December 1997

Denmark tightens transfer pricing legislation

On 14 November 1997 the Danish Minister of Taxation proposed a bill on increased documentation requirements in connection with cross-border intra-group trade.

The bill affects multinational enterprises doing business in Denmark. The existing Danish transfer pricing legislation is more than ten years old and is perceived as following behind developments in the global economy, international trading and world-wide fiscal practice.

The bill entails that

1. As from 1998 companies must provide information as to the nature and extent of intra-group transactions in their tax returns.
2. As from 1999 companies must prepare and keep written documentation for use in the tax authorities' assessment of whet-her prices and terms have been fixed on an arm's length basis, i.e. on normal business terms.
3. The taxable income concerning intra-group transactions can be changed according to an estimate if the tax authorities consider the written documentation insufficient or disagree with the pricing.

The proposed legislation will be administered on the basis of OECD's guidelines.

In our opinion, the bill will imply an increased burden of proof for the tax payers in transfer pricing matters in Denmark. An adoption of the bill will thus result in a noticeable tightening of the transfer pricing practice, not only with regard to documentation requirements, but also regarding the burden of proof. The bill does not contain precise information as to documentation requirements and consequently the establishment of transfer pricing documentation will to a great extent be based on companies´ own decision as to the level of documentation they consider necessary for an assessment of pricing of intra-group transactions.

Aksel H. Olsen

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Finn Madsen

Stock options

The Danish Parliament has changed the rules for taxation of stock options with effect from 1998. Options granted to employees on or after 1 January 1998 will be taxed when the option is exercised.

Options granted before 1998

Options granted before 1998 are taxed according to several different sets of rules. However, as a main rule taxation took place when the option was granted.

Options granted in 1998

The taxation of options granted on or after 1 January 1998 are under certain conditions postponed until the option is exercised. In order for the new rules to apply, the option must be

  • a right to purchase already issued shares,
  • granted to employees or to members of the board of directors or others for personal services rendered to the company,
  • granted by the direct employer.

Options granted by the employer's parent company are not subject to the new rules. If the conditions are not met, the option will be taxed when the option was granted.

Tax consequences

The fair market value of the option when exercised is taxed as personal income, i.e. at rates up to 58% in 1998. The value of the option is the difference between the market value of the shares at the time of exercise and the exercise price.

The company has no withholding requirements or reporting obligations. If the cost of the option is borne by a Danish company or a permanent establishment of a foreign company, the value of the option is deductible for the company when the option is exercised.

Departure tax

Individuals who have been residents in Denmark for seven years out of the past ten years are subject to departure tax even if the option is not exercised at the time of departure.

Future amendments

The Minister of Taxation has announced that he intends to amend the new rules with effect from 1 January 1998. The taxation of options granted by a parent company will be postponed until the option is exercised. Further the value of the option will be subject to an 8% AM-contribution when the option is exercised.

Esben Christensen

Additional Contribution to the ATP in 1998

As a means to moderate the economic activity in Denmark, an extra 1% contribution to the ATP pension scheme is payable in 1998. The additional contribution is imposed on employees and self-employed individuals as well as on receivers of welfare. The contribution does not apply for employees who do not pay social contributions in Denmark, i.e. people who are subject to the provisions of EU regulation 1408/71 or a bilateral totalisation agreement. For employees and selfemployed individuals, the contribution is 1% of the amount on which the AM-contribution is based less contributions to employer administrated pension schemes. The contribution is levied on income for work performed in 1998.

The contributions are added to each contributor's individual account administered by the ATP, separately from the ordinary ATP accounts. The amount is distributed to the contributors when they reach the age of 67 or to the estate if death occurs before that age. When the amount is paid out, it will be added to the taxable income unless the amount is less than DKK 1,100 in which case a 40% tax applies. The additional contribution is deductible before calculating income tax. The total contribution to be withheld by the employer in 1998 is 9%.

Birgitte Sejrsdal Christensen

Taxation of benefits in kind

Prior to the end of the 1996/97 session of the Danish Parliament in June 1997, a bill regarding taxation of certain benefits in kind was passed with retroactive effect from 1 January 1997.

Tax-exempt computer

According to the new rules, the private use of a computer provided to an employee by an employer for business purposes is not taxable for the employee. This also applies to any additional equipment, e.g. modem, software, scanner, etc.

However, a separate telephone line for data transmission between the employee's home and the employer is taxable as free telephone if the employer pays the costs. According to the general rules the taxable value equals the employer's expense, with a maximum of DKK 3,000 per year. The effect of this taxation can be reduced because the employee can reduce the taxable value with the expenses for a private telephone. In case the employer already provides free telephone for the employee, the DKK 3,000 covers all telephones provided and therefore also the line for data transmission.

Lower limit of taxation of certain minor benefits

The bill adopted also introduced a lower limit of taxation of some minor benefits in kind. If the total annual value of the minor benefits in question is less than DKK 3,900, they are tax exempt. If the total value exceeds DKK 3,900, all minor benefits in question are taxed. The benefits in question must all be provided for business purposes and not only for private use. If the benefits are provided as remuneration, they are taxable as such.

Extra equipment in company cars

Generally, a company car is delivered with some extra equipment, e.g. upgraded radio, CD player, winter tyres, air-conditioning, engine pre-heater or sunroof. Equipment such as this should only be included in the basis for calculating the taxable value if the equipment is subject to registration duty.

As a rule of thumb, extra equipment is not subject to registration duty if it is delivered in accordance with an agreement between the seller and the purchaser and the equipment is separately specified in the contract. Furthermore, the equipment may not be mounted by the factory nor by the import company.

The above is a clarification of the rules which have been in force since 1 January 1994 and corrections can be made retroactively. Claims for 1994 must be filed with the authorities before year-end 1997.

Finn Madsen

Inter-company dividends

As a result of the Denkavit case on the interpretation of the EU Parent-Subsidiary Directive, the Danish rules on taxation of inter-company dividends have been modified. Under the existing rules, dividends received by a parent company with an ownership interest of at least 25% are tax exempt, providded that the shares of the EU subsidiary have been held either for the entire income year of the parent company in which the dividend is received or for a continuous period of at least two years up to the time when the dividend is received.

Under the new rules implementing the provisions of the directive, dividends are tax exempt, provided that a minimum holding period of 12 months is subsequently observed.

Aksel H. Olsen

Tax rates 1998

Expatriate concession, 25% tax scheme

The minimum monthly salary in cash after deduction of pension contributions withheld by the employer and Danish social security including the additional ATP contribution of 1% is DKK 46,200.

State Tax Rates

Basic tax (payable on the aggregate taxable income)            8%
Medium tax (personal income plus/less investment income
exceeding DKK 139,000)                                         6%
High tax (personal income plus positive investment income in 
excess of DKK 21,400 (married couples DKK 42,800)), applies 
to income exceeding DKK 251,200                               15%
The tax-free allowance of DKK 139,000 which applies to the 
medium tax is transferable between spouses.  
Local  average tax rate                                       31%
The aggregate percentage of the state taxes and the local 
tax cannot exceed 58%.  

Personal allowances - DKK 31,400

AM-contribution (labour market contribution)                   8%

ATP (annual rate)                 DKK
- Employee                        894.30
- Employer                      1,788.60
- Additional employee contribution for 1998 - 1%

Company Car

For cars purchased within three years of the first registration, the tax value in 1998 equals 23% of the original purchase price of the new car. In the third year after the year of registration, the tax basis is reduced to 75%. For cars registered more than three years prior to the time of purchase, the tax base is the employer's purchase price, including any expenses for improvements paid by the employer. A minimum price of DKK 150,000 and a maximum of DKK 400,000 always applies.

Free telephone, expected rate - DKK 3,000

Free Accommodation

The taxable amount is set at fixed rates depending on the size and location, with a maximum of approx. DKK 44,000 plus utilities. For managing directors, etc. the market value will form the basis of taxation.

Mia Bilde Fogh

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.

For further information contact Thor Klief on Tel: +45 38 18 3000 or Fax: +45 38 18 3045 or visit the KPMG Denmark website at Click Contact Link