rate of 22% does not apply to Danish oil and gas upstream activities. Instead, there are two ‘ring fenced’ taxes on Danish oil and gas upstream activities. One very similar to the ordinary CIT; however, the tax rate is 25% instead of 22% and the income is ring fenced (i.e. no tax losses from other income can be deducted in income from the Danish oil and gas upstream activities). In addition to the 25% tax, a special income tax, labelled ‘hydrocarbon tax’, is levied on profits from the exploration and extraction of oil and gas on the Danish continental shelf at a rate of 52%. The 25% tax is deductible in computing the hydrocarbon tax, resulting in an effective tax rate of 64%.
Annual tax depreciation of platforms, wells, and inter-platform installations is allowed with up to 15% on a declining balance. Pipelines and other infrastructure assets can be depreciated with up to 7%.
Exploration costs can either be expensed or capitalised for tax purposes. If capitalised, the costs shall be amortised over five years with 20% annually from the year of first oil.
The following assets, which are subject to the special hydrocarbon tax (52%), qualify for an uplift of 5% in six years (30% in total):
- Exploration costs; however, only if capitalised, and only on exploration costs before declaration of commerciality on a specific field. After first oil in company, exploration costs can no longer be capitalised and thus no uplift can be claimed. Appraisal wells are regarded as exploration costs, and not a fixed asset as, for example, production wells.
- Platforms, wells, inter-platform installations, pipelines, and other fixed assets; however, only if the company owns the fixed assets, and not on leased or rented assets.
No uplift is granted under Chapter 2 (25%).
Temporary tax incentive regime
A voluntary and temporary tax incentive regime for oil and gas companies has been adopted (Chapter 3B).
The regime increases depreciation of production assets subject to hydrocarbon tax to 20% and uplift to 6.5% in six years (39% in total). Furthermore, it advances depreciation, as well as uplift, to time of payment. No accelerated depreciation/uplift applies to Chapter 2.
Chapter 3B is applicable to investments submitted for approval during the 'investment window' from 1 January 2017 until 31 December 2025 and finally approved by the Danish Energy Agency and completed no later than 31 December 2026. A decision to enter into the 3B regime should be made when filing the tax return for the first year the regime shall apply.
If the average annual oil price increases to 75 United States dollars (USD)/USD 85 per barrel, from 2022 a 5%/10% surtax will apply to income from upstream oil and gas production before interest and tax (Chapter 2) capped to 20.1% of capital expenditure investments made during the investment window. The surtax is deductible in the hydrocarbon tax. Any repayment obligation expires in 2037.
Activity connected to the prospecting, exploration, or exploitation of oil and gas is taxed at 22%; however, it is taxable under a more aggressive regime than non-oil/gas activity. Any activity connected to oil and gas (e.g. drilling, seismic surveying, oilfield services) is taxable, regardless of whether a PE exists or not. This may be tempered by provisions in applicable DTTs.
Tonnage Tax Scheme
Amendments to the Tonnage Tax Scheme
In December 2015, the Danish Parliament passed an amendment to the Tonnage Tax Act including more activities under the Tonnage Tax Scheme. The amendment was approved by the European Commission on 12 October 2018, with retrospective effect from fiscal year 2017.
On 20 December 2019, the Danish Parliament passed the Tonnage Tax Scheme to comply with EU law. The adjustment comes into effect for income years starting 1 January 2020 or later.
The Tonnage Tax Scheme will be limited to ten years starting from 1 January 2017 and terminating on 31 December 2026. Subsequent to this timeframe, the Tonnage Tax Scheme shall be subject to re-approval by the European Commission.
Application of the Tonnage Tax Scheme
Danish tax law provides for a special tax scheme for shipping entities.
The main principle of the Tonnage Tax Scheme is that qualifying shipping entities are not taxed on the basis of their actual income derived from their business but on a fictitious income based on the net tons (NT) carrying capability of their fleet used for purposes covered by the Tonnage Tax Act.
The Tonnage Tax Scheme is available to:
- Danish shipping entities organised as limited liability companies (Aktieselskab [A/S] or Anpartsselskab [ApS])
- foreign shipping companies with the place of management and control in Denmark, and
- EU shipping companies with a PE in Denmark.
A decision to enter into the scheme should be made in the first income year where the entity qualifies for the Tonnage Tax Scheme, and the decision is binding for a period of ten years.
As a general rule, group-related shipping companies based in Denmark must make the same choice regarding the Tonnage Tax Scheme. However, shipping companies that do not have the same management or operating organisation and do not conduct business in related fields may be exempt from the joint decision provision.
The Tonnage Tax Scheme is restricted to certain types of business activities. The entity must operate at least one vessel of minimum 20 GT used for commercial transportation of passengers or cargo between different destinations or hire out such vessels on time charter contracts for the same purpose. The ships must be owned or chartered on either ‘bareboat’ terms of a period not exceeding three years and where the capacity leased out is temporary excess capacity or one-to-seven year time-charter contracts with a call/buy option by the company. From income years starting 1 January 2020 or later, any income from gross tonnage leased out on a bareboat basis exceeding 50% of the total gross tonnage is taxed under the general rules of Danish tax legislation. The assessment as to whether the condition is fulfilled is made at group level, and the calculation of leased out gross tonnage therefore does not include bareboat leasing between group companies domiciled in an EU/EEA country. Certain restrictions apply for ships chartered on a time-charter basis without a call/buy option. The ships must be strategically and commercially managed from Denmark. From income years starting 1 January 2020 or later, it will be possible to apply the provisions of the Tonnage Tax Scheme even when the vessels are to some extent being commercially and/or technically operated from another EU/EEA member state. However, place of effective management will most likely still need to be observed in order not to fall outside the Danish tax net all together.
Turnover from activities that are carried out in close connection with this business 'ancillary income', such as the usage of containers and loading facilities, rental of shop space on board, etc., may, from income years starting 1 January 2020 or later, only be included in the Tonnage Tax Scheme if they account for less than 50% of the total turnover from business. The turnover includes income from the sale of vessels (which was actually made tax-exempt in 2007 for vessels acquired after 1 January 2007). If the threshold is exceeded, it will entail a taxation of the exceeding part of the company’s gross earnings. Ships used for exploration, diving, fishing, towing, sand dredging, etc. are specifically exempt from the scheme. The same applies for certain types of ships, such as barges, floating docks, etc. However, EU or European Economic Community (EEC) registered ships used for towage activities at sea (i.e. not in and around ports) during at least 50% of their operating time during the income year may be included in the Tonnage Tax Scheme.
Ship management companies may also use the Tonnage Tax Scheme. A ship manager is defined as a company doing business with crew management and technical management of ships qualified for use in the Tonnage Tax Scheme. It is a requirement that the ship manager has taken over the full operating responsibility and all obligations and responsibilities according to the International Safety Management codex.
The taxable income for the part of the business that qualifies for the Tonnage Tax Scheme is determined for each ship as a fixed amount of Danish kroner per 100 NT per day according to the following:
|Ship net ton (NT)||Fixed amount per day (DKK per 100 NT)|
|0 to 1,000||10.62||10.93|
|1,001 to 10,000||7.62||7.85|
|10,001 to 25,000||4.56||4.69|
The income is taxed at the ordinary CIT rate of 22%. No deduction for expenses related to tonnage-taxed income is allowed.
Income that does not qualify for the Tonnage Tax Scheme is taxed according to the general tax provisions in Denmark, thus expenses are deductible. Consequently, deduction for losses derived from other income can be offset against the income calculated under the Tonnage Tax Scheme.
Furthermore, losses from tax consolidation with group companies and, to a certain extent, financial expenses are deductible under the Tonnage Tax Scheme. However, deductibility for financial expenses is subject to various capping rules and implies that gains/losses are not derived from financial instruments entered into in order to secure the shipping income.
Shipping entities that apply the Tonnage Tax Scheme from the time of their establishment may not deduct depreciation for tax purposes. Special rules apply for shipping entities that were already in existence when they elected to become subject to the scheme and for entities that elect to include certain other assets at a later point in time that were not previously subject to the scheme.
Gains on the sale of ships
Gains on the sale of ships that have not been used in the scheme prior to 1 January 2007 are tax exempt. The same applies to gains on the sale of contracts on the delivery of ships if the ship was destined to be delivered after 1 January 2007. Gains on the sale of ships used in the scheme in prior years are taxable. The taxable gain is calculated as the sale price minus the purchase price plus improvements. Any losses on ships acquired and sold within the same income year as the income year in which a gain is realised may be offset against the gain. From 2020 onwards, gain on vessels will also be comprised by the new 50% threshold for ancillary income from closely related business activities measured on turnover basis.
New activities to be included
The new activities covered by the Tonnage Tax Scheme due to the expansion include the following:
Guard, supply, and construction vessels
The amendment to the Tonnage Tax Act includes revenue from guard service (e.g. in connection with cable laying and other non-fixed installations) as well as all activities relating to supply services. This means that, for example, transportation of victuals or bunker fuel oil is covered.
Ice management vessels
Every kind of ice handling at sea is included in the amendment. This can be escorting of vessels through icy waters, protection of drilling units against floating icebergs in arctic waters, and actual ice breaking.
Offshore installation vessels
The amendment includes construction at sea, including the building, repair, and dismantling of wind farms at sea. These activities are typically carried out by wind farm service vessels.
Furthermore, the amendment includes the building, repair, and dismantling of other offshore installations, such as oil installations, wave-breaking installations, and other coast protection measures. In regards to oil installations, the building, repair, and dismantling of these is only included when the activities are carried out outside the Danish sea territory or continental shelf.
Also, the amendment includes the laying, inspection, and repair of pipelines and cables on the seabed. Specialised pipeline layers and cable layers typically carry out these activities.
Accommodation and support vessels (ASVs)
Income from the housing of employees, spare parts, or workshop facilities in connection to offshore operations is included in the amendment to the Tonnage Tax Act. Specialised ASVs typically carry out these activities. The vessels can be part of comprehensive and lengthy offshore works and form an integral and necessary part thereof.
It is a condition that the shipping companies provide an annual management declaration that states that the company complies with all conditions under the Tonnage Tax Scheme.
Local income taxes
There is no local CIT or similar surcharge.