Introduction

Denmark has managed to cope quite well with the macro-economic complexities that have arisen in recent years: COVID-19, supply-chain shortages, inflation and the war in Ukraine. Inflation rates are rapidly decreasing, and as of June 2023 we have not seen businesses or private individuals go under or forfeit on loan obligations.

Harder times for start-ups and scale-ups raising funding

In the start-up and scale-up space, the development is much more dramatic, with founders finding it increasingly difficult to acquire funding, especially in those business cases where hockey-stick growth is needed to get to profitability. To lower the risk profile, many business angels and VC funds are starting to focus investment into start-ups and scale-ups that are able to arrive at a profitable growth scenario much quicker than the ask was in 2020 and 2021.

The valuations achieved in 2020 and 2021 (which were also driven by a public subsidy regime where often each DKK raised in equity gave businesses access to DKK3 as a loan) are not happening any longer, and during 2022 and 2023 quite a range of growth businesses have needed to raise additional funding in down rounds or through convertible instruments where the investor/founder discussion on pricing has been deferred to a later stage.

Danish FDI screening regime

Like many other European countries, Denmark adopted in 2021 an FDI screening mechanism whereby foreign investments became subject to scrutiny if made into certain critical sectors, technologies and infrastructure.

The critical areas seem to be defined more broadly in Denmark than is otherwise commonplace across the EU, and from our experience with the rules during the past 18 months anything energy-related causes the need for approval, and many high-tech businesses are also in scope (for instance, AI, quantum, industrial robots, 3D printing, cybersecurity, etc, as well as if you develop or manufacture for instance systems that can become critical infrastructure, which makes FDI relevant to many fintech businesses). The same goes for businesses that have operational contracts with the Danish Armed Forces. A range of biotech businesses also fall inside the scope, and if a company develops or manufactures even one “dual-use” product, FDI screening is a must.

Generally, the Danish Business Authority, which administers the rules, has adopted a cautious position of “if in doubt, file for approval”. A recent change to the administrative process that came into effect on 1 July 2023 hopes to remove some of the red tape for deals where it is obvious that there is no adverse impact on “national security” or “public order” and that the transaction consequently should proceed. In these Phase 1 cases, the case-handling period has now been lowered to 45 days, whereas the more complex deals go into Phase 2, which can span 125 days from when you are told that a Phase 2 review is necessary.

Another specific feature of the Danish FDI regime is that the thresholds for when foreign investments need to be looked at are at a very low level, with no lower monetary threshold applying and a foreigner only needing to get to a 10% stake or “similar control” (which can be established, eg, through veto rights, board appointees, etc).

The Danish FDI regime applies to all foreigners, including those from OECD and other EU countries, and has extra-territorial effect so that transactions happening offshore of Denmark but where relevant control of a “critical” Danish business shifts also need Danish approval.

The first publicly known blocking decision pursuant to the Danish FDI regime came in May 2023 when the Minister of Commerce blocked the sale of NKT Photonics by Danish-listed NKT to Japanese Hamamatsu. The decision came as quite a surprise to the Danish M&A ecosystem and has sparked public debate. Before the Hamamatsu blocking decision, it was the overall belief that only transactions where, for instance, the buyers were Chinese or Russian would in reality be in scope.

Within the energy sector, Denmark has plans to construct an energy island in the North Sea, which holds huge development potential for Danish cities on the west coast of Jutland, for instance Esbjerg. However, in a recent amendment to the FDI rules, the scope of the legislation has now been expanded so that any contract with a public contracting party concerning construction, co-ownership or operation of the energy island will need approval, whether the contracting party is Danish or foreign. Later this might be extended to other “critical areas”.

If a foreigner wants to set up a new company in Denmark that would be involved in a “critical area”, the establishment itself is subject to approval. Given the EU treaty-based “freedom of establishment”, it is questionable whether this rule when it comes to people and businesses based in the EU conforms to the EU treaty.

In relation to impact on M&A deals, since the FDI regime has a “gun-jumping” prohibition disallowing de facto implementation until approval has been obtained, a lot more deals in the mid-market range now are not allowed to contain “operation pending closing” restrictions on the seller, which is leading to the use of MAC provisions that are much broader than before. This of course leads to more deal uncertainty.

In the wake of the Hamamatsu blocking decision and as we have little experience with how the Danish authorities will go about negotiating how a foreign investor that is initially blocked from closing a transaction could still proceed, we advise clients to be very cautious with undertaking “come hell and high water” provisions obliging them to do whatever is necessary for the deal to go through (or pay a costly penalty).

The Danish “beneficial ownership” cases

The Danish Supreme Court has in January and in May 2023 ruled in the Danish beneficial ownership cases on dividends (January 2023) and interests/group accruals (May 2023).

The regulatory backdrop is as follows: in recent years, the Danish tax authorities have brought many cases against Danish companies that have either distributed dividends or paid interest to their parent companies domiciled in other EU countries or in countries with which Denmark has entered into a double taxation agreement.

Because of the recipients’ domicile and the application of EU regulations or double taxation agreements, the distributors in Denmark of dividends or interests have not withheld tax at source based on exemptions established in either double taxation agreements or the EU regulations (Parent-Subsidiary Directive or Interest and Royalty Directive).

The decision not to withhold tax at source has been questioned and overruled by the Danish tax authorities, on the basis that the actual beneficial owner of the dividend or interest was not domiciled in an EU Member State or in the country of the contracting state under the relevant double taxation agreement.

These matters have now been through the Danish court system based on rulings from the Court of Justice of the European Union (CJEU).

The CJEU had previously ruled in several matters on the Danish regulations on withholding tax for dividends and interest paid to companies residing in the EU (such cash streams being subject to the Parent-Subsidiary Directive or the Interest and Royalty Directive). In these rulings, the CJEU found in principle that prohibition of abuse as a legal doctrine does exist in EU law and must be applied by the Member States, resulting in the rejection of tax exemption principles in the Parent-Subsidiary Directive or the Interest and Royalty Directive, and that this concept is an element of EU law (not only international tax law), and hence must be applied by a Member State, even in situations where there is no national legislation to this effect.

In January 2023, the Danish Supreme Court ruled in two cases concerning NetApp Danmark ApS. In these cases, the group had made two dividend distributions from the Danish subsidiary to a parent company domiciled in Cyprus, which was owned by a Bermuda-based parent, and ultimately by a US-based owner.

In one of the distributions (2005-distribution), the Cypriot parent company routed the received cash to its Bermuda parent company, which five months later distributed the funds to the ultimate US parent company. In this intermittent period, the Bermuda company invested the cash proceeds in bonds etc and generally acted as if the funds belonged to it, before later distributing the cash to the US-based parent company. On this basis, the Danish Supreme Court ruled that it could not be ruled out that the purpose of the setup was to abuse the tax exemption regimes, and that the Bermuda company was the beneficial owner of the funds (instead of the US ultimate parent company) and hence the Danish subsidiary should have withheld tax at source. 

In the other case (2006-distribution), the dividend was declared by the Danish subsidiary in 2006 but not paid to the US ultimate parent until 2010 (pending the sale of a Dutch subsidiary and receipt of funds) as part of a pool of dividends from the Bermuda intermediary company. Overturning the ruling from the Danish High Court (Eastern division), the Supreme Court found that it was established by the taxpayer that the pool distribution in 2010 to the US parent included the 2006 distribution by the Danish subsidiary to the Bermuda intermediary, which had not been able to use (ie, abuse) the proceeds for its own investment purposes as such were only paid in 2010. Consequently, the Supreme Court ruled that the US parent was the beneficial owner of the 2006 dividend and that it was correct that no withholding tax at source was deducted by the Danish subsidiary, when declaring the dividend.

The other case from January 2023 concerned a distribution from a Danish subsidiary (TDC A/S) to its Luxembourg parent company (a partnership limited by shares – SCA), which owned a majority of the Danish subsidiary. The Luxembourg parent company was owned by another Luxembourg company (public limited company/SA), which was ultimately owned by a private equity fund. The Danish subsidiary was either unwilling or unable to establish and document, in which country the distribution ultimately ended and in which country the ultimate beneficial owners were domiciled (for tax purposes). On this basis, the Supreme Court ruled that the Luxembourg entities were merely pass-through vehicles established for tax reasons, and that the Danish subsidiary should have withheld tax at source, as the taxpayer must evidence the domicile of the beneficial owner and that the funds do not end up with tax residents which are not exempted under the relevant double taxation agreements or the relevant directive.

On the basis of the January rulings, we can conclude that the Supreme Court generally accepts look-through for intermediary companies, but it is a requirement that the beneficial owner of the cash streams can be identified, that it is clear and documented where the distributions end, and that the “route” of the cash streams cannot be interfered with, ie, that no intermediary company in the cash stream trail can act as if the distribution belongs to it, before the cash streams end up with the claimed beneficial owner, such that it can be excluded that the setup has been arranged to abuse the tax exemption regimes.

In May 2023, the Danish Supreme Court ruled in two cases concerning payment of intergroup interests, without deduction of withholding tax.

In the first matter, the Danish subsidiary (Nycomed A/S) was seeking reduction or exemption for paid interest. In this matter, the court found that the immediate beneficiaries of the interest, namely the parent companies in Sweden and Luxembourg respectively, were flow-through companies which could not be considered the rightful beneficial owners of the interest within the meaning of the Interest and Royalty Directive (and the double taxation agreements), and that the tax arrangements in question constituted abuse. The Supreme Court noted that when assessing whether a company should be considered the rightful beneficial owner of the interest or should be considered a flow-through unit, it is irrelevant whether the interest has been effectively paid or whether the interest has been attributed to the principal of the loan. As was the case in the TDC ruling, the Supreme Court further found that the taxpayer had not established and documented, in which country the distribution ultimately ended and in which country the ultimate beneficial owners were domiciled (for tax purposes).

In the other matter (NTC Parent), the court also found that the Danish taxpayer had not documented that the investors in the private equity funds behind the Luxembourg flow-through companies were the rightful owners of the interests in question. Consequently, the Danish subsidiary should have deducted withholding tax, upon payment of interest.

In general, the rulings by the Danish Supreme Court (as based on the CJEU principles) make it clear that the burden is on the Danish taxpayer to establish that a foreign holding structure in the EU or in a territory covered by a double taxation agreement is not a pass-through structure established to abuse the tax exemption regimes in the directives. As such, we encourage foreign holding companies with Danish-domiciled operating companies to seek tax advice before distributing dividends, interest and royalties without deduction of withholding tax pursuant to the Danish (national) tax regulations.

Danish employment contracts to contain additional information

An area that is often of particular importance to foreign businesses in Denmark is labour laws. Denmark recently introduced new rules governing the statutory content of employment contracts which will take effect from 1 July 2023.

The law is an implementation of European Parliament and Council Directive 22019/1152 on transparent and predictable working conditions in the EU. The directive extends the Danish employers’ duty to provide information to employees about their terms of employment. As something new, the directive also introduces several minimum requirements for employees’ terms of employment.

The new law means that employees with an average working time of three hours or more per week in a reference period of four weeks are entitled to an employment contract. The same applies to employees where a guaranteed amount of paid work has not been determined in advance before the beginning of the employment relationship. This is thus a tightening of the rules compared to today, where an employee is only entitled to an employment contract if the employment relationship has a duration of more than one month and if the average weekly working time exceeds eight hours.

At the same time, the employer’s obligation to provide information has been expanded to include more information than what follows from the current Act.

It has also been decided that the deadline for the delivery of some detailed information will be shorter, since whereas today the employment contract must be issued no later than one month after the employment relationship has begun, according to the new rules there is a general deadline of seven calendar days.

The new legislation also introduces a number of qualitative minimum rights, including that (i) a trial period of more than six months may not be agreed (and already for salaried “white collar and office work staff” this is limited to three months) and (ii) an employer is not allowed to prevent an employee from taking up parallel employment, unless the secondary employment is incompatible with the existing employment relationship. 

Platform businesses

Platform work-companies such as Wolt, Foodora, Glovo, etc are new triangular working relationships that are built with an online platform, a platform worker and a customer/customer.

This structure contrasts with the traditional employment relationship between an employer and an employee, and the development has led to an increased focus on the platform workers’ employment protection and is at the same time an important reminder of the boundaries between employees and self-employed people. In Denmark, we expect platform businesses to come under increasing scrutiny in coming years, both from regulators including local tax authorities, and from unions and consumer activist groups.

In this context, Danish online supermarket nemlig.com in February 2023 ended a long-lasting dispute with Danish union 3F over work terms and conditions for employed drivers that also extends to the drivers attached to nemlig.com on a “platform” independent contractor basis.

When the working relationship in work platforms has changed, it leaves the legal question of what legal status online platforms and platform workers have. This has been important for the legal literature, jurisprudence and politics.

It is interesting to observe that most online platforms do not consider themselves employers with corresponding duties. Instead, they consider themselves intermediaries who mediate an agreement between, eg, two private individuals or between private individuals and companies. When an online platform does not formally have legal status as an employer, platform workers will largely not be categorised as employees. Instead, they are categorised as self-employed.

The self-employed generally do not have the same protection as employees who are covered by employment legislation and possibly collective agreements. This applies, among other things, to protection against dismissal, pay during sickness and holiday, health and safety protection as well as access to collective representation and negotiation. It can therefore be of great importance whether, in the sense of employment law, you are regarded as an employee or as self-employed.

In most European countries, authorities and courts will not automatically consider platform workers to be self-employed simply on the basis that, according to the agreement with the platform company, they run their own business. The decisive factor will instead be a factual and legal assessment of whether there is in fact an employment relationship.

In a reasoned ruling in C-692/19 (Yodel-case), B v Yodel Delivery Network Ltd, the European Court of Justice ruled in April 2020 whether Yodel’s parcel couriers were employees according to the rules of the Working Time Directive (2003/88).

The EU Court noted at the outset that the Working Time Directive does not define the term “employee”, but that, according to the Court’s practice, this term has an independent meaning that is specific to EU law. According to this jurisprudence, it is up to the national courts applying the concept of “worker” in Directive 2003/88 to determine the extent to which a person carries out his or her activities under the direction of another and to base this classification on objective criteria. An overall assessment of all the circumstances of the submitted case must then be carried out, considering the nature of activities and the relationship between the parties involved.

Furthermore, the European Court of Justice noted that an employment relationship implies a hierarchical relationship between an employee and an employer. It is stated that the most important feature of an employment relationship is that a person performs services for and under the direction of another person for a certain period of time in return for remuneration.

Despite new developments in case law and in the EU, the legal status of online platform workers is still unclear. Rulings from various European Member States both contrast with each other and are largely opposite to the ruling of the European Court of Justice in the Yodel case. This illustrates both that there is a contrasting legal picture and that it is difficult to place platform workers unambiguously in either the employee or self-employed category.

ESG and greenwashing

For many businesses, ESG-related issues and the marketing of green claims are matters rapidly moving up the ladder of importance in relation to strategy discussions. In the ESG reporting and due diligence field, Denmark is bound to implement to various EU directives, but we do not expect separate Danish initiatives.

In one area related to the environment, Denmark, however, seems to take a hard line: the marketing of green claims, or “greenwashing”. In 2021, the Danish Consumer Ombudsman was told to spend more time and efforts looking into this area, which has resulted in the issuance of new guidelines as well as the first publicly communicated decisions telling businesses how to behave.

In adopting the Green Claims Directive, the EU gave due consideration to the fact that an EU Commission report showed that in excess of 50% of all “green claims” in marketing were false or at least unsubstantiated. The result of a Danish survey would likely be the same.

Particularly in relation to general statements on or using imagery implying that you are “green”, “climate-friendly” or likewise as well in relation to the use of the word “sustainable”, the Danish Consumer Ombudsman is taking quite a stand.

The room for using general green statements is very narrow and only available to “top of class” operators when it comes to being climate-friendly, with an additional requirement being that the statements need to be verified by a cradle-to-grave analysis crafted by independent experts. Using the word “sustainable” is almost a “no go” in Denmark, as that necessitates compliance with the parameters established by the Brundtland Report in the late 1990s: you have to take into consideration not only that you are not doing harm now but also that you are not adversely impacting the needs of future generations. And who can honestly say that?