On 1 June 2007 the Danish Parliament enacted Bill L 213 on CFC taxation and private equity funds. The main features of the enacted Bill include:

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1 On 1 June 2007 the Danish Parliament enacted Bill L 213 on CFC taxation and private equity funds. The main features of the enacted Bill include: Reduction of the corporation tax rate to 25% Capped deductibility of net financing costs New taxation of share income Reduction of depreciation rate for buildings and certain long-life assets New CFC rules for companies and individuals Changed taxation of dividend and liquidation distribution 1. Reduction of the corporation tax rate to 25% The tax rate for corporations has been reduced to 25% as for income year 2007 and later income years. This also applies for funds and foundations subject to the Danish Taxation of Foundations Act and for personally run enterprises subject to the Danish Business Taxation Scheme. The rates for dividend, interest and royalty tax remain unchanged. As a rule of thumb therefore, the rate for dividend remains 28% and 30% for royalty and interest subject to the limitations provided by legislation, including Denmark s double tax treaties with other countries. Companies which - under the old joint taxation rules - have used foreign losses which have not been recaptured will not be able to take advantage of the reduced corporation tax rate in relation to the recapture. This is because under the transition rules existing recapture balances were converted to tax value according to the rate applicable at the time, ie. 28%. 2. Capped deductibility of net financing expenses Up until now, the only rules limiting the right to deduct interest were the rules on thin capitalisation. According to these rules, the deductibility of interest expenses on controlled debt is capped if the company s total debt-to-equity ratio exceeds 4:1. According to the new rules, the deductibility of net financing expenses exceeding a basis amount of DKK 20 mill. will be additionally capped under both the rules on the variable deduction ceiling (the 6.5% rule) as well as the so-called EBIT-rule. Any limitation to deductions will be in the following order of priority: 1. interest costs on controlled debt will be capped according to the thin capitalisation rules hitherto 2. net financing expenses exceeding the variable deduction cap will be limited 3. net financing expenses will be reduced according to the EBIT rule * connectedthinking

2 2.1 Deductible basic amount At maximum, the interest cap can reduce the deductible net financing expenses of the year to a basic amount of DKK 20 mill. The basic amount will be regulated each year along with other tax rates and other limits. Jointly-taxed companies have only one basic amount in total. 2.2 Cap due to deduction ceiling Contrary to the thin capitalisation rules, the deduction cap will apply to interest on all debt - including debt to independent lenders and not just to expenses related to controlled debt. According to the interest ceiling, the net financing interest deduction can at maximum constitute an amount which corresponds to a standard rate of 6.5% of the company s assets calculated according to special rules. Jointly taxed companies must calculate one total basis of calculation for the deduction cap. Net financing expenses exceeding the variable deduction cap are not deductible. However, capital losses on claims, debt and financial contracts subject to the Danish Gains on Securities and Foreign Currency Act, including foreign exchange losses which are limited due to the deduction cap are deductible against similar gains recognised in the following 3 income years. Such losses in jointly-taxed companies are carried forward jointly by the administration company. This rule will only be relevant if there is no limitation of the deduction in the following years. The standard interest is regulated once annually according to the calculation method used when determining the minimum interest Calculation of net financing expenses Net financing expenses are defined as the negative sum of: 1. Taxable interest income and deductible interest expenses excepting interest income from trade debtors and interest expenses to trade creditors. 2. One time costs and similar, including establishment fees which are deductible under s 8(3) of the Danish Tax Assessment Act and corresponding taxable commission. 3. Taxable capital gains and losses on claims, debt and financial contracts subject to the Danish Gains on Securities and Foreign Currency Act, with the exception of a. Losses on claims received as business payment. Gains on claims on a debtor which is a group-related company are not included in the calculation of the debtor company s net financing expenses. b. Gains and losses on loans where the taxpayer is a bank or similar business engaged in the purchase and sale of claims or financial trading and the debtor is not group-related with the creditor. c. Gains/losses on forward contracts, etc. to hedge operating income and expenses not only in the company itself but also in jointly-taxed companies. Only forward contracts, etc. related to operating income and expenses are covered by this exemption. Contracts related to noncurrent assets are not exempted. Gains and losses on forward contracts, etc. must also be included in the calculation of net financing expenses if: PwC 2

3 I. the company trades in financial contracts or conducts a financing business or II. the contracting party is a group-related company or III. the contracts are forward exchange contracts, etc. and are subject to s 30 of the Danish Gains on Securities and Foreign Currency Act 4. In a financial leasing transaction the lessee must include a calculated financing expenses and the lessor a calculated financing income. Leasing payments for leased assets according to the international accounting rules are subject to this rule. 5. Taxable gains and deducted losses on the disposal of shares and taxable dividend and consideration under section 16 B of the Danish Tax Assessment Act. As indicated above, certain currency contracts are not exempted and losses on such contracts will be subject to the new rules on carry forward of currency losses for offset against currency gains for a period of 3 years. The same applies to contracts related to non-current assets. The interest in relation to financial leasing is fixed in the same way as under the international accounting rules. If it is not possible to reliably calculate the interest, the lessee s marginal borrowing rate is used, ie. the interest which the lessee should pay over a similar period and with similar security in order to borrow enough funds to purchase the asset. A leasing contract will generally be classified as financial if: Ownership is transferred to the lessee on expiry of the contract. The lessee has a right to purchase and there is an expectation that the right is so advantageous that it is very likely to be exercised. The current value of the minimum leasing payments on entering the contract is greater than or essentially corresponds to the current value of the leased asset. The leasing contract runs for most of the economic lifetime of the asset. The leasing contract covers a specific asset which only the lessee can use unless major changes are made to it. Financing expenses and income included due to CFC taxation or due to recapture of previous foreign losses are not included in the calculation of the net financing expenses Calculation of assets The interest cap is calculated on the basis of the tax value of the company s assets at the expiry of the income year. The written down value of the deductible assets for tax purposes is included. The tax value after the depreciation of the year is used in the calculation which means that the possibility for interest deduction is limited when tax depreciations are made. For non-depreciable assets the acquisition price plus any costs of improvements to the asset are included. PwC 3

4 Losses carry forward under s 15 of the Tax Assessment Act calculated at the income year-end are included in the total assets and thereby increase the cap for interest deductions. The losses are calculated before the deduction limitation under the deduction cap and the EBIT-rule. Financially leased assets are included by the lessee as a tax asset. The lessor does not have to include the leased assets in its total assets. The tax net value of contract work in progress is included in the assets. The same applies for the tax value of inventories and trade receivables. However, the value of work in progress, stocks and trade receivables are only included if the value exceeds the value of accounts payable related to the purchase of goods and services. Tonnage-taxed assets are not included in the calculation of the total assets constituting the basis for the deduction of net financing expenses. Shares, etc., subject to the Capital Gains Tax Act are generally not included in the calculation; see however below. The same applies to claims and financial contracts subject to the Gains on Securities and Foreign Currency Act and premium bonds. Liquid assets are not included in the assets. Shares in jointly-taxed companies are not included as the assets in these companies are already included in the calculation of the ceiling. Companies in a joint taxation - both national and international - must calculate the group s net financing expenses and the tax value of the total assets in such a way that shareholdings in jointly taxed companies and interest payments, etc. between them are eliminated. Shares contributed by foreign group-related entities are only included in the assets if the assets remain in the Danish company for at least two years. On the other hand, such assets are always included if the group has elected international joint taxation. If the group has elected international joint taxation, the foreign companies net financing expenses and assets are also included in the joint calculation Shares included Even though shares are generally not included, shares in non-jointly taxed group-related foreign companies can be included to a limited extent. In principle, 20% of the total acquisition price of the company s directly owned shares in group-related companies which do not participate in a Danish joint taxation is included. However, in relation to the deduction cap the acquisition price of the shares must be reduced by the value of the purchased foreign company s shares in Danish companies and permanent establishments and property in Denmark. As a rule of thumb, acquisition sums for shares acquired from other group-related companies are not included; see however below. PwC 4

5 Capital increases in an existing group-related foreign company are generally not included in the total assets. However, it is possible to include a capital increase in a foreign company which was carried out so that the company could acquire a subsidiary from an independent third party. It must be possible to document that the capital increase was carried in order to make the acquisition. The amount which can be included as a result of the capital increase is reduced in the same way as in relation to purchase through a Danish company by the value of the foreign company s shares in Danish companies, permanent establishments and property in Denmark. The maximum amount which can be added to the assets is the contributed amount multiplied by five. The amount which can be included in the total assets is calculated by recording a balance of the total purchase prices for the shares. The balance is calculated on a regular basis so that the share acquisitions are only included proportionately for the period of the income year which the acquisition influences the balance. The balance is reduced by: 1. The fair value on the acquisition date of shares in Danish companies, permanent establishment and property in Denmark which are directly or indirectly owned by the foreign group company. This is because under mandatory national joint taxation the tax value of these assets is already included in the calculation of the assets on which the interest deduction is based. It should be noted that the fair value reduces the balance and not the accounting value. 2. Cash and cash equivalents in the purchased company will also reduce the balance. The term cash and cash equivalents is defined in the same way as in the so-called money tank rule in s 34 of the Danish Capital Gains Tax Act. This means that the balance is reduced by the fair value on the acquisition date of the company s rental property, cash, securities, etc. 3. The balance is also reduced by the value of subsequent direct or indirect acquisitions of shares in Danish companies, permanent establishments and property in Denmark. This is to prevent the same assets being included twice in the total assets when calculating the interest cap. 4. The selling price of shares in the directly owned company also reduces the balance. This provision also covers indirect sales, eg. sale of the Danish company which owns the shares in the foreign group company. These selling prices must be corrected in the same manner as acquisition costs for the value of direct or indirectly owned shares in Danish companies, permanent establishments and property in Denmark. Termination of the group relationship is equated with a sale. This means that the balance must be reduced in the same manner as if all shares were sold if the group relationship with the foreign group company is terminated. The selling prices for indirectly owned shares must also be deduced from the balance. For example, if a Danish company uses a capital increase in its foreign subsidiary to acquire a foreign sub-subsidiary which it subsequently sells, the selling price of the shares in the sub-subsidiary will reduce the balance. PwC 5

6 However, the sale of shares in a directly or indirectly owned foreign company will not reduce the balance if the sale is to a jointly-taxed company or permanent establishment. It is also possible to sell shares further down in the group without reducing the balance provided the direct and indirect ownership interests which the jointly-taxed companies and permanent establishments have in the purchasing company are at least as large as in the selling company. 5. Sale of the company s activity reduces the balance in the same way as a sale of shares, the difference being that the balance is also reduced if a foreign activity is sold to a jointly-taxed company or permanent establishment. This is because directly owned foreign activities / permanent establishments are not included in the balance. 6. Distributions from the directly owned company to jointly-taxed companies also reduce the balance. However, the balance does not have to be reduced in the case where a selling price which has already reduced the balance is redistributed or in the case of cash and cash equivalents which have already been reduced from the acquisition price at the date of acquisition. 7. The balance is reduced by distributions of dividend preference shares in the directly owned company or companies in which this company already directly or indirectly owns shares to grouprelated companies which are not part of the joint taxation. However, the reduction is only allowed if the jointly taxed companies and permanent establishments have a smaller ownership interest in the dividend-receiving company than in the distributing company. 8. The balance is reduced by contributions from the directly owned company or companies in which this company directly or indirectly owns shares to a company which is part of the joint taxation. Contributions to group-related companies which are not part of the joint taxation also reduce the acquisition sum if the jointly-taxed companies or permanent establishments have a lesser direct or indirect ownership interest in the receiving company than in the contributing company. A joint balance is kept by the administration company for jointly-taxed companies. If the balance is negative due to distributions or sale of shares, the group can not include acquisition sum for the new acquisitions until the balance becomes positive as the result of an acquisition. On the other hand, a negative balance does not reduce the value of the other assets included in the calculation of the interest cap Distribution of any deductibility cap among jointly-taxed companies Any limitation of deductibility for jointly taxed companies is distributed in proportion to the amount by which each individual company s net financing costs exceed the standard interest on the company s assets. However, the value of shares in foreign subsidiaries is not included in the cost allocation base. 2.3 Cap according to the EBIT rule According to the EBIT rule the taxable income before net financing costs can at maximum be reduced by 80% by deduction of net financing costs after any limitation of deductibility due to the deduction cap. Net financing costs are defined in the same way as described above. PwC 6

7 The limitation of deductibility according to the EBIT rule can at maximum reduce the deductible net financing costs of the year to the basic amount of DKK 20 mill. If the taxable amount before net financing costs is negative, the deductible net financing costs cannot exceed the basic amount. Contrary to what applies in relation to the limitation of deductibility due to the deduction cap, net financing costs which are limited under the EBIT rule can be carried forward for offset in later years. Amounts carried forward due to this rule are included in the calculation of any limitation of deductibility in following years. The net financing costs of jointly-taxed companies limited under the EBIT rule are carried forward in the administration company. Under joint taxation the taxable amount and net financing costs are calculated as one for the jointly-taxed companies, etc. Any limitation of deductibility under the EBIT rule reduces each company s net financing costs proportionally. 2.4 Commencement date The rules on interest deduction caps will apply to interest related to the period from 1 July 2007 onwards. As the basic amount of DKK 20 mill. is related to a 12-month period, the basic amount must be adjusted in proportion to the part of a full 12-month period constituted by each company s accounting period from 1 July 2007 until the expiry of the financial year. If the company s financial year follows the calendar year, the basic amount for 2007 will therefore be DKK 10 mill., equalling 6/12 of DKK 20 mill. On the other hand, if the company s financial year runs from 1/ to 30/ , the basic amount is 3/12 of DKK 20 mill., ie. DKK 5 mill. 3. Taxation of share income In order to adjust the taxation of the shareholder as a result of the lower corporation tax rate, a new progression limit has been introduced whereby share income exceeding DKK 100,000 for single persons and DKK 200,000 for spouses (2007) is taxed by 45 %. In future the taxation of share income will be according to the following scale: Share income Tax rate Total taxation shareholder and company From DKK 0 to DKK 45,500 / 91,000 28% 46% Exceeding DKK 45,500 / 91,000 up to and 43% 57.25% including DKK100,000 / 200,000 Exceeding DKK 100,000 / 200,000 45% 58.75% The new rules on taxation of share income will apply for income year 2008 and onwards. A transition scheme has been introduced to prevent income earned and taxed at the level of the company before the reduction of the corporation tax to 25% from being taxed at the level of the shareholders at the PwC 7

8 increased rate of 45%. According to the transition scheme shareholders who were subject to full tax liability to Denmark on 1 January 2007 must calculate a special transitional balance as soon as the progression limit is exceeded for 43% taxation. The transitional balance amounts to the difference between the acquisition sum for the shares which the shareholder owned on 1 January 2007 and the value of these shares at the end of income year 2006, ie. the calendar year 2006 or the non-calendar accounting period which replaces the calendar year It is possible that due to transition rules in connection with previous amendments to the Danish Capital Gains Tax Act the shares in question have a higher acquisition value for tax purposes than the actual acquisition price. In this case, the higher value must be applied in the calculation of the transitional balance. Only positive balances are included in the transitional balance. In other words, the transitional balance represents the increase in the value of the shares before the reduction of the corporation tax rate became effective. With regard to listed shares the differential amount to be included in the balance is calculated by deducting the acquisition price of the shares from the listed market value of the shares as of 1 January For non-listed shares the amount is calculated as the difference between the acquisition price of the shares and the proportion of the company s equity for accounting purposes made up by the shares at the end of the 2006 income year. It is possible for shareholders to achieve a higher transitional balance for the taxation of share income if the company changes accounting policies for income year 2006 or According to the legislative history to the new legislation, shareholders in companies which had already presented their financial statement for accounting year 2006 when the Bill was tabled should not be in a worse position than shareholders in companies which had not presented their financial statements when the bill was submitted and therefore could achieve a higher transitional balance by changing their accounting policies. A shareholder in a company which has presented its financial statement for accounting year 2006 without changing its accounting policies has the possibility to increase its transitional balance if the company changes its accounting policies for income year 2007 so that one or more of the assets in the company s balance at the end of 2006 are written up to a higher value for accounting purposes. It is a condition that the shares in question are not sold during the 2007 accounting year. The balance is reduced by the positive net share income for 2007 and following years. As long as the balance is positive, the share income is not taxed at 45% but at the previous highest share income rate of 43%. PwC 8

9 4. Changed depreciation rates The rate of depreciation for buildings has been reduced to 4% for income year 2008 and later income years. The rate of depreciation for the following assets which must be depreciated on a separate balance has been reduced to 15%: Ships with a gross tonnage of 20 t or more used for business transport of passengers or freight and which are not subject to s 5 B of the Danish Act on Amortisation and Depreciation Aircrafts Rolling stock Drilling rigs, production platforms and other equipment for surveys, exploration, extraction and refinement of oil and gas Fixed plants and machinery for the production of heat and electricity with a capacity of more than 1 MW except windmills Plants used for the extraction of water in public water supply plants Sewage works The reduction of the depreciation rate to 15% will be scaled down as follows: % % % % % The following infrastructure equipment is depreciable by up to 7% as from 2008: Plants for the transport, storage and distribution, etc. of electricity, water, heat, oil, gas and sewage Plants for the transmission of radio, TV and telecommunication Fixed railway material There is no gradual transitional scheme. The new balances for fixed plants and infrastructure equipment do not apply to computer software/hardware which is still treated according to the rules hitherto. Assets which under the rules hitherto could only be depreciated on a declining balance with up to 25% but which can only be depreciated with 15% or 7% in future must be transferred to new balances at the beginning of income year The distribution according to the three balances is made on the basis of the accounting values of the assets at the beginning of Operating equipment which is used exclusively for business purposes is still depreciated with up to 25% on a total balance. Windmills and ships with a gross tonnage of less than 20t are still written off as operating equipment with up to 25% PwC 9

10 5. CFC rules for companies In autumn 2006 the European Court of Justice (ECJ) ruled in the so-called Cadbury Schweppes-case that the UK rules - which are very similar to the Danish rules - were contrary to EU law. As CFC rules are still considered necessary as a protection against relocation of mobile income, the Danish rules have been amended so that a Danish parent company must include income from both Danish and foreign subsidiaries if 1. The parent company controls the subsidiary 2. The subsidiary s CFC income exceeds 50% of the subsidiary s total taxable income and 3. The subsidiary s financial assets on average amount to more than 10% of the subsidiary s total assets in the income year CFC taxation will only be triggered if all three criteria are met. 5.1 Control When assessing whether the parent company has control from a CFC perspective, not only the parent company s own direct and indirect influence through voting rights is included, but also voting rights owned by the parent company s shareholders or parties related to them are included. Voting rights held by owners with whom the parent company has an agreement on control or voting rights held by a transparent entity in which the parent company has ownership interests are also counted. When assessing whether more than 50% of the subsidiary s taxable income consists of CFC income, income from companies which the subsidiary controls is disregarded if these companies are domiciled in the same country as the subsidiary. Instead taxable income in the companies in question is included in proportion to the subsidiary s CFC income based on the subsidiary s direct or indirect shareholding in the companies in question. 5.2 CFC income CFC income is calculated as the sum of: 1. Taxable interest income and deductible interest expenses 2. Taxable gains and deductible losses on claims, debt and financial contracts subject to the Danish Gains on Securities and Foreign Currency Act. Gains and losses on forward contracts, etc. which serve to secure operating income and operating costs are excluded unless the subsidiary trades in the purchase and sale of claims and financial contracts or runs a financing business. 3. Foreign exchange gains and losses 4. Deductible and taxable commission and similar. 5. Taxable dividend and taxable consideration for shares subject to the Capital Gains Tax Act. 6. Taxable gains and deductible losses on the disposal of shares subject to the Capital Gains Tax Act. 7. Payments of all types received for the use of or the right to use a subsidiary s intangible assets, including gains and losses on the disposal of such intangible assets unless the payments are from companies which are not group-related to the subsidiary and the payments are connected to the use of intangible assets produced by the subsidiary s own R&D activity. 8. Taxable incomes from financial leasing, including gains and losses on the disposal of assets which have been used for financial leasing. 9. Taxable incomes related to research, banking, mortgaging and financial business. Under certain PwC 10

11 circumstances the Tax Assessment Committee may accept that income in subsidiaries with licences to carry out research, mortgaging and banking business under public supervision is exempt from CFC tax. Tax deductions related to the realisation of income mentioned in 1-7 above are included in the calculation of the CFC income. 5.3 Asset test Assets are financial if the gain on the asset is included in the calculation of CFC income. The value of the financial assets is based on accounting values, but intangible assets on which gains must be included in the CFC income (see 7 above) are included at market value. Non-interest bearing claims on trade accounts receivable are not included in the calculation of financial assets. Assets with tax-exempt gains are not included in the calculation either. Assets are not included as financial assets in the calculation if the subsidiary has owned the shares for more than 3 years so that a gain is tax-exempt, and the subsidiary fulfils the criteria for tax-exempt receipt of the shares in question. In relation to the asset test it should be noted that the same type of assets can have both tax-exempt and taxable gains which will affect whether or not the asset is categorised as financial. The asset test is made on the basis of an average of the subsidiary s assets for the entire income year in order to prevent changing the subsidiary s status by means of a non-capital contribution of non-financial assets just before the end of the income year. 5.4 Taxation of parent company If the asset test is met and the CFC income is positive, the parent company not only has to include the subsidiary s CFC income, but also the subsidiary s total income. The part of the subsidiary s income corresponding to the parent company s average share of the subsidiary s total share capital in the income period has to be included in the company s statement of income. Only income earned by the subsidiary in the period when the parent company had control is included. The income must be calculated in accordance with the Danish territorial principle, ie. income from the subsidiary s permanent establishments in other countries is not included in the CFC income in some cases. Instead an independent evaluation must be made of whether a subsidiary s permanent establishments by themselves trigger CFC tax liability. The Danish parent company can subsequently apply for credit relief for the Danish or foreign tax which the subsidiary has paid, but credit is only granted for the foreign tax which the subsidiary would have paid if the income had been calculated according to a territorial principle. Tax on income related to the subsidiary s permanent establishment in another country is therefore not included in the calculation of the relief. The subsidiary s losses carry forward and losses transferred from other companies via joint taxation or similar foreign rules which allow a transfer of losses must be included in the parent company s statement of income. PwC 11

12 Shares in investment companies, cf. s 10 of the Danish Capital Gains Tax Act, and shares owned via entities which are taxed according to the rules in s 13 F of the Danish Corporation Tax Act (life insurance companies) will not trigger CFC taxation. The same applies if the group has elected international joint taxation. The new rules will apply for CFC income earned as from 1 July Tax treatment of inward bound dividend According to the rules hitherto a Danish parent company could receive dividend tax-free from both Danish and foreign subsidiaries under certain specific conditions. Subsidiaries are defined as companies in which the parent company owns at least 15% of the capital (10% in 2009). This rule is changed so that tax exemption will only apply to dividend from: Subsidiaries resident in Denmark, in a EU/EEA member state, the Faroe Islands, Greenland or a country with which Denmark has concluded a double tax treaty Subsidiaries participating in international joint taxation under Danish rules Subsidiaries controlled directly or indirectly by the parent company itself If the Danish company owns less than the 15% (10% in 2009)) of the capital qualifying for tax-exempt receipt of dividend, only 66% of the gross dividend is included. With the reduction of the corporate tax dividend from such companies will be taxed at 16.5%. Dividend from companies in which the parent company owns 15% (10%) or more of the capital without having control must be included in total in the Danish company s taxable income if the company is resident outside the EU/EEA in a country with which Denmark does not have a double tax treaty. In cases where the dividend from foreign subsidiaries is nevertheless taxable, it is possible for the parent company to receive credit relief for the underlying corporate tax. The rules will apply to dividend distributions made on 1 July 2007 or later. 7. Withholding tax on interest to abroad Even though the corporation tax rate is reduced, 28% tax must still - as a general rule - be withheld on dividend from a Danish company to a foreign shareholder. Distribution from a Danish company to a Danish company which is not entitled to receive tax-exempt dividend must withhold 16.5%, ie. a rate which reflects the reduction of the corporation tax rate. The rules will apply to dividend distributions made on 1 July 2007 or later. 8. Distribution of liquidation proceeds Under the rules hitherto distributions in the year in which a Danish company was finally dissolved were subject to the rules on capital gains. This meant that a foreign shareholder could receive the distribution exempt of Danish tax as there were no rules on limited tax liability of capital gains. This has now been changed so that distributions made in the year in which a Danish company is finally dissolved must be treated as dividend if the foreign shareholder is a company which is resident in a PwC 12

13 country outside the EU/EEA with which Denmark does not have a double tax treaty and the company owns 15% (10% in 2009) or more of the share capital. If a company - either Danish or foreign - owns less than 15% (10% in 2009) of the share capital but is group related to the dissolving company, any distribution of liquidation proceeds must also be treated as dividend. Influence and subsequently a group relationship may exist by means of an agreement on joint control or joint management. A group relationship will also exist where control is held by a transparent company (for example, a K/S or similar). This means that when distributing liquidation proceeds to minority shareholders, it should be examined whether there is a group relationship which triggers dividend tax. The same applies to a sale-back of shares to the issuing company if the company is in the course of liquidation on the sale-back date. These rules will apply to dividend distributions made on 1 July 2007 or later. 9. CFC taxation of individual shareholders Under certain circumstances, a person (or estate of a deceased person) who is subject to full tax liability may be subject to CFC tax when he/she controls a foreign company. This means that the person s income is increased by the foreign company s CFC income and is taxed at the rate applicable for companies, ie. 25%. The foreign company is deemed to be controlled if the individual shareholder along with related parties own more than 50% of the voting rights or capital. The foreign company is deemed to be a CFC company if more than 50% of its total income consists of CFC income defined in the same manner as for companies. Unlike CFC taxation of companies, the CFC taxation of individuals still depends on how the foreign company is taxed. CFC tax will only be triggered if the foreign company is deemed to be low-taxed - this is the case if the foreign tax is less than ¾ of the corresponding Danish tax (ie. less than 18.75%). Another difference is that CFC taxation of individuals only comprises the foreign company s CFC income. Credit relief for the tax paid by the foreign company is granted proportionate to the total foreign tax. In response to the previously mentioned ECJ judgment in the Cadbury Schweppes case which established that CFC tax is generally considered to be contrary to the right of establishment, new rules have been introduced allowing Danish shareholders the right to apply for exemption from CFC tax on income in foreign companies domiciled in EU/EEA countries. The ECJ judgment stressed that only purely artificial arrangements could be CFC-taxed without being in conflict with the right of establishment. In line with this, individual shareholders can only be exempt from CFC-taxation if: PwC 13

14 the individual shareholder documents that the foreign company is in fact established within the EU/EEA the individual shareholder documents that the company carries out real business related to the CFC income that there is an exchange of information via agreements under double tax treaties, mutual assistance directives, or other agreements on the exchange of information which enable the tax authorities to confirm the individual taxpayer s information. It is clear that in order to be exempt from CFC tax liability the company must have business activities related to the CFC income itself. In other words, it is not enough that the foreign company actually carries out economic activity related to other income, eg. manufacturing business. 10 Reopening of previous tax assessments with CFC tax As the Danish rules hitherto were not in harmony with EU law, companies as well as individual shareholders are now entitled to reopen their tax assessments for income year 1996 and later years in order to reverse any CFC tax on income from a company domiciled in the EU or EEA. In order to reopen tax assessments from previous years the Danish parent company / individual shareholder must document that the foreign company is actually established in the foreign country in question and that it carries out real activities there related to the CFC income. It must also be possible by means of double tax treaties, mutual assistance directives, or other agreements on the exchange of information to verify the Danish company s documentation regarding the CFC income. Finally, the taxpayer must request a reopening within 6 months after the commencement date (1 July 2007) of the new legislation, ie. before the end of the 2007 calendar year. For yderligere information om dette kontakt venligst Deres sædvanlige rådgiver eller: Susanne Nørgaard, telefon , sun@pwc.dk. Lena Engdahl, telefon , led@pwc.dk. Verner Rasmussen, telefon , ver@pwc.dk. Denne publikation udgør ikke og kan ikke erstatte professionel rådgivning. PricewaterhouseCoopers påtager sig intet ansvar for tab nogen måtte lide som følge af handlinger eller undladelser baseret på publikationens indhold, ligesom PricewaterhouseCoopers ikke påtager sig ansvar for indholdsmæssige fejl og mangler PricewaterhouseCoopers. Med forbehold af alle rettigheder. PricewaterhouseCoopers betegner det netværk af virksomheder, der er omfattet af PricewaterhouseCoopers International Limited, hvor hver enkelt virksomhed er en særskilt og uafhængig juridisk enhed. *connectedtedthinking er et varemærke tilhørende PricewaterhouseCoopers LLP. PwC 14