In Denmark, businesses generally adopt a corporate form. The most commonly used corporate entities are: public limited companies (A/S), private limited companies (ApS), partnerships limited by shares (P/S), limited partnerships (K/S) and general partnerships (I/S).
A/S and ApS are the most commonly used forms of corporations in Denmark. For tax purposes, the primary difference between limited liability companies (A/S and ApS) and partnerships (P/S, K/S and I/S) is that limited liability companies are taxed as separate legal entities while partnerships are treated as transparent entities for tax purposes (ie income and loss are taxed at the level of the participants).
In a P/S or a K/S, it is only the general partner(s) which has an unlimited liability – the remaining participants (the limited partners) will have a limited liability. The P/S, although a transparent entity for tax purposes, is generally subject to the same regulation requirements as an A/S, while the K/S is almost unregulated, other than by overall principles and doctrines, and as such provides a great deal of flexibility.
In an I/S, all partners have a direct, joint and unlimited liability. Also, the I/S is almost unregulated, other than by overall principles and doctrines, and as such provides a great deal of flexibility.
The most commonly used transparent entities are the limited partnerships (P/S and K/S) and the partnership (I/S).
Private equity and hedge funds are often established as a K/S due to the tax transparency and the flexibility. The K/S is also often used within the real estate sector, however, with the P/S often being the preferred alternative for real estate investments by pension funds and life insurance businesses. The P/S is also used by many of the large audit, legal and advisory firms. In true joint ventures, the transparent entity chosen will often be the I/S because of the joint and unlimited liability.
Incorporated businesses are resident in Denmark for Danish tax purposes if (i) they are public or private companies (A/S or ApS) or other non-tax-transparent corporate entities registered with the Danish Business Authority or (ii) the seat of effective management is in Denmark (generally, if the day-to-day management is carried out in Denmark).
The Danish corporate income tax rate is 22% (2018).
The tax rate for individuals who own a business directly or through transparent entities generally depends on the nature of the income and on the size of the total income as Denmark has a progressive tax system for individuals. The marginal tax rate for personal income is 56.5% (2018).
Subject to certain requirements, individuals may elect a special business tax regime where profits accumulated in the business are taxed at the corporate income tax rate (22% in 2018) while profits withdrawn for private purposes are taxed in accordance with the progressive tax rates applicable for individuals (up to 56.5% in 2018).
Generally, the taxable income is the gross income earned during the year less (i) deductible expenses, ie costs incurred in order to acquire, secure or maintain the taxable income, and (ii) tax depreciations. Income and expenses are generally recognised on the accrual basis. Accordingly, income is generally taxable in the year in which the taxpayer becomes entitled to the income and expenses are normally deductible in the year in which the obligation to pay them is incurred.
The taxable profits are not based on the accounting profits. In practice, however, the taxable profits are for incorporated businesses generally calculated, documented and reported on the basis of accounting profits with necessary adjustments.
Generally, R&D expenses may be either deducted in the year they were incurred or depreciated in equal amounts over five years, starting in the year the expenses were incurred. For the income years 2018 and 2019, R&D expenses may be deducted with 101.5% of the actual incurred expense. That percentage will be increased to 103% in the income year 2020, 105% for the income years 2021 and 2022, 108% for the income years 2023-2025 and 110% in the income year 2026 and onwards.
Further, the acquisition costs for ships, machinery and equipment used for R&D may generally also be depreciated with increased percentages corresponding to the percentages regarding deduction of R&D expenses.
A tax credit may be granted by the Danish tax authorities as a cash payment for certain R&D expenses. Unlike the increased percentages of deduction and depreciation for R&D-related expenses and assets, only the tax value of the actual incurred R&D expenses may be granted.
Further, a special expat tax regime applies to qualifying research workers and to other individuals with a monthly salary exceeding DKK65,195 (2018). Individuals who apply the special tax scheme are subject to an effective flat tax rate of 32.84%, for a period of up to 84 months from moving to Denmark, without deductions of any kind.
Denmark has a tonnage tax regime applicable for shipping companies. Under the tonnage tax regime, shipping companies are taxed with a certain amount per net tonnage tons – irrespective of the actual profits or losses for the year. If the tonnage tax regime is elected, shipping companies may generally not depreciate shipping-relevant assets or deduct costs incurred in connection with its shipping business.
Tax deductible losses may generally be carried forward by businesses indefinitely. Carry-back of losses is not allowed.
Losses carried forward may be used to set off against future positive net income of up to DKK8,205,000 (2018) per year. Any remaining losses carried forward may reduce the remaining net income by up to 60% per year. For consolidated tax groups, the threshold is calculated on a consolidated basis for the entire tax group.
Certain types of losses on capital (eg immovable property or certain portfolio shares) are ring-fenced and may only be set off against corresponding gains on such capital.
In the case of a qualifying change of control (generally when more than 50% of a corporation's capital or votes are owned by different shareholders at the end of the tax year than in the beginning of the tax year), losses carried forward cannot be offset against financial income. However, losses may still be set off against other business income.
In the case of a qualifying change of control in dormant companies (companies without economic risk in connection with business activities) any and all losses carried forward are lost and may no longer be carried forward or set off against any type of income.
Losses carried forward may also be lost to the extent that a company is granted a tax-exempt debt remission or in certain cases of qualifying mergers and restructurings.
Financial expenses, including interest on debts, are generally deductible for Danish tax purposes. The following restrictions may, however, apply.
A thin capitalisation rule entails that deductibility of interest may be limited if the debt/equity ratio of a corporation exceeds 4:1 and the debt to – or secured by – group-related parties exceeds DKK10 million.
An asset limitation or interest ceiling rule entails that net financing expenses (including interest) in excess of 2.9% (2018) of the tax value of the assets will not be tax deductible (certain carry-forward rules apply for restricted expenses).
An EBIT limitation rule entails that net financing expenses (including interest) will not be tax deductible to the extent they exceed 80% of the EBIT (certain carry-forward rules apply for restricted expenses). The EBIT rule will be replaced by an EBITDA rule in accordance with the EU Anti-Tax Avoidance Directives (ATAD) no later than 1 January 2019, basically restricting net financing expenses exceeding 30% of EBITDA.
The limitation rules apply on a Danish group consolidated basis and a safe harbour threshold applies whereby net financing expenses below DKK21.3 million per year will be tax deductible regardless of the interest ceiling and EBIT limitation rules.
Further, the general transfer pricing rules entail that interest payable to group-related parties will not be tax deductible to the extent the interest exceeds an interest rate which would have been agreed by two non-related parties on the same loan (the arm’s length principle).
Finally, certain hybrid mismatch rules apply whereby interest may be requalified to return on equity (and therefore not tax deductible) to the extent interest is payable on a loan to a group-related party and the interest qualifies as return on equity in the hands of the creditor. The hybrid mismatch rules are also expected to be affected by the imminent implementation of the ATAD in Denmark.
Mandatory Danish joint group taxation (tax consolidation) applies in Denmark, entailing that a consolidated taxable income is determined and reported for the group.
Generally, a group consists of a parent corporation and its subsidiaries. Corporations are group-related for the purposes of the joint taxation rules if one corporation effectively controls another corporation (eg holds more than 50% of the capital or votes) or if the corporations are under common control by a national or foreign corporation.
The consolidated taxable income is calculated as the sum of the net income of each of the corporations in the consolidation, ie the net income of each corporation must be determined on a stand-alone basis. Generally, losses may be utilised within the consolidated tax group but restrictions apply in the case of corporations leaving or joining the group.
Cross-border tax consolidation is optional under comparable rules but, if elected, it applies to all entities in the entire group on a worldwide basis and the decision to establish a cross-border tax consolidation is binding for ten years. The cross-border tax consolidation regime is not commonly used.
Generally, a corporation's disposal of assets will trigger taxation of any capital gains at the corporate income tax rate (22% in 2018).
An exemption generally applies in respect of capital gains on unlisted shares. Listed shares are subject to a participation regime entailing that capital gains on listed shares are generally exempt in the case of a participation of at least 10% of the capital in the listed corporation. If the participation in a listed company is less than 10%, the corporation will be subject to capital gains on the shares in accordance with an annual mark-to-market principle (entailing that any value increase or decrease will be included in the calculation of the net taxable income).
Apart from capital gains tax, no taxes are generally levied in Denmark on a transfer of a business.
The supply or import of goods and services in Denmark is generally subject to value-added tax at a rate of 25% of the transaction value. Further, a large number of excise duty regimes exist in Denmark, such as duties on alcoholic beverages, tea and coffee, mineral water, chocolate and sugar, ice cream, almonds and nuts, liquorice, tobacco, packaging materials, batteries, electronic products, incandescent lamps, petrol, cars and certain insurance policies.
An annual municipal tax of 1.6-3.4% applies to the value of land (not including buildings). In addition, an annual tax may be imposed by municipalities on the value of buildings used for offices, hotels, plants, workshops and similar business purposes. These taxes are deductible for Danish corporate income tax purposes.
With respect to the transfer of certain property (including immovable property, ships and aircraft) and property rights (mortgages etc), a registration duty applies. For the transfer of immovable property, the registration duty constitutes 0.6% (plus DKK1,660), while the registration duty for mortgages etc constitutes 1.5% (plus DKK1,660). If the shares in a corporation which owns immovable property are transferred, no registration duty will be levied.
There is no general net worth tax or tax on capital for incorporations.
Certain sectors are subject to special direct or indirect tax regimes. For instance, companies involved in the exploration or production of hydrocarbon are generally subject to a special hydrocarbon tax at a rate of 52% of hydrocarbon income, and financial activities are generally subject to a payroll duty calculated as 14.5% (in 2018) of the qualifying payroll of the business.
A large number of minor one-man businesses are operated in a non-corporate form but most of the other closely held businesses operating in Denmark are incorporated.
There are generally no rules preventing professionals (eg architects, engineers, consultants, accountants) from earning income at corporate rates either by operating the business in a corporate form or by applying the special business tax regime. In both cases, any profits distributed or withdrawn from the business to be used for private purposes will be subject to taxation, whereby the effective tax rate level will be almost the same as for income earned by other individuals.
A substance-over-form doctrine, however, generally prevents individuals and professionals from earning employment income at corporate rates. Accordingly, consultancy agreements etc concluded with an individual or a closely held corporation may for Danish tax purposes be qualified as an employment contract and subject to ordinary income tax in the hands of the relevant individual.
Generally, Denmark does not have rules preventing closely held corporations from accumulating earnings for investment purposes. As corporations are generally subject to tax on financial investment income, there is often no or little benefit from investing accumulated earnings of a closely held corporation in listed securities etc.
A significant tax advantage, however, exists for investments in unlisted shares and debt instruments and it is quite common for the accumulated earnings of closely held corporations to be invested in other non-listed securities or assets. Special rules aim at preventing a closely held corporation from certain succession tax reliefs (postponement of capital gains tax and lower inheritance tax) if the majority of the corporation's assets is made up of financial investment assets etc.
Dividends from and gain on the sale of shares in closely held corporations are taxed as share income for individuals. Share income is taxable at a rate of 27% up to a threshold amount of DKK52,900 (2018) and 42% of share income exceeding DKK52,900. For spouses cohabiting at the end of the relevant income year, the amount is DKK105,800 (2018).
Losses on shares in closely held corporations may generally be set off against other positive share income (dividends and capital gains).
For individuals, dividends and capital gains on the sale of shares in listed corporations (ie shares admitted to trading on a regulated market) are taxed at the same rates as shares not admitted to trading on a regulated market, ie a rate of 27% applies to such income up to an amount of DKK52,900 (2018) and 42% of such income exceeding DKK52,900. For spouses cohabiting at the end of the relevant income year, the amount is DKK105,800 (2018).
Losses on listed shares are ring-fenced and can generally only be set off against income from listed shares (iedividends and capital gains on shares admitted to trading on a regulated market). Any remaining ring-fenced loss may generally be set off against a cohabiting spouse's income from listed shares. Unutilised losses may be carried forward indefinitely and set off against the income of future years from listed shares.
As a main rule, a withholding tax of 27% is levied on dividends from Danish companies. In general, a foreign company may, however, always apply for partial reimbursement of Danish withholding tax down to 22%. In the absence of income tax treaties, it is possible to apply for partial reimbursement of Danish withholding tax down to 15% provided (i) the shareholder together with related parties holds a participation of less than 10% and (ii) the competent authority in the jurisdiction in which the shareholder is resident is required to exchange information with the Danish tax authorities according to a tax information exchange agreement or similar. A foreign company may be fully exempt from withholding tax on dividends if the foreign company holds a direct or indirect participation of at least 10% and qualifies for the benefits of the EU Parent-Subsidiary Directive (Directive 2011/96/EU as amended).
The Danish Government has announced that a new model for taxation of dividends distributed on shares admitted to trading on a regulated market will be presented in December 2018. The exact details of the proposed new model have not yet been announced.
A 22% withholding tax may apply to intra-group interest accrual or payments to a controlling foreign company situated in a jurisdiction with an effective corporate income tax rate of less than 16.5%. The concept of control in this context is broadly defined. A number of specific withholding tax exemptions may apply depending on the circumstances.
Royalties paid from a Danish corporation to a foreign recipient are subject to a royalty withholding tax at a rate of 22% levied on the gross amount. Generally, no royalty withholding tax applies to the extent that the recipient qualifies for the benefits of the EU Interest and Royalties Directive and the payor and the recipient have been or remain associated for a period of at least 12 months.
Luxembourg is the country most commonly used to make investments in Danish corporate equity or debt instruments, but other jurisdictions such as Cyprus, France, Germany, the Netherlands, Norway, Sweden, the UK and the US are also frequently used.
The Danish tax authorities have in recent years aggressively challenged the use of treaty country entities by non-treaty country resident legal or natural persons in order to prevent the use of treaty shopping.
The transfer pricing area is a big focus point for the Danish tax authorities and transfer pricing audits are regularly carried out – especially in respect of large multi-nationals. The adjustments made in respect of continuous transactions and intangible assets represented 78% and 10%, respectively, of the total amount of transfer pricing adjustments made in 2017.
The Danish tax authorities generally rely on the methods and principles set out in the OECD Transfer Pricing Guidelines, but will often tend to focus on the merits, circumstances and tax revenue in the specific case rather than the overall principles. Consequently, a significant transfer pricing issue presented for inbound investors operating through a local corporation is the lack of certainty, safe havens or generally accepted approaches.
The Danish tax authorities generally rely on the methods and principles set out in the OECD Transfer Pricing Guidelines, but will often tend to focus on the merits, circumstances and tax revenue in the specific case rather than the overall principles. Depending on the specific circumstances, the Danish tax authorities may therefore challenge the use of related-party limited risk distribution arrangements.
In general, Denmark follows the OECD transfer pricing standards closely and Danish domestic transfer pricing rules must be interpreted in accordance with the OECD Transfer Pricing Guidelines.
In general, compensating adjustments are allowed when a transfer pricing claim is settled.
Danish branches of non-local corporations are generally taxed in the same manner as Danish corporations provided they qualify as permanent establishments for Danish tax purposes. Such permanent establishments are subject to the ordinary corporate income tax rate (22% in 2018) in respect of the income and capital gains that can be attributed to the permanent establishment.
Generally, Denmark does not levy any taxes on non-residents' sale of shares in Danish corporations.
Special rules apply to distributions in connection with capital reductions, liquidations or resale of shares to the issuing company as well as sale of shares to a group company.
In Denmark, no taxes or duty charges are triggered upon a change of control. However, when a change of control occurs, the possibility of carrying forward existing losses may be affected as described under 2.4 Basic Rules on Loss Relief.
There are no statutory formulas used to determine the income of foreign-owned local affiliates selling goods or providing services.
Under Danish law, costs incurred in order to acquire, secure or maintain the taxable income are generally tax deductible. Accordingly, payments by a Danish affiliate for management and administrative expenses incurred by a non-Danish affiliate may be tax deductible for the Danish affiliate if those criteria are met and provided that the payments are compliant with the transfer pricing principles.
Interest and financial expenses paid by Danish corporates to foreign affiliates are generally subject to the thin-capitalisation rule, the interest ceiling rule, the EBIT limitation rule (or, in the near future, the EBITDA limitation rule) and the hybrid mismatch rules described above under 2.5 Imposed Limits on Deduction of Interest as well as the general transfer pricing principles and the interest withholding tax regime.
Generally, foreign-sourced income, such as dividends, interest and royalties, is included in the Danish corporate income tax base of Danish corporations.
However, profits and losses generated by foreign immovable property and foreign permanent establishments are generally not taxable in Denmark provided that those profits are taxable in the relevant foreign jurisdiction. If the cross-border tax consolidation regime is applied, profits and losses of foreign immovable property and permanent establishments will, however, generally be taxable in Denmark.
Expenses incurred by a Danish corporation which are attributable to foreign immovable property or permanent establishments are generally not deductible for tax purposes in Denmark.
Dividends from qualifying foreign and local subsidiaries (participation of at least 10%) and other group-related corporations are generally tax-exempt for a Danish corporation under a participation exemption.
Dividends received from a foreign subsidiary will only be tax-exempt to the extent that the foreign subsidiary is not exempt from corporation taxation in its own jurisdiction and the competent authorities in that jurisdiction are required to exchange information with the Danish tax authorities pursuant to a tax treaty or another administrative agreement on mutual assistance in tax matters.
If the foreign corporation distributing the dividends has a right to deduct the dividend payment – or if an intermediary corporation has a right of deduction – the dividends will generally be taxable for the receiving Danish corporation.
The general transfer pricing principles apply in respect of the use of intangibles developed by Danish corporations by foreign subsidiaries. As such, the Danish corporation should generally include a fair market remuneration in its Danish corporate income tax base.
In Denmark, a CFC regime applies. Accordingly, a Danish corporation may be subject to CFC taxation of income generated by non-Danish subsidiaries and non-Danish branches/permanent establishments. The CFC regime is expected to be affected by the imminent implementation of the ATAD in Denmark.
No general rules relating to the substance of non-Danish affiliates apply, but in assessing whether or not a non-Danish affiliate qualifies for tax treaty benefits a general anti-abuse test may be applied by the Danish tax authorities.
Generally, Danish corporations' gains on the sale of shares in non-Danish affiliates are not subject to taxation in Denmark.
Historically, Denmark has not had general anti-avoidance provisions in statutory law, but a substance-over-form doctrine has been applied in case law.
With effect from 1 May 2015, a general anti-abuse rule applies in respect of tax treaty benefits and benefits otherwise obtainable under the EU Parent-Subsidiary Directive, the EU Merger Directive and the EU Interest and Royalties Directive.
As part of the imminent implementation of the ATAD, the Danish Parliament is expected to replace this rule with a true general-anti abuse rule.
According to the new rule, corporations shall, when calculating the income, disregard arrangements or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of applicable tax law, are not genuine having regard to all relevant facts and circumstances.
The new anti-abuse rule is expected to be effective from 1 January 2019.
The Danish tax authorities do not carry out audits in a regular routine cycle.
Denmark has incorporated the following noteworthy anti-avoidance rules which are covered by the BEPS recommendations:
The Danish Government has always had and continues to have a major focus on combating tax abuse and tax avoidance. Accordingly, numerous measures have been implemented over time and Denmark generally had many anti-avoidance rules in place before the BEPS recommendations were completed in 2015.
International tax has a high public profile in Denmark, and Denmark is very likely to continue implementing the BEPS recommendations. Accordingly, in the near future, Denmark will have implemented the EU tax avoidance directives into national law, eg in relation to the fourth BEPS recommendation regarding limiting base erosion involving interest deductions and other financial payments by implementing the EBITDA interest limitation rules and by implementing a general anti-abuse rule applying to deemed abuse of corporate tax law in general.
In our assessment, BEPS could turn out to improve Denmark's position as a tax competitive jurisdiction given the circumstance that Denmark already had BEPS-type anti-abuse measures in place prior to the BEPS Project and therefore does not need to make fundamental changes to its corporate tax rules as a result of BEPS whereas this may be the case to a greater extent for other competing jurisdictions. This could create a more "level playing field" regarding corporate tax for Denmark.
However, as Denmark has generally tended to implement relatively strict anti-abuse tax measures, the competitiveness of the Danish corporate tax rules would likely rely on how much flexibility ultimately exists – and is de facto applied – when BEPS is implemented in national tax legislation in various jurisdictions, and how strict such national measures are when compared to the Danish national measures.
As Denmark has not prior to the BEPS Project operated a specific GAAR rule under Danish tax law, but primarily relied on a number of SAAR rules targeted at specific identified potential abuse, the general competitiveness of the Danish corporate tax rules would likely rely on the application in practice of the principal purpose test (PPT) which is envisaged under the ATAD implementing BEPS in the EU as there are strong concerns in the Danish business community that the PPT as envisaged in the currently proposed Danish legislation implementing the ATAD is indeed a very blunt instrument that could make the application of Danish tax rules by the Danish tax authorities more uncertain and unpredictable than is the case today.
Denmark has already implemented various rules regarding hybrid mismatches and taxation of hybrid entities etc.
Further, the Danish Parliament is expected to enact legislation in 2018 which implements the ATAD I and II directives, including rules on hybrid mismatches. The rules on hybrid mismatches etc in the ATAD I and II directives are, to a large extent, based on the BEPS recommendations.
On the one hand, the proposed rules have a broader application than the existing hybrid mismatch rules. On the other hand, tax planning in Denmark has for a number of years only quite rarely been based on hybrid mismatches and we would therefore deem the practical impact of the amended rules to be limited.
In Denmark, a territorial tax regime generally applies for companies. The existing interest deductibility as well as those proposed to implement the ATAD have generally been tailored to that regime. The interest deductibility restrictions are generally an issue for large companies and groups given the safe harbour rules applicable when financing costs at group level are limited. Large companies have criticised the rules for the broad scope and limited carry-forward of non-deductible losses/costs caught by the rules. This criticism continues to be relevant with the currently proposed implementation of the ATAD in Denmark as this will only lead to a relatively limited change to the existing rules which have a broader application than suggested under the ATAD.
In Denmark, a territorial tax regime generally applies for companies. Accordingly, profits and losses concerning foreign permanent establishments and real estate situated in other jurisdictions is not included in the taxable income of Danish companies. The territorial regime, however, does not apply to certain types of income. For example, profits and losses from foreign permanent establishments and real estate are included in the taxable income in Denmark if international tax consolidation is applied in Denmark, and if the Danish CFC rules would have applied, had the income been earned by a foreign subsidiary. As such, the territorial regime does not change the application of Danish CFC rules.
In fact, the Danish CFC regime is in many ways a sweeper rule whereby, in effect, if the CFC income (defined as a number of items of income which are mobile in nature) is above a certain threshold, then all the income in the CFC would be subject to Danish tax, irrespective of substance (ie there is no specific substance test). The CFC income threshold is reduced by the currently proposed Danish implementation of the ATAD, which has been heavily criticised by the Danish business community.
Reference is made to 9.5 Features of the Competitive Tax System. Denmark does not currently seek to incorporate limitation of benefit clauses.
In general, Denmark follows the OECD recommendations in the transfer pricing area closely and is expected to continue to uphold measures covered by the BEPS. As mentioned in 9.1 Recommended Changes, in a wide range of areas, Denmark has already adopted legislation on areas covered by the BEPS recommendations.
For a number of years, Denmark has generally followed the OECD Transfer Pricing Guidelines closely and, according to the Danish tax authorities, the Danish domestic transfer pricing rules must be interpreted in accordance with the OECD Transfer Pricing Guidelines.
No specific rules apply to the taxation of the digital economy in Denmark; however, in connection with the proposed EU directives on taxation of the digital economy which, amongst other things, propose that a digital turnover tax is introduced, taxation of the digital economy is a focus point of the Danish Government.
The general view of the Danish Government appears to be that profits created by companies operating within the digital economy must be taxed in the jurisdiction where the income is generated. Accordingly, Denmark appears to oppose a general tax on digital turnover.