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Denmark

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Danish Tax Board Holds External Debt Covered by Parent's Collateral is Subject to Thin Capitalization Rules

Denmark has published a 28 April 2020 Tax Board decision concerning a question of whether or not the thin capitalization (4:1) rule under Denmark's interest deduction restrictions applies in a case where a subsidiary (the taxpayer) had taken out an external loan and collateral had been provided by the parent company in the form of self-payment guarantee and shares of the company. The subsidiary had used the loan to finance the construction of an investment property.

The taxpayer's position was that the collateral provided was in fact worthless, as there were no significant assets in the company other than the shares in and receivables against the subsidiary, and that the financing was on market terms. As such, the external debt should not be regarded as controlled debt. If it is considered controlled, however, the taxpayer's secondary position was that the amount of controlled debt should be calculated considering the value of the collateral provided.

In its decision, the Tax Board did not accept either position. The Tax Board ruled that since collateral had been provided by the parent company, and this was a requirement from the external lender, all external debt should be regarded as controlled debt, as the loan could not have been obtained without the collateral provided. Further, the Tax Board ruled that the calculation of the interest deduction restriction could not be made on the basis of the value of the collateral provided, since the entire secured loan had to be regarded as controlled debt.

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