Material changes in favourable Danish expatriate tax scheme

The favourable tax scheme is changed materially in two ways - one change tightens the rules, and one change makes the scheme more attractive. The changes took effect on 1 January 2011.

With the recent changes in Danish taxation of individuals with effect from 2010, salary income is ordinarily taxed according to a progressive scale at a rate of up to 55.4 % (2011, and including labour market contribution).

With the changes in the special favourable tax scheme for foreign individuals, salary income can optionally be taxed at a marginal taxation rate of 31.9 % (including labour market contribution) for 5 years.

The use of the scheme is subject to certain conditions.

According to the newly implemented strengthening of the rules, if an employee wants to benefit from the scheme, it is a condition that the employee has not been subject to unlimited - or limited - taxation of salary income/earned income etc. within the last 10 years preceding commencement of the employment subject to the favourable tax scheme. Earlier, this period was only 5 years effectively.

Best chef in the world

In April 2010 the Danish Michelin restaurant NOMA was awarded a prize as the best restaurant in the world, and now Denmark also has the best chef in the world.

Danish chef Rasmus Kofoed won the gold medal in the unofficial world championship for chefs, Bocuse d'Or.

The world's best menu comprised 10 dishes consisting, among other things, of organic beetroots, King Bolete mushrooms, poached monkfish, jellied langoustine, and crab with caviar.

Bocuse d'Or is the most sought-after prize for chefs around the world, and chefs practise for the event for months and years.

Withholding tax at source on interest paid to Swedish parent company - beneficial owner

The Danish National Tax Tribunal has made a ruling in a case concerning a Danish company's payment of interest to its Swedish parent company. It was held by the Tax Tribunal that the Swedish company was not the beneficial owner, and therefore the Danish company should have withheld tax at source. The Danish company was liable for payment of the tax. This is the first decision agreeing with the Danish Tax Administration's (SKAT's) opinion that a company is not the beneficial owner.

Generally, no tax must be withheld at source from interest paid to a consolidated company situated in e.g. a EU member state. However, if the interest is paid to a company which is considered not to be the beneficial owner of the interest, it might be necessary to withhold tax at source.

According to the comments to the OECD model tax convention, the assessment of the "beneficial ownership" involves an assessment of whether the formal recipient of the interest only acts as a conduit on behalf of another entity which actually receives the relevant income.

In this specific case, a Danish company had paid interest to its Swedish parent company. The Swedish company then transferred the amounts to its own Swedish parent company, which paid the money onward as interest to a company in Jersey.

New methods in the fight against sheltering the assets of wealthy Danes in tax havens

With data from banks and the Danish Payments System, the Danish Tax Administration (SKAT) has investigated foreign credit cards with an unnatural consumption in Denmark, and so far the "Credit Card Project" has revealed a large volume of unknown assets in tax havens.

As a result of the project, a Danish businessman has been charged with tax evasion amounting to DKK 20,000,000, and the police have now found new ways to ensure that the money required to pay the tax bill will be available once the matter has been decided.

The Danish Public Prosecutor for Serious Economic Crime has been granted permission by the courts to seize the man's holding company, which at the end of the latest financial year held shares in the amount of DKK 50,000,000.

Following that seizure, the businessman cannot sell the shares without the consent of the police.

It is expected by the Public Prosecutor that this procedure will be applied more and more, because many of the persons investigated by the Public Prosecutor have a business in Denmark where it will be possible to seize an ownership interest or shares.

Cross Border Mergers

Two decisions by the Danish National Tax Tribunal have caused a change of Danish Merger Tax Act.

On 22 September 2010 the National Tax Board concluded that a vertical merger between a Danish holding company and a parent company in another EU member state with the latter as the surviving company will be considered a distribution of liquidation proceeds. This implies that the distribution will be taxable in Denmark unless such taxation is waived or reduced under the provisions of Directive 90/435/EEC or a double-taxation treaty.

The decision was later changed by the Danish National Tax Tribunal, which found that there was no basis for finding that the proceeds should qualify as a distribution of liquidation proceeds.

On 16 November 2010, in a similar case, the Danish National Tax Tribunal reached the same result. In this decision the Tribunal also found that there is no basis for qualifying the proceeds received by the surviving company as a distribution of liquidation proceeds. Consequently, no taxation was triggered due to the cross-border merger, since the surviving company only held tax-exempt subsidiary shares in the Danish subsidiary.

This meant that the safeguards - which should prevent dividends from flowing tax-exempt to tax havens - were without any substance. The Danish safeguard rule could be circumvented - rather than by paying dividends - by performing a cross-border merger of a Danish holding company with a parent company in another EU member state. Immediately following the merger, the proceeds may be distributed tax-exempt from the merged company to a company located in a tax haven (provided that there are no rules regarding withholding tax in the country of the surviving company).

Due to the decisions by the Danish National Tax Tribunal a Danish bill was introduced to create clarity in this area.

Taxation of liquidation proceeds - Individuals Resident Abroad

Liquidation proceeds to be paid to individuals may qualify as a dividend payment according to an enacted bill.

Individuals resident abroad and receiving gains from shares in a Danish company are not liable to pay tax to Denmark on such gains, whereas dividend may be subject to Danish withholding tax.

As of today, liquidation proceeds received by individuals and paid in the calendar year of the final dissolution of the relevant company are always taxed as gains on shares (i.e. not taxable to Denmark). However, according to the enacted bill, such liquidation proceeds may qualify as a dividend payment if the individual is domiciled outside the EU/EEA and has a controlling interest in the company liquidated.

Directors' fees could not be invoiced through a Swedish company

The Danish tax authorities take a very restrictive position on the invoicing of directors' fees through consultancy firms, etc. and not as personal income belonging personally to the directors. This is also applicable to foreign residents who are directors in Danish companies, etc. The Danish Tax Assessment Council recently made a decision maintaining the restrictive position in respect of a Swedish resident who was director in a number of Danish companies.

Background

Under Danish company law, a directorship is a personal appointment - a right and a duty - of a certain individual. Thus, only natural persons may be appointed directors - or managers, etc. For the same reason, limited-liability companies, etc. cannot be appointed directors, etc.

Against that background, the Danish tax authorities have over the years been extremely reluctant to recognise, with tax effect, that the directors' fees could be invoiced through an enterprise or a company operated by the director.

Historically, only directors' fees to lawyers and, on very rare occasions, other types of consultancy fees have been recognised as being invoiceable through an enterprise or a company.

In all other circumstances the directors' fees are considered personal income for the directors - irrespective of any other agreement between the director and the company in that respect.

Where the director is a foreign resident it is furthermore important to bear in mind that the directors' fees are separately taxable to Denmark irrespective of the country of residence of the director and irrespective of the physical place of performance of the director's duties

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.