RECENT DEVELOPMENTS IN INTERNATIONAL TAXATION DENMARK INTERNATIONAL BAR ASSOCIATION, 2014, TOKYO, JAPAN

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1 Attorney Niclas Holst Sonne Philip Heymans Allé 7 DK-2900 Hellerup Tel Fax Our ref RECENT DEVELOPMENTS IN INTERNATIONAL TAXATION DENMARK INTERNATIONAL BAR ASSOCIATION, 2014, TOKYO, JAPAN Horten Advokatpartnerselskab CVR

2 1. RECENT HIGHLIGHTS Page Decrease of the Danish corporate income tax rate from 25 to 22 per cent On 27 June 2013 a bill was passed in the Danish parliament reducing the corporate income tax rate from 25 per cent to 22 per cent. The tax rate will be lowered gradually with a corporate tax rate of 24.5 per cent in 2014, 23.5 per cent in 2015 and 22 per cent in 2016 and subsequent income years. The decrease of the corporate income tax rate will not apply to businesses engaged in the hydrocarbon industry which will remain subject to a tax rate of 25 per cent. 1.2 New anti-avoidance rules on expatriation of Danish investments New anti-avoidance rules were adopted on 25 March 2014 with effect as of 20 November 2013 (the date of introduction of the bill) whereby capital gains on shares under certain conditions are deemed to be dividend payments. The new rules are an addition to existing anti-avoidance rules adopted back in The existing rules were introduced to ensure that it is not possible to convert a taxable dividend payment into a tax-exempt capital gain on shares by way of an exchange of shares against consideration partly in cash. Denmark generally imposes withholding tax on out-bound dividend payments whereas no withholding tax applies on capital gains. Due to this, repatriation of a Danish investment may be preferred to be in the form of a capital gain on shares rather than as a dividend payment. An exchange of shares against consideration partly in cash can ensure capital gains taxation even in a situation where the proceeds from a sale of a Danish target company is trapped within a Danish holding company. The existing anti-avoidance rules (adopted back in 2012) only apply to intra-group exchange of shares. The new rules widen the scope of the anti-avoidance rules to include any exchange of shares when the exchange of shares is made against shares in a new company or a company with no or limited existing business activities. The consequence in case a transaction becomes subject to the new anti-avoidance rules is that the part of the consideration which is received in cash (or a cash equivalent) is being treated as a dividend payment instead of a capital gain. The new anti-avoidance rules may in certain situations result in a pure commercially motivated disposal of shares becoming subject to Danish dividend tax. For instance this may be the case where a Danish company or group is sold to a (non-affiliated) buyer and the SPA contains an obligation for the sellers to re-invest a part of the proceeds received in the buyer group.

3 The new anti-avoidance rules must be carefully taken into consideration when structuring the disposal or acquisition of Danish companies in a situation where the existing shareholders (or a part of the shareholders) are subject to Danish tax on dividend payments. Page Tax loss register On 27 May 2014 a bill was passed in the Danish parliament introducing a new tax loss register. All companies subject to Danish tax liability will be obligated to report existing carry forward tax losses to the online register once the development of the register has been completed. It is expected that the register will be ready for reporting of existing carry forward tax losses as part of filing of the tax return for the income year The filing deadline is not yet known. If existing carry forward tax losses are not reported to the new tax register before the filing deadline, such carry forward tax losses will be forfeited. It is therefore imperative to ensure that the filing deadline is observed. 1.4 Permanent establishment in Denmark for foreign investors in a Danish partnership On 20 December 2013 a binding ruling was published (SKM SR) relating to whether non-danish investors in a Danish transparent partnership (a Danish "kommanditselskab") were considered to have a permanent establishment in Denmark as a result of their investment in the Danish partnership. The Danish partnership invested in non-danish real estate based investment. The Danish Tax Assessment Council was of the opinion that each of the foreign investors had a permanent establishment in Denmark. The primary reason for this was that the general meetings of the Danish partnership were held at the offices of the Danish management company whereby the partnership was deemed to have a fixed place of business in Denmark through which the business of the partnership was carried on. Moreover, the Danish Tax Assessment Council emphasised that the entire investment project was set up, managed and controlled by the same group of individuals through the management company and the general partner. Before the ruling was published there was a general and firm understanding that the setting up in Denmark of a capital fund structure would not create a permanent establishment in Denmark of the foreign investors. This was among other things based on the fact that, previously, a number of binding rulings on similar structures have been obtained each of which concluding that no Danish permanent establishment was created for non-danish investors. The ruling has consequently been criticised as being both inconsistent with existing published decisions and harmful for the Danish investment environment. It will despite the new decision still be possible to structure investments through Danish investment vehicles such as a Danish partnership. It should in this connection be emphasized that profits on unlisted shares in

4 Danish companies are generally tax exempt and that, consequently, a tax presence in Denmark should in general not trigger any tax in Denmark to the extent the fund assets consist of unlisted shareholdings in Danish companies. But new Danish fund structures should be set up with renewed focus on avoiding adverse Danish tax consequences for the foreign investors. Page Update on beneficial ownership cases in Denmark In the so-called Net-App case (SKM LSR) published on 13 January 2012, it was established by the Danish National Tax Tribunal that the Parent/Subsidiary Directive does not contain anti-avoidance provisions and that, consequently, the use of a beneficial owner approach presupposes that either a general anti-avoidance principle or a specific beneficial ownership requirement has been adopted in the national tax regime. Due to this, Danish withholding tax cannot be imposed on outbound dividends merely on the ground that an EU parent company is not deemed the beneficial owner of the dividend payment. This is due to the fact that Danish tax law does not include a general anti-avoidance provision and that no beneficial ownership requirement exists in current tax legislation. Despite the ruling in the Net-App case issued by the Danish National Tax Tribunal (which is the highest ranking Danish administrative tax organ) the Danish tax authorities continue to uphold their position that a beneficial owner approach may be used even where dividends have been distributed to an EU-based recipient subject to the Parent/Subsidiary Directive (an "EU-blocker"). This appears from a number of recent binding rulings which are referred to below. In a binding ruling published on 26 June 2013 (SKM SR) the Danish tax authorities concluded that a beneficial owner approach may be applied (resulting in a possible Danish dividend withholding tax) where a claim is distributed to the effect that the claim ceases to exist by way of confusion. In its reasoning the Danish Tax Assessment Council stated that they are of the opinion that the Parent/Subsidiary Directive contains a beneficial ownership requirement (despite the ruling issued by the Danish tax administrative court in the Net-App case). In two other binding rulings (SKM SR and SKM SR) both published on 5 March 2014, the Danish Tax Assessment Council specifically states that Danish law contains a beneficial ownership requirement and that neither the Parent/Subsidiary Directive nor the applicable double tax treaties prevent Danish withholding tax on dividends. The binding rulings related to distribution of liquidation proceeds. In both binding rulings the conclusion was that no Danish withholding tax should be imposed as the immediate recipients were considered beneficial owners. The statements from the tax authorities were thus not contested. The Net-App case has been appealed by the Tax Ministry to the Danish High Courts where it is currently pending. Meanwhile we anticipate that the Danish tax authorities will continue to argue that the

5 Parent/Subsidiary Directive does indeed contain a beneficial ownership requirement. Page 5 2. FUTURE DEVELOPMENTS 2.1 Hiring-out of labour With effect as of 20 September 2012 the Danish rules on hiring-out of labour were amended. The main consequence of being considered hiringout of labour is that the Danish "employer" is liable to withhold 30 per cent Danish tax calculated based on the part of the contract payments that relate to salaries. According to the rules existing until September 2012, Danish tax liability applied to income from employment when the services provided related to work performed in Denmark, i.e. salary payments to a foreign employee hired-out by its foreign employer to a Danish company to perform work in Denmark. Work performed according to an independent contract under which the foreign contractor had the authority of instruction and supervision of the work was not considered hiring-out of labour. The new rules introduced in 2012 amended the Danish definition of hiring-out of labour to apply to income from employment when the services provided related to work performed in Denmark and those services constituted an "integral part" of the business activities of the Danish company. This has in fact led to a very wide definition of hiringout of labour in Denmark making it nearly impossible to avoid the hiringout of labour rules when outsourcing work on independent contracts if the activities of the Danish company were within the same area of business as the independent contractor. On 10 March 2014 a draft governmental notice was presented according to which the Danish tax authorities propose to relax the interpretation of the Danish hiring-out of labour rules. According to the proposal, it should as a main rule not lead to hiring-out of labour for tax purposes simply because the Danish company and the foreign contractor work within the same area of business. The interpretation of the new Danish hiring-out of labour rules is thereby expected to return to a state more similar to the interpretation under the former rules existing before September If enacted, the new interpretation will have retroactive effect for all agreements on hiring-out of labour entered into or amended as of 20 September Denmark, June 2014 Niclas Holst Sonne Attorney-at-law, Head-of-tax