Like most other countries the Danish corporation tax system allows the tax losses of one company to be set off against the profits of other companies within the same group. Such systems are known as "fiscal unity", "group relief" or "tax consolidation". The Danish system is generally known as "joint taxation". The following is a description of the Danish system and the conditions which must be met in order for a group of companies to qualify to use the system.

It should be noted that while the basic joint taxation system as such is fairly straight forward the details are not, and specific advise must be obtained on any planning which is aimed at utilizing the system.

Basic system

The joint taxation system allows profits and losses of companies to be set off against each other so that Danish tax is only charged on the net profit of the group.

A Danish company can elect to be jointly taxed with all or some of its Danish as well as foreign subsidiaries, but cannot be jointly taxed if the parent company is not fully tax liable in Denmark. The option to be jointly taxed with a foreign subsidiary i.e. to set off foreign losses against Danish profits is unique to the Danish corporation tax system.

Technically the companies must be connected as parent-subsidiary and consequently sister companies are only eligible for joint taxation if their mutual parent company is Danish and part of the joint taxation. All companies which are not the immediate parent and subsidiary of each other must be linked by companies which are part of the joint taxation.

General conditions

If the following conditions are met permission for companies to be jointly taxed must be granted upon application:

The accounting periods of the companies must be identical.

The parent company must hold the shares of the subsidiary throughout the accounting period in question. There is some flexibility in situations where the parent, or the subsidiary is set up or wound up during an accounting period or where a dormant company is acquired.

The parent company must hold all of the shares in the subsidiary either directly or through other companies that are part of the jointly taxed group.

Only exceptions are

if the shareholding in a foreign subsidiary is restricted by law and/or where a Danish government body ("Investeringsfonden for Udviklingslandene" or "Investeringsfonden for Ostlandene") holds part of the shares.

if shares are held by employees under an approved share incentive scheme.

There are certain other conditions which in most circumstances will be easily met.

Residency

The parent company which connects the subsidiaries must be resident in Denmark. There is no requirement that the foreign subsidiaries are (also) resident in Denmark and the foreign subsidiaries are in no respect treated as if they were resident in Denmark.

Termination

Companies may leave the joint taxation by electing to do so and notifying the tax authorities. Once a company has left the joint taxation it can never reelect to be jointly taxed with the same companies.

Time limits

Generally application for permission to be jointly taxed must be submitted together with the tax return for the companies. Likewise notification that joint taxation with one or more companies is to cease must be given within the same time limit.

Effect

The basic system requires the taxable income to be calculated for each of the companies under the joint taxation scheme. Each foreign subsidiary's taxable income is calculated according to Danish rules but using the domestic currency of the subsidiary in question. The income is translated into Danish currency using the year end or an average exchange rate.

The taxable results of the individual companies are set off against each other and tax is paid on the net result, if positive. The tax is payable by the parent company but all Danish companies have joint and several liability for the payment. A loss is carried forward in accordance with the general rules i.e. to be set off against profits of any of the jointly taxed companies.

Limitations

The only limitation in setting off the profit of one company against the loss of another is found in cases where a company's loss is fully or partly caused by its net financial expenses. Even in this case the limitation only disallows setting off all or part of the loss against the profit of subsidiaries or other companies in which the loss-making company holds shares directly or through other companies. There are no limitations in setting off a loss "upwards" or "sidewards" within a jointly taxed group.

The calculation of the part of the loss which cannot be set off against the profit of the subsidiaries is quite complicated. In general terms the higher the equity which the parent company has, the less the limitation. In all circumstances the limitation is phased out over a seven-year period from the year of acquisition.

Double taxation

Foreign subsidiaries under the joint taxation scheme are subject to tax in the country in which they are resident. In calculating the Danish tax on the jointly taxed group of companies the "double taxation" will be relieved by giving a credit against the Danish tax for all or part of the foreign taxes paid.

Recapture of losses

Losses generated by a Danish company and utilized by other group companies will never give rise to a recapture of losses. Once such losses are utilized the benefit obtained will never result in adverse effects even in the event of terminating the joint taxation.

If the loss-making company is foreign there will be some recapture of previously utilized losses when the joint taxation with that company is terminated. A recapture will never arise as long as the joint taxation with the company in question is maintained. The recapture has the effect of increasing the parent company's taxable income with an amount equal to the recaptured loss.

The recapture can never exceed the part of the net loss which has actually been utilized by other group companies. Within this upper limit the recapture is determined in the following way:

(i) In the first year after joint taxation with the loss-making company has been terminated, the recaptured amount is equal to the net amount of taxable gains, recaptured depreciations, etc. which would have arisen had the loss-making company remained within the joint taxation and sold all assets and liabilities at fair market value.

(ii) In any year after terminating the joint taxation a (further) recapture arises if the Danish group receives tax free dividends from the (formerly) loss-making company, or realizes a tax free capital gain on disposal of shares in that company.

Even in cases where there is a total recapture of the previously utilized net losses the group has the advantage of deferring the payment of tax.

The future

The joint taxation system has been subject to a major revision recently. Some further adjustments along the way are inevitable, but the basic system as it stands today is unlikely to be changed. Any future adverse changes should not have retroactive effect and in any event a Danish holding company can sell its subsidiaries free of capital gains tax after three years' ownership thus providing an easy exit from Denmark.

This article is intended to provide general information, and no transaction should be undertaken without prior advice on the specific situation.

If you have any further questions, please do not hesitate to contact Tax Director Verner Rasmussen or Senior Tax Manager Niels Villadsen at Coopers & Lybrand Tax Department, Lyngbyvej 16-28, 2100 Copenhagen, Denmark. Tel. + 45 3927 7200 or Fax. + 45 3927 2815, or enter text search "Coopers & Lybrand Denmark" and "Business Monitor".