Denmark: Guide To Business Taxation In Denmark - Part 1

1.1 The Danish Tax System

1.1 Types of Taxes

The Danish tax system comprises of direct and indirect taxes. Direct taxes include income tax and property tax, while the principal indirect taxes are value added tax (VAT), customs, green taxes and excise duties.

The Danish income tax for companies is a flat rate corporation tax of 25 percent.

The income taxes for individuals are state tax, municipal tax, health tax and church tax. The state tax is a progressive tax divided into bottom-bracket and top-bracket tax rates. The municipal, health, and church taxes are calculated on a flat rate basis. The church tax is payable by members of the Danish National Evangelical Lutheran Church (Folkekirken). Individuals also have to make contributions to a labour market pension fund.

Aside from taxes on personal income, Denmark applies taxes to share income and capital gains on, for example, real property, and other income from investments.

The Danish government levies a number of other taxes, such as, for example, property taxes, property value tax, taxes on gifts and inheritance, payroll tax, special gas and oil taxes and tonnage taxes – as described below.

On 28 May 2009, the Danish Parliament approved a major reform to Danish tax law (entitled Forårspakke 2.0 or in English, Spring Package 2.0). The primary purpose of the tax reform was to reduce the taxation of employment income, which, for Denmark, is still set at one of the highest levels in the world, with a marginal tax rate of 56.5 percent including social contributions. However the tax reform also has significant tax consequences for Danish businesses.

1.2 Main Sources of Law

The main source of Danish tax law is the 1922 statute on income taxation to the state (Statsskatteloven) which includes the fundamental principles of Danish tax law. However, over the last 88 years, different Danish governments have introduced numerous acts governing tax matters, which today make taxation in Denmark a particularly complex matter.

1.3 The Danish Tax Administration Structure

In Denmark, taxes are administered through the Danish Tax and Customs Administration (SKAT), which was formed on 1 November 2005 following a merger between the municipal and state tax administrations. The Danish Tax and Customs Administration is a single administrative body with a number of units located across the country. It employs around 8,000 staff.

Apart from the Ministry of Taxation and the Danish Tax and Customs Administration, the Danish tax authorities include a Tax Council, a National Tax Tribunal and a number of local tax and tax assessment tribunals Taxation of corporations

2. Taxation of corporations

Corporations resident in Denmark are liable to pay corporate tax on their worldwide income. However, income from permanent establishments and real property located abroad is not taxable income.

There are two forms of corporations in Denmark – private limited companies (in Danish, anpartsselskab, which can be abbreviated to ApS), and public limited companies (in Danish, aktieselskab, which can be abbreviated to A/S).

In addition to Danish corporations, a number of other business entities – including certain other limited liability companies and associations – are subject to corporate taxation in Denmark.

2.1 Filing of Tax Returns and Payment of Corporation Taxes

As a general rule, the income year for companies is the calendar year. However, companies are also permitted to select an income year that differs from the calendar year. Companies included under joint taxation (see item 2.4) must have the same tax year as the administrative company.

A yearly tax return must be filed with the tax authorities within 6 months following the end of the fiscal year. However, if a company's nominated tax year ends between 1 February and 31 March, its tax return must be filed on or before 1 August in the relevant year.

Companies pay taxes on a current year basis. Taxes are due as account payments on 20 March and 20 November.

2.2 Calculation of Income Taxes

2.2.1 The Tax Rate

Danish corporations are taxed at a flat rate of 25 percent.

2.2.2 Taxable Income

In general, any income is taxable if it is subject to full tax liability. As a rule, capital gains are added to the taxable income, as described below.

2.2.2.1 Capital gains on shares

The 2009 tax reform has significantly changed the Danish participation regime with effect from the income year 2010.

The tax reform introduced a distinction between "subsidiary shares", "group shares" and "portfolio shares".

"Subsidiary shares" are shares where (i) the corporate shareholder owns at least 10 percent of the shares in another company, and (ii) the company is a Danish company subject to corporate tax, or a foreign company where the taxation of any dividends it pays out must be waived or reduced according to the Parent-Subsidiary Directive (Directive 90/435/EEC) or a tax treaty between Denmark and the jurisdiction where the foreign company is a tax resident. "Group shares" are shares where the corporate shareholder and the company are subject to Danish national joint taxation or could elect to be subject to Danish international joint taxation (generally, this requires that the corporate shareholder controls more than 50 percent of the votes in the company).

"Portfolio shares" are shares that do not qualify as subsidiary shares or group shares.

Capital gains on subsidiary shares and group shares are generally exempt from taxation, while capital gains on portfolio shares are generally taxable (at the full corporate tax rate of 25 percent). Further, capital gains on portfolio shares are – as a starting point – taxed annually on a mark-to-market basis. However, corporate taxpayers may opt for taxation on a realization basis in relation to shares that are not traded on a regulated market.

Losses in respect of subsidiary shares and group shares are not deductible. Losses relating to portfolio shares can be deducted from the taxable income. However, if the taxpayer has opted for taxation on a realization basis, losses may only be set off against gains on shares that are taxed on that basis.

The ownership period is no longer decisive for the taxation of capital gains on shares.

Anti-avoidance provisions and a number of transitional rules that apply to shares acquired prior to 2010 have increased the complexity of Danish capital gains taxation.

In order to counter structures where two or more corporate shareholders with shareholdings below the 10 percent threshold pool their shares in a joint holding company (to reach the 10 percent threshold), an anti-avoidance rule has been introduced. According to this rule, subsidiary shares or group shares held by a holding company are for tax purposes deemed to be held by the shareholders of the holding company if the following cumulative conditions are met:

• the primary function of the holding company is to own subsidiary shares and group shares,
• the holding company does not carry out genuine economic business activities in relation to the shareholding,
• more than 50 percent of the shares in the holding company are – directly or indirectly – owned by Danish resident companies (or a Danish permanent establishment of a foreign company) that would be unable to receive tax-free dividends in case of direct ownership of the shares owned by the holding company, and
• the shares in the holding company are not listed on a regulated market or a multilateral trading facility.

2.2.2.2 Capital gains and bonds, debentures and financial contracts etc.

Companies are subject to tax on all capital gains and losses on bonds, debentures and similar financial instruments, and on debts, irrespective of the currency and the interest rate. Capital gains on futures, options and other financial instruments are also subject to tax.

Structured bonds are generally taxed pursuant to the rules applicable to derivatives. A bond is for Danish tax purposes considered to be structured if the principle in whole or in part is adjusted in accordance with prices or other factors related to securities, goods or other assets.

Capital gains on convertible bonds are, however, treated as capital gains on shares. Also, special rules apply to inter-company debt between affiliated companies.

Following the 2009 tax reform, gains and losses on most types of bonds held by companies are taxed annually on a mark-to-market basis.

2.2.2.3 Capital gains on real property

Capital gains on real property are generally taxable. For certain properties used for business purposes, roll-over relief is available in connection with the sale and re-purchase of real property.

2.2.2.4 Goodwill and intangible rights

Capital gains on goodwill and other intangible rights are taxable income.

2.2.3 Deductions and Depreciation

2.2.3.1 Deductions

Trading losses and interest expenses may be set off against other income and gains.

2.2.3.2 Depreciation

Depreciation on machinery is calculated by pooling the value of all such items and then using the declining-balance method. A company may use a depreciation rate from 0% to 25%.

Depreciation cannot be claimed in the year of disposal. Machinery and equipment with a purchase price of less than DKK 12,300 (2010) or an estimated life span of less than 3 years may be fully depreciated in the year of acquisition.

Expenditures relating to the acquisition of computer software may be fully depreciated in the year of acquisition.

Assets used for leasing activities are governed by special rules.

A company acquiring machinery and equipment for leasing purposes is not allowed to claim depreciation on leased assets in the acquiring year. In the following year, 50% may be depreciated. The tax authorities may allow the normal depreciation rules to be applied.

Buildings used for production or other business purposes – but not offices – may, as a main rule, be depreciated on a straight-line basis by 4% annually.

Acquired goodwill and other intangible properties such as patents and trademarks may be depreciated by up to one-seventh of their acquisition value per year. If the right in question allows its owner a period of exclusivity of less than 7 years, the acquired right may be depreciated by the same percentage amount each year, where that annual rate is calculated using the value of the acquisition during the remaining period of exclusivity.

Acquired know-how and patents may be fully deducted in the year of acquisition.

Infrastructure assets for transportation, the storing and distribution of electricity, water, heat, oil, gas and sewage, the transmission of radio and television and telecommunications equipment (except for IT hardware and software), and railway assets or similar may be depreciated by 7%.

For certain ships, planes, railway equipment, heat and electricity production assets, drilling rigs and various hydrocarbon-related assets, the depreciation rate will be reduced gradually from 25% to 15% as follows:

2007: 25%

2008 - 2009: 23%

2010 - 2011: 21%

2012 - 2013: 19%

2014 - 2015: 17%

2016: 15%

Licenses for the exploration and exploitation of oil and gas are to be depreciated over the lifetime of the licenses.

2.2.4 Tax Losses

Losses may be carried forward indefinitely. Carry-back is not possible.

The right to set off losses carried forward against other income may disappear or be reduced if more than 50% of the shares in the company have changed ownership since the beginning of the year in which the losses were incurred, or if the company has obtained a remission of debt, composition or similar.

2.2.5 Taxation of Dividends

Dividends received by a Danish parent company from Danish or foreign subsidiaries are generally tax-exempt. However, this tax exemption only covers dividends from subsidiary shares or group shares.

"Subsidiary shares" are shares where (i) the corporate shareholder owns at least 10 percent of the shares in another company, and (ii) the company is a Danish company subject to corporate tax or a foreign company where the taxation of any dividends it pays out must be waived or reduced according to the Parent-Subsidiary Directive or a tax treaty between Denmark and the jurisdiction where the foreign company is a tax resident.

"Group shares" are shares where the corporate shareholder and the company are subject to Danish national joint taxation or could elect to be subject to Danish international joint taxation (generally, this requires that the corporate shareholder controls more than 50 percent of the votes in the company).

Previously, the tax exemption for dividends only applied for companies that had held shares in a subsidiary for a period of at least 12 months, and the dividend was declared during this period. However, following the 2009 tax reform this requirement has been abolished with effect from the tax year 2010.

The exemption also applies to foreign companies with a permanent establishment in Denmark. However, it is a condition that the company is domiciled within the EU or EEA, in the Faroe Islands or Greenland or in a state that has concluded a tax treaty with Denmark.

The tax exemption does not cover dividends if the company paying such dividends is allowed to deduct the distribution of dividends. However, the distribution of dividends is still tax-exempt if foreign taxation is waived or reduced pursuant to the Parent-Subsidiary Directive and common taxation schemes for parent companies and subsidiaries from different member states.

Dividends received from investment companies are not tax-exempt – see 3.5, below.

2.3 Transfer Pricing

The Danish transfer pricing legislation is based on the general principle of arm's length transactions.

Accordingly, all transactions between connected parties must be concluded on general market terms as if the parties to the transactions were independent entities (transactions must be concluded at "arm's length"). A "connection" exists between parties if a company or an individual (or a group of affiliated companies or related persons) owns, directly or indirectly, more than 50% of the shares in the relevant company or may exercise more than 50% of the votes in the relevant company.

In order to catch private equity funds and similar arrangements, the definition not only includes companies but also extends to:

• Entities and associations which are fiscally transparent under Danish tax law and which are governed by the rules of corporate law, a corporate agreement or articles of association.
• Entities with joint management.
• Entities that have entered into an agreement regarding the exercise of a joint controlling influence.

The Danish practice in the transfer pricing field is generally in accordance with the OECD Guidelines.

The Danish Parliament has adopted rules on transfer pricing documentation. The legislation states that affiliated companies must provide information in their tax return evidencing the nature and extent of any transactions with associated enterprises. In order to ensure compliance with the arm's length principle, connected parties are subject to a duty of disclosure (i.e. a duty to provide information in the tax return about the nature and extent of controlled transactions), and a duty to provide documentation (i.e. a duty to prepare written documentation describing how prices and other terms have been fixed).

The duty of disclosure and the duty to provide documentation only apply to companies or similar entities that are subject to the special tonnage tax regime, to the extent that the income of such companies is not covered by the regime.

Further, a general exemption applies to small and medium-sized companies. Such companies are only obliged to prepare transfer pricing documentation in respect of controlled transactions entered into with companies in countries outside the EU or the EEA and with which Denmark has not entered into a tax treaty. Also, a general exemption applies to controlled transactions that are deemed immaterial in respect of either volume or frequency. The documentation must be in writing and of a nature that can provide the basis for an evaluation as to whether the prices and conditions have been determined at arm's length. The enterprise must explain which method or methods were used in order to arrive at the arm's length price. Non-compliance with the requirement to provide documentation is punishable by fine, provided that the non-compliance can be characterised as wilful or grossly negligent. Furthermore, companies that have not prepared documentation risk a discretionary assessment of their taxable income.

The tax authorities are afforded the opportunity to commence a taxation case concerning transfer pricing issues for a period of up to 5 years and 4 months after the expiry of the relevant tax year. The Danish Tax and Customs Administration has recently increased its focus on transfer pricing issues and has decided on a number of major income adjustments based on the transfer pricing rules.

2.4 Joint Taxation

According to the Danish joint taxation regime, all Danish group companies and all permanent establishments and real properties in Denmark owned by foreign group companies are automatically taxed on a joint basis. The consolidated taxable income will be calculated as the sum of the taxable income of each group company, irrespective of whether or not the group company is wholly owned or not.

International joint taxation (i.e. joint taxation with foreign group companies) is optional. However, if a group opts for international joint taxation, all foreign group companies as well as all permanent establishments and real property in foreign countries owned by group companies will have to be included in the joint taxation. Therefore, it is not possible to include only some foreign group companies in Danish joint taxation.

If international joint taxation is selected, that choice will be made in connection with

binding on the group for a period of 10 years. However, a group may choose to terminate international joint taxation prior to then expiry of the 10-year period against taxation of the full amount of losses deducted under the joint taxation

As part of the joint taxation, a so-called "administrative company" must be appointed. The administrative company must be the Danish group parent company. The main duty of the administrative company is payment of the tax levied on the consolidated taxable income of the group. In return, any other Danish group companies must pay to the administrative company an amount equal to their portion of the tax levied on the consolidated taxable income of the group. Similarly, foreign group companies can pay their portion of the tax levied on the consolidated taxable income of the group to the administrative company, but are not obliged to do so. As a starting point, each group company is only liable for its portion of the tax levied on the consolidated taxable income of the group. However, the administrative company assumes tax liability for the Danish group companies upon receipt of payment of the respective portions of the consolidated taxable income of the group.

Group companies include all companies (with minor exceptions) that qualify as group companies within the meaning of the Danish Corporation Tax Act (Selskabsskatteloven).

This means that a company (the subsidiary) is deemed to be part of the same group as another company (the parent company) if the parent company holds the majority of the voting rights in the subsidiary, may appoint or remove a majority of the members of the senior body of the subsidiary, or is able to control the subsidiary in any other way.

2.5 Intra-Group Contributions

As a general rule, contributions – other than capital contributions made in connection with increases in share capital, including premiums – are included in the taxable income for the recipients and are non-deductible for the grantors (unless, as an exception, the contribution can be substantiated as a business cost incurred in the interests of the grantor).

However, contributions from a company which is under joint taxation or could have been under joint taxation with the recipient company (see above, under item 2.4) may be received as tax exempt. On the other hand, the grantor of the contribution cannot deduct the contribution.

Contributions are only tax-exempt if the grantor is directly or indirectly the parent company to the recipient company, or if the grantor and the recipient company have a joint parent company (and are therefore sister companies).

Further, contributions between sister companies are only tax exempt if the grantor could have distributed tax-exempt dividends to the common parent company, see item 2.2.5 above. If the parent company is not a Danish entity, it must be covered by the provisions of the Parent-Subsidiary Directive or by a tax treaty, according to which the Danish taxation of dividends paid to such a foreign company must be waived or reduced. A contribution is not tax exempt if it can be deducted by an affiliated company outside Denmark or if the grantor is an investment company.

2.6 Territorial Rules

A company that is either registered with the Danish Commerce and Companies Agency or is effectively managed in Denmark is subject to full tax liability. Effective management is interpreted in accordance with the same principle as the OECD Model Treaty and generally refers to the place where the day-to-day management decisions are made.

Danish companies are generally subject to taxation on their worldwide income.

However, Danish companies are not subject to taxation on income related to permanent establishments or real property in foreign countries except except (i) in respect of income from the operation of ships or aircraft in international traffic, or (ii) when Denmark has been granted the taxation right by a tax treaty or other international agreement.

Permanent establishments or real property in foreign countries will, however, be included under Danish taxation if the company as part of international joint taxation – see item 2.4. Further, the CFC regime (see item 2.7) applies to permanent establishments of Danish companies and, therefore, a Danish company will be subject to taxation on any taxable income attributable to a permanent establishment in a foreign country, provided that the CFC conditions are met.

A company which is not subject to full tax liability to Denmark may be subject to limited tax liability – see item 2.12 below.

2.7 CFCs – Controlled Finance Companies

As from 1 July 2007, the Danish CFC regime for companies was amended substantially in order to bring the Danish rules in line with the principles set out by the European Court of Justice in the Cadbury Schweppes case (C-196/04).

Since July 2007, the CFC regime has been extended to apply not just to foreign companies, but to all subsidiaries meeting a revised CFC test, i.e. irrespective of their tax residency and irrespective of the taxation actually applied to the subsidiaries.

Companies will only be deemed CFCs if they are (i) controlled by a Danish parent, (ii) have financial income (such as interest, dividends, royalties, and capital gains on shares, debts, and financial instruments etc.) constituting more than half of their total income, and (iii) have financial assets constituting more than 10% of their total assets.

A company's financial income and financial assets are calculated on a consolidated basis together with any subsidiaries located in the same jurisdiction.

The total income of a CFC will be included in the taxable income of the Danish parent and relief will be granted for tax payments made by the CFC. Insurance companies, banks and mortgage credit institutes with substantial activities in foreign jurisdictions may apply for exemption from CFC taxation.

The CFC regime also applies to permanent establishments of Danish companies. Therefore, a Danish company will be subject to taxation on any positive CFC income from a permanent establishment in a foreign country, provided that the CFC conditions are met.

The CFC rules do not apply to subsidiaries that are included under international joint taxation or which are investment companies.

2.8 Anti-Avoidance Legislation

A change of domicile by a Danish company or taxable legal entity will usually be considered as liquidation with the same taxation effect as a sale. A company may move its activities abroad, but to ensure that there is no tax avoidance, such a transfer is considered a disposal.

2.9 Rules on Thin Capitalisation

The Danish Corporation Tax Act has included rules on thin capitalisation since 1998. However, on 1 June 2007 the Danish Parliament adopted a bill which introduced two new rules limiting the deductibility of interest. These new rules – an interest ceiling and an EBIT (Earnings Before Interest and Taxes) model – supplement the thin capitalisation rules.

The new "interest ceiling" and "EBIT model" took effect from 1 July 2007. Three tests now have to be made in order to determine the actual deductibility of net financing costs:

The thin capitalization test

The "interest ceiling" test

The "EBIT model" test.

2.9.1 Thin Capitalisation

The Danish rules on thin capitalisation apply to Danish legal entities which have debt (debt is defined as the aggregate of controlled debt and third party debt) to Danish or foreign legal entities that either control the Danish entity, are being controlled by the Danish entity, or are under joint "control" together with the Danish entity ("controlled debt").

Control exists if a company or an individual (or a group of affiliated companies or related persons) owns, directly or indirectly, more than 50% of the shares in the relevant company or may exercise more than 50% of the votes in the relevant company. The definition of "control" also includes:

• Entities and associations that are fiscally transparent under Danish tax law but are governed by the rules of corporate law, a corporate agreement or articles of association.

• Entities with joint management.
• Entities that have entered into an agreement regarding the exercise of a joint controlling influence.

Controlled debt also includes third party loans which have been guaranteed by the controlling shareholder(s) or its affiliates. If the debt-equity ratio exceeds 4:1, the interest on the excess part of the controlled debt is not deductible if the controlled debt exceeds DKK 10 million. However, the limitation only applies to that part of the debt which should have been equity in order to avoid the limitation.

As an exception to the main rule, interest can be deducted if the taxpayer is able to show that a similar loan could be obtained from an independent third party without any security from the controlling shareholder(s) or its affiliates.

If the total debt is comprised of controlled debt and debt to an independent third party, the limitation on deductibility will only apply for the interest on the controlled debt.

The interest that cannot be deducted is not requalified as dividends. Therefore, no withholding tax applies for such payments.

2.9.2 Interest Ceiling

According to the "interest ceiling", net financing costs exceeding a ceiling calculated as a standard rate of return (variable, at present 5% p.a.) on the tax value of the company's assets and exceeding an annual minimum relief of DKK 21,300,000 (adjusted annually) are not deductible. Accordingly, interest (and other financing costs) below the annual minimum relief of DKK 21,300,000 (2010) are always deductible, unless limited by the existing thin capitalisation rules. Net financing costs are defined as the negative sum of interest income and interest expenses, deductible and taxable loan commissions, gains and losses on debt claims and financial contracts (with certain exceptions), the interest element of financial leasing and taxable dividends, taxable capital gains and offset losses on shares. Net financing costs include interest irrespective of whether the interest relates to intra-group debt or external debt.

The tax value of the company's assets basically consists of the depreciated value of depreciable assets, the cost base of other assets and carry-forward losses, excluding the value of cash, debt claims, financial contracts and shares.

However, only 20% of the acquisition price for shares in directly owned subsidiaries not subject to joint taxation is included in the tax value, subject to complex adjustment mechanisms. As all Danish group companies are automatically taxed jointly, this provision will in practice only be relevant in relation to foreign subsidiaries. As part of the substantial 2009 tax reform, this 20% rule will be gradually phased out between 2010 and 2017, thereby effectively rendering financing expenses related to acquisitions of shares in foreign companies as non-deductible.

Calculation of the tax value is made on a consolidated basis for companies that are taxed jointly. Assets contributed by a foreign affiliated company are only included in the tax value if the assets remain in the company for at least two years, unless international joint taxation is opted for.

2.9.3 EBIT Model

From 1 July 2007, an "EBIT model" has been introduced, 14 15 maximising the deductibility of net financing costs to 80% of EBIT (Earnings Before Interest and Taxes). However, deduction of net financing costs not exceeding DKK 21,300,000 (2010) is always allowed.

2.10 Hybrid Instruments

If a company owes debt to a person or company abroad and the tax laws in the foreign country class the debt as equity, the debt will also be treated as equity for the purposes of Danish taxation. Therefore, the interest cannot be deducted by the Danish company. Instead, any interest and capital gains relating to the "debt" will be treated as dividends for Danish tax purposes.

2.11 Liquidation

A Danish company is liable to pay Danish tax until it is finally dissolved. The fact that a Danish company goes into liquidation does not affect the company's tax liability.

When the company disposes of its assets under liquidation, all gains are taxable according to the general rules described above. Further, any shareholders who are liable to pay tax in Denmark will be liable for taxation on any capital gains on the shares or any distributions of surplus remaining on winding up.

As a general rule, remaining surplus on winding up that is distributed in the calendar year where the liquidating company is finally dissolved is taxed as capital gains (see item 2.2.2.1), whereas surplus distributed prior to this year is treated as dividends (see item 2.2.5).

However, surplus left on winding up that is distributed in the calendar year where the liquidating company is finally dissolved will be taxed as dividends, if (i) the recipient company owns at least 10% of the share capital of the liquidating company but is not a resident of the EU/EEA, the Faroe Islands, Greenland or a Danish treaty partner, or (ii) the recipient company owns less than 10% of the share capital in the liquidating company (but is affiliated with the liquidating company).

On the other hand, surplus left on winding up that is distributed prior to the calendar year in which the liquidating company is finally dissolved is taxed according to the rules for capital gains on shares for shareholders that carry on trade by the sale and purchase of shares and which would otherwise be entitled to receive tax-exempt dividends.

2.12 Limited Tax Liability and Withholding Taxes

Foreign companies that are not subject to full tax liability in Denmark may be subject to limited tax liability with respect to income and gains deriving from certain sources in Denmark. Limited tax liability for companies applies to, for example, income from permanent establishments, immovable property situated in Denmark, and dividends, royalties and interest distributed from sources in Denmark and certain capital gains on debt claims.

2.12.1 Withholding Taxes

2.12.1.1 Dividends

As a general rule, dividends distributed from a Danish company to a foreign shareholder are subject to 27% withholding tax. However, the withholding tax is reduced or removed completely by way of an exemption for dividends paid to a foreign parent company where the parent company holds "subsidiary shares" or "group shares" (as defined above in item 2.2.21) and if the foreign parent company is resident in another EU country, or in a country with which Denmark has entered into a tax treaty according to which Denmark must grant relief or reduction from withholding tax.

Most of the tax treaties concluded between Denmark and other countries state that the Danish withholding tax on dividends is reduced.

Further, the withholding tax does not include dividends received by participants in parent companies named in the list of companies under Article 2(1)(a) of the Parent-Subsidiary Directive, and which are considered transparent entities in respect of Danish taxation. It is a condition that the company participant is not domiciled in Denmark.

In the opinion of the Danish Tax and Customs Administration, the benefit of the exemption may be denied with respect to dividends distributed by Danish companies to intermediary holding companies if in reality the dividends flow through that entity to another entity resident in a "tax haven" jurisdiction. In recent years, the Danish Tax and Customs Administration has adopted an approach that actively scrutinizes such beneficial ownership issues. They are preparing a number of cases on this issue.

2.12.1.2 Royalties

Withholding tax is also applicable to royalties. A 25% tax is withheld from royalty payments deriving from Denmark in relation to patents, trademarks, technical know-how etc. This withholding tax may be reduced under a tax treaty. The withholding tax does not apply if the royalties are attributable to the receiver's permanent Danish establishment, or the receiver is subject to the protection of the EU Interest/Royalty Directive (Directive 2003/49/ EEA), which prohibits EU member states from retaining withholding tax on royalty and interest payments between affiliated companies within the EU.

A company is considered affiliated if another company owns at least 25% of the share capital or if a third company owns at least 25% of the two companies during a period of at least one year during which the payment is made.

2.12.1.3 Interest

As a general rule, a 25% withholding tax applies to interest payments made between controlled companies. However, due to a number of exceptions, the withholding tax generally only applies to interest payments to affiliated companies in low tax countries. Control exists if a company or an individual (or a group of affiliated companies or related persons) owns, directly or indirectly, more than 50% of the shares in the relevant company or may exercise more than 50% of the votes in the relevant company.

For this purpose, entities with joint management are treated as affiliated companies, and regard is also taken of entities and associations which are fiscally transparent under Danish tax law but which are governed by the rules of corporate law, a corporate agreement or articles of association.

Further, the definition of "control" has been extended so that shares and voting rights held by other participants must be taken into account in the determination of whether an entity holds a controlling interest in another entity, provided that the entity in question has entered into an agreement regarding the exercise of a "joint controlling influence" with such other participants.

The withholding tax does not apply if, alternatively:

The limited tax liability on interest is finally fulfilled by the retention of a 25% withholding tax.

2.12.1.4 Capital gains on claims

In order to prevent taxable interest payments being converted into tax-exempt capital gains, there is also a limited tax liability on capital gains. The limited tax liability on capital gains includes – with the same exemptions that apply to interest – capital gains on claims which are to be paid in at a predetermined premium when the creditor is a foreign, affiliated legal person.

The limited tax liability on capital gains is finally fulfilled by the retention of a 25% withholding tax.

2.12.2 Permanent Esta blishments

In Denmark, a permanent establishment is determined in accordance with the principle set out in Article 5 of the OECD Model Treaty. In general, a permanent establishment is a fixed place of business through which the business of an enterprise is wholly or partly carried on. This may include, for example, a place of management, a branch, an office, a factory, a workshop, a place of extraction of natural resources, or a building site, construction or installation project.

Generally, activities such as direct sales from a foreign seller to a Danish purchaser, purchases of stocks of goods and merchandise, collection of information, advertising, public relations and research and development do not constitute a permanent establishment. If an employee or other representative is authorised to conclude contracts in the name of the foreign entity, the foreign entity may be regarded as having a permanent establishment in Denmark. However, selling through a Danish independent agent or distributor does not create a permanent establishment in Denmark provided that such a person is acting in the ordinary course of his business.

A foreign company which has a permanent establishment in Denmark will generally also be required to register a Danish branch with the Danish Commerce and Companies Agency. A foreign company is permitted to establish a branch office in Denmark if the company has been lawfully set up in its home country and the establishment of the branch office is permitted in accordance with an international agreement, if the Danish Commerce and Companies Agency finds that the country in question also allows Danish companies to set up branches, or if the Danish Commerce and Companies Agency grants an individual permission. Corporations resident in the EU, the EEA, the U.S., Switzerland, Georgia and South Korea are free to establish branch offices in Denmark.

A branch office may not commence its activities in Denmark before it has applied for registration. Transactions between the branch office and its parent entity must be conducted at arm's length in order to avoid transfer pricing adjustments.

If a company has a permanent establishment in Denmark, it is subject to limited tax liability with respect to any income/gains and costs/losses derived from the permanent establishment.

The taxable income is generally determined as if the company was subject to full tax liability and the taxable income is taxed at the corporate tax rate applied to Danish companies (currently 25%). However, certain exceptions apply for branch offices. For example, interest on loans paid by the branch office to the foreign head office is not deductible and profits made by the branch office may be remitted to its head office free of withholding tax.

In principle, no restrictions exist for remittance of profits from a branch office to its head office, while dividends from a subsidiary may be restricted by the Danish Companies Act (Selskabsloven). If activities in Denmark are expected to generate losses for a period of time, it may be advantageous for a foreign company to conduct its operations through a Danish branch office because branch office losses can be used to offset profits outside of Denmark. Capital gains may arise when a branch office is transformed into a Danish subsidiary. However, according to special rules on "contribution of assets", such a transfer can be structured so that no tax is levied on the branch, provided that the subsidiary takes over the tax liability. Tax losses carried forward by a branch office cannot be transferred to a subsidiary. Therefore, a transfer to a Danish subsidiary should not take place before the branch office has been profitable for a period and any losses have been absorbed.

2.12.3 Requalification of Non-Transparent Companies

Under the Danish Corporation Tax Act, a legal entity will be considered to be transparent for tax purposes when, under the rules of another country which is a member of the EU or the EEA or which has entered into a double taxation treaty with Denmark, it is treated as a transparent unit for taxation purposes so that the income of the Danish company is included in the assessment of affiliated legal persons' taxable income in that country.

The purpose of the provision is to prevent the situation where a Danish company is treated as a transparent entity in the home country of the parent company, for example according to the U.S. "check-the-box" rules, so that interest payments are tax-exempt in the U.S. but may be deducted by the Danish company.

The allowance limitation also applies in relation to payments to other foreign group companies which are not liable to pay tax in Denmark but which are considered to be transparent for the purposes of tax in the parent company's home country, unless these companies are resident in an EU or EEA country or a country which has entered into a double taxation treaty with Denmark. Companies which are deemed to be transparent are always considered to have a permanent establishment in Denmark.

2.12.4 Requalification of Transparent Entities

According to the Danish Ministry of Taxation, the different tax qualification of Danish branches and certain other entities – e.g. limited partnerships – in Denmark and abroad has made it possible to avoid incurring tax liability on certain types of income.

In order to counter this, a special anti-avoidance rule has been introduced. The rule operates so that fiscally transparent entities (e.g. limited partnerships) and branches of non-Danish entities may be qualified as separate tax entities and taxed in the same way as public limited companies, where direct owners holding more than 50% of the capital or the voting rights are domiciled in one or more foreign states, in the Faroe Islands or in Greenland, if the state(s) where such owners are domiciled:

This rule applies where the transparent entity or branch is required to be registered in Denmark, has its registered office in Denmark under the articles of association, or is effectively managed in Denmark.

Non-Danish entities and branches that are deemed transparent in their home jurisdictions are disregarded in a determination of who the direct owners are.

An exemption exists for venture funds investing in small and medium-sized companies.levied on the individual partners in proportion to their shares in the partnership.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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