Following a European Court of Justice judgment holding that the present Danish exit tax rules for companies are incompatible with the freedom of establishment in the EU/EEA, a bill has been presented amending the rules. The bill maintains the existing Danish rules, but provides for deferral of the payment of exit taxes. The new rules will apply to income year 2013 and onwards. Taxpayers having suffered exit taxation in income year 2008 and onwards may elect the new rules retroactively.
Danish rules contrary to EU law
Under current Danish tax law, any transfer of assets internally within a company, e.g. to a permanent establishment (PE) outside Denmark to the effect that the assets are no longer subject to Danish tax, is regarded as a sale and is taxed as if the assets had been sold in the year of transfer. A transfer of assets between a company's different establishments within Denmark is not taxed.
In its judgment of 18 July 2013 (case C-261/11) the European Court of Justice (ECJ) held that the Danish rules are contrary to EU law, cf. Article 49 TFEU on the freedom of establishment, reaffirming its position in e.g. National Grid Indus (case C-371/10).
According to the ECJ, Denmark is allowed to tax capital gains attributable to the period of time when the assets were subject to Danish tax jurisdiction and to fix the amount of tax at the time of the transfer. However, the immediate recovery of tax on unrealised capital gains on assets transferred is disproportionate. This applies irrespective of whether the assets are actually realised after the transfer or not.
Deferral of payment of exit taxes added to Danish rules
The proposal maintains the existing Danish rules, but adds to them an option for deferral of the payment of exit taxes arising at:
- Transfer of assets and liabilities from a Danish resident company to a PE in the EU/EEA.
- Transfer of assets and liabilities from a Danish PE to the head office of a company resident in the EU/EEA.
- Transfer of assets and liabilities from a Danish PE to another PE in the EU/EEA.
- Migration of a Danish resident company to another country in the EU/EEA.
- Transfer of the corporate seat of a SE company or a SCE company.
No bank guarantee or other security is required, but election to defer payment of exit tax means that an "exit tax balance" must be established, equalling the amount of the deferred exit tax. Penalty interest at the higher of 3 % per annum and the Danish National Bank's discount rate plus 1 applies to the balance.
The exit tax balance must be settled by annual instalments being the higher of:
- 1/7 of the original exit tax balance, and
- The applicable Danish corporate tax rate of any actual or deemed income from the exit assets.
Accordingly, deferred exit taxes will have to be paid in full within a maximum of seven years.
A company having suffered exit taxation in 2008-2012 on transfers, etc. comprised by the new rules may apply the new rules retroactively. Applications for retroactive effect must be submitted to the Danish tax authority no later than 30 June 2014.
Retroactive application requires that the company
- still owns the exit assets/liabilities, and
- that the exit assets/liabilities have not been transferred out of the EU/EEA.
The retroactive deferral is available for the exit tax originally determined less payments that would have applied had the new rules been in force for the historical years. Any resulting tax refund is made without interest.
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.