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Important 2020-21 Changes Impacting the Structuring of Business in and through Denmark — Orbitax Expert Corner

Introduction

The tax scene in Denmark in 2020 and so far into 2021 has been marked by important developments which are bound to impact the structuring of international business and investment in and through Denmark. This article examines those developments and their potential impact.  

The Multilateral Convention is now fully incorporated in Danish law

On 30 September 2019, Denmark deposited its ratification instrument for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). Based on the date of deposit, the MLI entered into force in Denmark on 1 January 2020.

Although the MLI is in force in Denmark, it will not automatically cover all the Danish tax treaties. The MLI will enter into force with respect to specific tax treaties after both treaty parties have deposited their instruments of ratification, acceptance or approval of the MLI. The MLI will generally enter into force for a particular covered agreement on the first day of the month following a three-month period after both parties to the covered tax treaty have deposited their ratification instruments.

Once in force, the provisions of the MLI will generally apply for a covered agreement from 1 January of the year beginning on or after the date of its entry into force in respect of withholding taxes, and for all other taxes with respect to taxable periods beginning on or after the expiration of a 6-month period following the date of entry into force. However, solely for purposes of Denmark's own application of the MLI for other taxes, Denmark has opted for the MLI to apply from 1 January of the calendar year beginning on or after expiry of the 6-month period. When signing the MLI, Denmark listed almost all its existing tax treaties as covered tax agreements.

Even though Denmark has decided to include all elements of the MLI, several options and reservations still had to be made between the different available alternatives in some of the MLI provisions. For instance, with respect to general anti-avoidance provisions, Denmark has decided to apply the principal purpose test (PPT).

Mandatory disclosure rules - DAC6

On 19 December 2019, a bill on implementation of the European Union Directive on Administrative Cooperation (DAC6) on reportable cross-border tax planning arrangements was adopted in Danish law. The Executive Order setting out the details of the implementation was published on 31 December 2019. On 17 April 2020, the Danish Tax Agency published a DAC6 guidance that contains various examples along with the Danish Tax Agency's interpretations of the Directive.

The rules include measures to require the reporting of cross-border tax planning arrangements and the exchange of the information so reported with other EU Member States. The reporting requirement primarily applies to intermediaries that design, market, organize, or manage the implementation of a reportable arrangement, but the obligation may be shifted to the taxpayer in certain cases, such as when the intermediary is subject to confidentiality obligations or where a taxpayer has designed an arrangement without external intermediaries.

There are three basic conditions that must be met for a reporting obligation to occur in accordance with DAC6, 1) there must be an arrangement, 2) the arrangement must be cross-border, and 3) it must meet at least one of the relevant criteria (so-called hallmarks)

Reportable arrangements from 1 January 2021 onwards must be disclosed within 30 days.

The Danish DAC6 legislation provides for penalties for intermediaries and relevant taxpayers that wilfully or through gross negligence fail to comply with the reporting requirements, e.g. to provide correct and accurate information or to fulfil the reporting obligations in a timely manner.

The Executive Order does not specify the fine amounts but notes that when determining the fine for offences committed by companies, emphasis will be placed on the company's net sales at the time of the offence and whether it is the intermediaries or the relevant taxpayer who has failed to comply with the legislation.

New measures introduced to curb the use of tax havens

In April 2020, the Danish Parliament unanimously agreed on the first stage of a tax control reform focused on money laundering, VAT, criminal cases, and the fight against tax havens.

An extra 100 officers are now being assigned to working with measures against tax havens and international tax evasion, and some of them will be dedicated to a targeted effort against multinational companies' alleged tax evasion.

To support these measures, a new centre for international corporate tax will be established, one of its focal points being the challenges posed by the increased globalisation for calculation and settlement of corporate tax.

Also, a new specialized unit will be tasked with identifying and analyzing the greatest risks within the area of transfer pricing. The unit will contribute to a targeted control of transfer pricing and help the DTA keep aware of, and remain on top of, inter-national trends and risks relating to transfer pricing.

Further, the Danish Government wishes to strengthen international cooperation on international tax evasion and aggressive tax planning. The EU Member States have agreed on a series of initiatives designed to make it easier and faster to report information and share tax fraud suspicions across all EU Member States. One of the EU measures is a Danish proposal for establishing an EU alarm-central to curb tax fraud, to which information and suspicion of cross-border tax fraud can be reported.

Defensive measures against EU blacklist countries

On 20 April 2021 a bill regarding defensive measures against countries on the EU’s list of non-cooperative jurisdictions for tax purposes (the blacklist) was adopted.

The bill presents two sets of defensive measures against the countries on the blacklist.

Firstly, Denmark shall henceforth deny the tax deduction of payments to related parties resident or registered in blacklisted countries. Likewise, such payments should not be included in the calculation of taxable income. The rules are based on the notion of ‘beneficial owner’, requiring the paying company to assess whether the recipient of the payment is the beneficial owner thereof. This approach targets the interposition of conduit and similar structures between the Danish payer and recipients established in blacklisted jurisdictions. To the extent the interposed recipient is not the beneficial owner of the payment and the intended ultimate recipient resides in a blacklisted country, the deductibility of the payment shall be denied in Den-mark.

Secondly, withholding tax will be due at an increased rate of 44% on dividends distributed on Danish shares to persons resident in a blacklisted jurisdiction.  The company paying the dividend will be obliged to withhold the tax. It is a condition that the person or enterprise is the beneficial owner of the dividend.

The new rules will take effect 1 July 2021. The list of blacklisted non-cooperative jurisdictions has been updated by the EU Council lastly on 22 February 2021. Note, however, that countries included in the EU list are excluded from the Danish defensive measures if the relevant country has a tax treaty with Denmark.

Transfer pricing: Income adjustments of more than DKK 80bn.

In June 2020, the Danish Tax Agency published a list showing that in the period from 2010 to 2019 the Agency proposed income adjustments in transfer pricing cases increasing income by an aggregate DKK 81.2bn. In November 2020, responding to criticism that the list showed only gross adjustments and did not take into account the final outcome of the cases after hearings in e.g., the Danish National Tax Tribunal, the Ministry published an elaborated version.

The new list shows that in 2010-2019 the Tax Agency increased companies’ income by DKK 114.7bn in total. Over the same period of time, there were decreases totalling DKK 33.5bn. In net figures, therefore, the amount of increases during said period is DKK 81.2bn. These net increases consist of the Agency’s increases less decreases resulting from MAP (Mutual Agreement Procedure) and other review requests in the same period.

The reassessments implemented by the Agency in 2010-2019 were subsequently decreased by DKK 900 million in total, due to final outcomes of cases settled by the National Tax Tribunal and by the courts. There are presently cases pending before the National Tax Tribunal and the courts over increases for a total of DKK 23.5bn.

The DKK 114.7bn increases in 2010-2019 were subsequently decreased by DKK 16.1bn in total as a result of MAP negotiations. Of the Tax Agency’s total increases, there are presently MAP negotiations for DKK 26.4bn in all.  

In aggregate, therefore, increases worth DKK 49.7bn are currently pending before the National Tax Tribunal, before the courts, or in MAP negotiations.

So far, the Ministry of Taxation has generally been ultimately unsuccessful in the high-profile and noteworthy legal actions that have made it all the way to the Supreme Court. For example, the Danish Supreme Court ruled on 25 June 2020 in favour of the claimant company in a transfer pricing case regarding trademark royalties, setting aside the Danish Revenue's contention that the royalties were not deductible business expenses and were not on arm's length terms.

Bill on changes to CFC rules introduced

In November 2020, the Danish Minister of Taxation introduced a bill on adjustment of the Danish CFC rules. The purpose of the bill is to adjust the Danish CFC rules for alignment with the EU Anti-Tax Avoidance Directive, also known as the ATAD. The rules are proposed to have a broad application and are expected to increase the administrative burden for Danish companies.

In the following we have noted some of the important changes proposed in the bill:

  • The CFC income threshold will be reduced from 50% to only 1/3 CFC income. Furthermore, the current 10% asset test will be removed.
  • The CFC rules only apply if a company (the parent company) controls another company (the subsidiary). Un-der current Danish CFC rules, control is determined on the basis of rights (or similarly). The bill expands the control definition for alignment with the control definition in the ATAD, i.e. control will be deemed to exist if a company (the parent company) by itself, or together with its associated enterprises holds a direct or indirect participation of more than 50% of the voting rights, or directly or indirectly owns more than 50 % of capital or is entitled to receive more than 50% of the profits of the other company (the subsidiary),
  • The ATAD gives the EU Member States the possibility to implement a so-called "substance test", when implementing the directive into domestic law. This means that it is possible to avoid the CFC taxation in situations where the foreign subsidiary (or permanent establishment) carries on a substantive economic activity supported by staff, equipment, assets, etc. According to the bill Denmark has chosen not to implement the substance test. The lack of a substance test has been highly discussed in Denmark and is one of the main challenges with the bill.

The reading of the bill is postponed until May 2021. It is expected that the bill will be adjusted when Parliament starts the reading.

Danish GAAR developments - Tax Assessment Act, section 3

Since 1 January 2015, the Parent/Subsidiary Directive (2011/96/EU) GAAR has been transposed into Danish law by way of section 3 of the Danish Tax Assessment Act. From 1 January 2015 to 31 December 2018, the wording of section 3 closely resembled the general anti-tax avoidance rules in the Parent/Subsidiary Directive, Interest and Royalty Directive (Directive 2003/49/EC), and the Merger Directive (Directive 2009/133/EC).

However, as of 1 January 2019, the rule was given a more general scope of applicability and thus, the wording has been amended slightly.

In summarized form, the Danish GAAR, as it is currently worded, entails that an arrangement (or series of arrangements) which is:

   a) not entered into for commercial reasons reflecting the underlying economic reality, and which is

   b) implemented for the primary purpose of obtaining, or one of the primary purposes of which is to obtain, a tax benefit which is against the purpose and intent of the Danish tax laws

should be disregarded for purposes of calculating the Danish corporate income tax (including withholding tax such as dividend withholding tax, etc.).

Since the Danish GAAR was amended, only a handful of administrative rulings have been published and no court precedent exists. Therefore, there is still general uncertainty on the exact scope of the Danish GAAR. The uncertainty forces Danish taxpayers to apply for a binding ruling, to ensure that a given arrangement will not get caught by the Danish GAAR.

New withholding tax regime for dividends coming up

On 3 July 2020, the Danish Ministry of Taxation sent a draft bill for consultation on a new model for collecting dividend tax for shares deposited in a central securities depository. The consultation ended in August 2020. At the current moment no bill has been introduced. However, it is expected that when the Ministry of taxation has processed the consultation responses, a bill will be introduced to the Danish Parliament.

Under the current model, a 27 % tax on dividends is withheld at source when the dividend is distributed to foreign shareholders. If the dividend recipient is covered by a double taxation treaty, the withholding tax rate is reduced in most cases to 15 % or an even lower rate if the conditions specified under the relevant treaty are met. Notwithstanding the availability of withholding tax relief under the relevant treaty, the Danish company is obligated to initially withhold and remit the 27 % in dividend tax to the Danish tax authorities. Applying for a post-fact refund requires the shareholder to provide the tax authorities with relevant documentation after the dividend distribution.

The current model has a high administrative burden and has resulted in significant tax fraud involving fraudulent dividend tax refund claims.

The new model is a relief-at-source model where the dividend tax is withheld at the correct rate at the time of distribution, taking into account any relief available under the double taxation agreement. The model includes that foreign shareholders must be registered with the Danish tax authorities and must have a unique identification number, so that the correct amount of dividend tax is withheld and paid when paying dividends.

Registration must be made via the shareholder's custodian bank and the shareholder must declare that the beneficial owner requirements in relation to the shares and the dividend under Danish tax law are fulfilled. The new model also provides that banks would be held liable for the payment of tax if it is shown that too little dividend tax has been withheld.

Shareholders who have not been able to obtain an identification number from the Danish tax authorities yet will under the new model have the opportunity to reclaim excess tax withheld from the Danish tax authorities within a short period.

New hybrid mismatch rules

From 1 January 2020, Denmark implemented new hybrid mismatch rules in accordance with at the ATAD and ATAD II directives.

The main purpose of these rules is - inter alia - to counteract situations in which a tax deduction can be claimed in Denmark, while the corresponding party to the transaction triggering the deduction is not taxed. The consequence of being in scope of the new hybrid mismatch scheme is generally a disallowance of deductions of such outbound payments.

The new hybrid mismatch rules are implemented in a manner (and using wording), which has led to a high degree of complexity. Hence, the exact scope of the Danish rules is still in many areas uncertain (pending the publication of tax rulings or better guidelines from the Danish Tax Agency).

One of the hybrid rules - the so-called reverse hybrid rule - has, however, seen some published administrative rulings. The reverse hybrid rule entails that Danish tax transparent entities in certain situations are requalified into an opaque entity for Danish tax purposes. The requalification is generally dependent on the tax status of certain qualified owners, but in the published rulings, the Danish Tax Agency seems to employ a broad interpretation of when owners are deemed "acting together" (and thus being in scope of the rules) in particular when investing thorough partnerships.