FOCUS SETTING UP IN DENMARK

FOCUS SETTING UP IN DENMARK SEPTEMBER 2008

CONTENTS INTRODUCTION TO THE DANISH LEGAL SYSTEM 1 COMPANY FORMATION 2 Introduction to company formation in Denmark 2 Formation of a Danish company 3 Company documents 3 Financial obligations 4 Management 5 Overview 6 TAX LAW 8 Tax law in general 8 Corporate income tax 8 Outbound dividends 10 Personal income tax 11 Taxes on capital and real estate 12 Value added tax 13 Oil and gas taxation 13 Transfer pricing 14 Filing of tax returns 14 CONTACT 16

I N T R O D U C T I O N T O T H E D A N I S H L E G A L S Y S T E M The Danish legal system is based on a modified civil code. One particular feature of Danish law is that there are no civil codes, as for instance in France and Germany, but that the civil law rules are found in specific legislation or are established by practice. Because Denmark is a civil law country, traditional features of the common law system such as trusts do not exist in Denmark. SETTING UP IN DENMARK 1

C o m pa n y f o r m at i o n Elements required for the formation of a Danish company: Introduction to company formation in Denmark In Denmark, the formation of both private companies (ApS type companies) and public companies (A/S type companies) is primarily regulated by the Danish Private Companies Act (lov om anpartsselskaber) and the Danish Public Companies Act (lov om aktieselskaber), respectively. These acts outline the formation requirements, the rights, and the obligations of the company (be it a public or private company). While the following information focuses on the Danish ApS and A/S type companies, foreign companies domiciled in any EU member state may also conduct business in Denmark through a branch. Non-EU companies may also utilise the branch form where an international agreement provides for this, or where a permit is granted by the Ministry of Economic and Business Affairs. The choice as to which company form to utilise (be it an ApS or an A/S or, alternatively, a European Company (SE) or branch) lies entirely with the promoters of the company. The increased need for stakeholder protection in public companies means that the requirements for public companies are generally more stringent than those for private companies. The following pages seek to provide our clients with a greater understanding of the legal requirements associated with both the Danish ApS and A/S; giving the client greater insight and therefore more command over the strategic planning and decision-making process involved in creating a Danish business entity. 2 SETTING UP IN DENMARK

Formation of a Danish company The basic requirements for the formation of the ApS and the A/S are outlined in Part 2 of the Danish Private Companies Act and Danish Public Companies Act, respectively. Following the decision to form a company, one or more promoters will initiate the formation process. In contrast to many other jurisdictions, the formation of a company in Denmark does not require notarisation, legalisation, or separate governmental approval. Not only is the incorporation process relatively simple, it can also be swiftly executed. Through the use of online incorporation the incorporation process can take less than one day. However, if the promoter is not a Danish natural person or a legal entity with registered office in Denmark, incorporation cannot be completed online but must instead be completed by submission of an application form to the Danish Commerce and Companies Agency (the DCCA ). This might take a couple of weeks, depending on the workload of the DCCA. There are fewer formalities involved in the formation of an ApS than in the formation of an A/S. The promoter(s) of the ApS need only prepare and sign the articles of association and memorandum of association, have the share capital fully paid up and then deliver the aforesaid documentation to the DCCA. In contrast, the formation of an A/S requires the promoter(s) to convene a general meeting at which the resolution to form the company is passed (at least two-thirds of the share capital must be represented at this meeting). The board of directors and auditors must be appointed, the company documents must be prepared, the share capital must be paid up, and the relevant documentation provided to the authorities. Registration Both the ApS and A/S must file for registration of the newly formed company with the DCCA. The time limit for this registration differs between the ApS and A/S. Given the liberty of the ApS to elect either a 1 or 2-tier board system (see Management ), whichever body is elected to exercise supreme managerial control must apply for registration within eight weeks of signing the memorandum of association. With a protracted time limit, the A/S s board of directors must deliver the particulars of the company to the authorities no later than six months from the signing of the memorandum of association. Naming Private companies must use anpartsselskab (private company) or the abbreviated form ApS in their title. Likewise, public companies must use aktieselskab (public company) or the abbreviated form A/S in their title. This naming requirement is strictly enforced for both ApS and A/S companies. A number of additional naming rules apply to both the ApS and A/S. Company documents In order to form either an ApS or an A/S, both the articles of association and a memorandum of association must be produced. Combined, these documents outline the form, organisation and rules upon which the company is based. While additional company documents are required by Danish law (and will typically be required by the client to protect the business), the articles of association and memorandum of association are paramount. Memorandum of association The promoter(s) of the company be that an ApS or an A/S must sign the memorandum of association prior to its submission to the DCCA. An ApS s memorandum of association must outline the identity and addresses of the promoters, members of the management board, and the company s auditor. It must also include provisions regarding the allotment of shares, share issue price, and the formation costs associated with establishing the company. SETTING UP IN DENMARK 3

The A/S s memorandum of association similarly requires details on the promoters, the share issue price, and the formation costs associated with establishing the company. Additionally, the memorandum of association must outline the: share subscription details (including the subscription period and cut-off date for payment of the subscription), time frames and standards for the first general meeting, formation costs, and decisions related to specific issues (including those related to in-kind contributions and the valuation thereof). Articles of association The articles of association essentially outline how the company shall be organised and managed, how and by whom decisions shall be made, and the rights and obligations of all involved parties. The articles of association for both the ApS and A/S must at minimum specify: the name of the company, the local authority in Denmark in which the company is to have its registered office (head office), the objects of the company, the amount of the share capital, shareholder voting rights, and the company s financial year. For an ApS, the articles of association must also include provisions about the management of the company and auditor appointment. Due to the potential for a high membership rate in the A/S, its articles of association must be more detailed than those for the ApS. Therefore, the articles of association of an A/S must contain details on the nominal share value, the number of board members and auditors, notices to convene general meetings and the business to be transacted at annual general meetings. Financial obligations Capital requirements The ApS must have a minimum subscribed capital of DKK 125,000 (approx. EUR 16,500). The A/S requires a minimum subscribed capital of DKK 500,000 (approx. EUR 68,000). This capital must be fully paid up in cash or by way of non-cash contributions. However, the financial value of the non-cash contribution must be capable of objective assessment. Dividends In both the A/S and the ApS, dividends may be distributed ordinarily, i.e. as approved in the annual report, or extraordinarily, i.e. based on audited interim accounts. In both the A/S and the ApS, dividends may only be distributed from current profits (as approved in the annual report), profits from previous years, or eligible reserves. The distribution of dividends in the A/S is further limited: A/S dividends must not exceed an objectively reasonable amount, given the company s financial positions (as represented in the financial statements and annual report or interim financial statements, as the case may be). Ordinary dividend distributions must be approved by the general meeting. Extraordinary dividend distributions may be approved by the board of directors if so authorised by the general meeting. Accounting and auditing requirements Both the A/S and ApS must, at the close of each financial year, prepare financial statements which are audited (as a general rule) and filed within five months. The financial statements of both the A/S and the ApS are subject to publicity requirements. 4 SETTING UP IN DENMARK

Management The rules related to a company s management will differ depending on whether it is a private company (ApS) or a public company (A/S). To appreciate the difference between the management of a private company and a public company, a distinction must be made between the 1-tier and 2-tier board systems. The 1-tier system (widespread in common law jurisdictions) places full managerial control in a single body. In contrast, the 2-tier system (predominantly found in Continental Europe) separates the day-to-day management of the business (which is controlled by the managerial body) from the policy and operational decisions (which are made by the board of directors). The ApS is able to elect how managerial control is to be exercised and where that supreme managerial control is to lie. They may opt to use either the 1-tier or 2-tier system. This choice of management system lies with the promoter(s). In contrast, the A/S company must utilise the 2-tier system. The management board is headed by the managing director who answers directly to the board of directors. It is this managing director who supervises the day-to-day management; while, as above, the board of directors has ultimate control. The management board of the A/S company is appointed by the board of directors it consists of between 1-3 members. Further, A/S law limits the extent to which members of the management board may also act as members of the board of directors. No restrictions as to nationality or place of residence of the managers apply. Board of directors The board of directors is, in most instances, the company s supreme managerial authority. The members of the board of directors collectively act as the company s agent, and together determine the company s policies and their implementation. SETTING UP IN DENMARK 5

In the ApS, the board of directors comprises at least one board member who is elected by the promoter(s). The powers of individual board members and the collective powers of the board of directors will typically be specified in the articles of association. In the A/S, the board of directors is elected at the first general meeting and must comprise at least three members. The rights, obligations, and the powers of the board of directors will be specified in the articles of association as will the terms of appointment. In regards to remuneration, the members are entitled to a fixed remuneration and/or emoluments. This remuneration is subject to requirements of reasonableness, gauged by factors such as the duties of the office and the company s financial position. No restrictions as to nationality or place of residence of the directors apply. General meeting Although ApS and A/S laws specify default provisions regarding the general meeting, it is the company s articles of association which definitively establish how the general meetings are to be conducted. The general meeting is the forum through which shareholders exercise their rights. In both ApS and A/S companies at least one general meeting must be held every year. This meeting must be conducted no later than five months after the end of each financial year. In the ApS, however, the requirement to conduct a general meeting can be circumvented if the articles of association provide an alternative forum for shareholder decision-making. Where the general meeting mechanism is used, the meeting is convened by the company s supreme managerial body. It is at this general meeting that proposed resolutions are presented to shareholders. In the A/S, the general meeting is compulsory, and it is the board of directors which is responsible for convening the meeting. Prior to a general meeting, notice of and the agenda for such meeting must be provided to all shareholders. The agenda must include the presentation of the financial statements, the auditors report and annual report. The business of the general meeting is presided over by the chairman. In both the ApS and the A/S, normal resolutions presented at the general meeting must be passed by a simple majority of votes and where a proposed resolution amends the articles of association, its adoption requires a two-thirds majority. Overview The basic rules and requirements imposed on Danish A/S and ApS companies are summarised below: For both ApS and A/S companies minutes of the general meeting must be prepared; and these minutes must be made available for shareholder inspection. 6 SETTING UP IN DENMARK

A/S ApS Minimum capital DKK 500,000 (approx. EUR 68,000). DKK 125,000 (approx. EUR 16,500). May be paid in cash or by way of non-cash contributions. Company capital must be fully paid up. May be paid in cash or by way of non-cash contributions. Company capital must be fully paid up. Formation Formed by one or more promoters. Formed by one or more promoters. Registration Naming Memorandum of Association & Articles of Association Company Management Board of Directors General Meeting Financial Statements / Auditing Dividends Danish promoter: Incorporation takes less than one day and can be completed online. Non-Danish promoter: Incorporation cannot be completed online and may take a couple of weeks. Incorporation of an A/S must be registered with the DCCA. Incorporation requires neither notarisation, legalisation, nor separate governmental approval. Public companies must use aktieselskab (public company) or the abbreviated form A/S in their title. Promoters must prepare and sign a memorandum of association (which includes draft articles of association). Composed of board of directors and management board (a hybrid 1-tier and 2-tier system). Day-to-day management undertaken by managing director. At least three members, the majority of whom are elected at the general meeting. Board members are not required to reside in Denmark. Employee representation on the board of directors can be required if the company has 35 or more employees. At least one every year (to be held within five months of each financial year). Financial statements must be filed within five months following the close of the financial year. Financial statements are, as a general rule, subject to both audit and publicity requirements. Dividend distributions may only be made from approved profits or eligible reserves. Both ordinary and extraordinary dividends may be distributed. Ordinary dividend distributions must be approved by the general meeting. Extraordinary dividend distributions may be approved by the board of directors if so authorised by the general meeting. Danish promoter: Incorporation takes less than one day and can be completed online. Non-Danish promoter: Incorporation cannot be completed online and may take a couple of weeks. Incorporation of an ApS must be registered with the DCCA. Incorporation requires neither notarisation, legalisation, nor separate governmental approval. Private companies must use anpartsselskab (private company) or the abbreviated form ApS in their title. Promoters must prepare and sign a memorandum of association (which includes draft articles of association). Composed of either a management board or a board of directors or both (may be either a 1 or 2-tier system). Day-to-day management undertaken by managing director. At least one member. Board members are not required to reside in Denmark. Employee representation on the board of directors can be required if the company has 35 or more employees. At least one every year (to be held within five months of each financial year). Financial statements must be filed within five months following the close of the financial year. Financial statements are, as a general rule, subject to both audit and publicity requirements. Dividend distributions may only be made from approved profits or eligible reserves. Both ordinary and extraordinary dividends may be distributed. Ordinary dividend distributions must be approved by the general meeting. Extraordinary dividend distributions may be approved by the board of directors if so authorised by the general meeting. SETTING UP IN DENMARK

Ta x l a w Tax law in general The Danish personal income tax rate is one of the highest in the world. Thus, the marginal personal tax rate is approximately 63%, which includes state tax (low, middle and top tier tax), municipality tax, church tax and a third tax (formerly a social security tax). The corporate income tax rate is 25%. Corporate income tax The corporate income tax system distinguishes between resident and non-resident entities. Resident entities are subject to taxation according to a territorial principle. This means that all income deriving from Denmark is subject to Danish taxation. Conversely, income from permanent establishments and properties located in foreign jurisdictions is as a principal rule not subject to Danish taxation. Non-resident entities are subject to tax only on Danish source income from listed sources. Taxable income comprises gross income less the costs of managing, securing and maintaining it. The taxable income is determined on the basis of the profit or loss shown by the company s statutory financial statements, which amount is then adjusted for such items as exempt income, disallowable expenditure and losses brought forward. Group consolidation All resident group entities and Danish branches of non-resident companies are subject to mandatory tax consolidation (local tax consolidation). The regime also allows foreign group entities in tax consolidation groups (cross-border tax consolidation). While cross-border tax consolidation is optional, it entails an all in principle, which means that all foreign group entities are included in the Danish tax consolidation group. Local tax consolidation Local tax consolidation is mandatory. It applies to all resident entities and Danish branches of non-resident group entities. Danish entities, i.e. resident entities and Danish branches of non-resident entities, are group entities if at any time during the income year they have been part of the same group. A group is deemed to exist where a company: 1 has the majority of the voting rights in another company; or 2 is a shareholder of another company and has the right to appoint or dismiss a majority of the members of that company s management; or 3 is a shareholder of another company and is entitled to exercise control over that company s operational and financial management on the basis of the articles of association or of an agreement with that other company; or 4 is a shareholder of another company and controls the majority of the voting rights in another company on the basis of a shareholders agreement; or 5 is a shareholder of another company and exercises control over that company s operational and financial management. As appears, focus is on the votes and influence rather than on the percentage of ownership interest. The rules on the local tax consolidation regime permit some exceptions to the rule that all resident group entities are subject to local tax consolidation. The taxable income of a member of the consolidation group is included in the consolidated income irrespective of the percentage of ownership, i.e. the entire taxable income is included even where the parent company s ownership interest is less than 100%. 8 SETTING UP IN DENMARK

All members of a consolidation group must have the same income year as the administration company. Cross-border tax consolidation The cross-border tax consolidation is optional and, if used, all foreign group entities will be included in the Danish tax consolidation group. The principle is not limited to foreign subsidiaries, but applies to all foreign group entities, including foreign parent companies and sister companies. Foreign entities are group entities if they fall under the definition of group set out in the local tax consolidation rules. The consolidated income is determined by calculating the taxable income separately for each member of the consolidation group and then pooling the taxable results. However, before the pooling, the taxable results of the members are adjusted by offsetting each member s losses carried forward (if any) against the member s taxable result. Losses for the current tax year of a member are transferred proportionally to the profit-making members. Losses that may not be set off against income of profitmaking members are allocated proportionally to the loss-making members to be set off against future profits of these members. Losses of a member incurred before the inclusion in a local tax consolidation group may be set off only against such member s own future income. A member of the tax consolidation group must be appointed administration company. If the ultimate parent company of the tax consolidation group is a resident company, this company will be appointed administration company. If there is no ultimate resident parent company but several resident sister companies, one of such companies will be appointed administration company. The administration company is responsible for the payment of all taxes levied on the consolidated income. The other members of the consolidation group are, however, required to pay their share of the taxes to the administration company. The members of the tax consolidation group are only liable for the share of taxes that is attributable to their share of the consolidated income. In addition, once a member has paid its share of the taxes to the administration company, its liability is transferred to the administration company. The objective of the all in principle is to prevent resident entities from establishing cross-border tax consolidation groups with their loss-making foreign subsidiaries while leaving out their profit-making foreign subsidiaries from the tax consolidation group. The decision to form a cross-border tax consolidation group is binding for a period of 10 years. If the group is dissolved during the 10-year period, recapture rules apply. The consolidated income is determined in accordance with the principles that apply to local tax consolidation. The same rules also apply to the appointment of an administration company, liability for tax claims, etc. with some exceptions. CFC taxation The Danish controlled foreign companies (CFC) tax regime has been in existence since 1995. Danish CFC taxation applies in the form of a mandatory joint taxation of a Danish company ( DanishCo ) holding a qualifying interest, cf. below, in a foreign or local entity ( SubCo ). In this context, mandatory joint taxation means that the SubCo s net income, if positive, will be included in the taxable income of the DanishCo. If the SubCo is not wholly owned by the DanishCo, the DanishCo will only have to include a proportionate part of the SubCo s income corresponding to the DanishCo s ownership share in the SubCo. SETTING UP IN DENMARK

CFC conditions In general, CFC taxation applies if the following three conditions are met: 1 DanishCo controls the SubCo, which generally means that the DanishCo holds more than 50% of the voting rights in the SubCo (the CFC Control Test ); 2 the CFC-Income of the SubCo exceeds 50% of the aggregate taxable income of the SubCo (the CFC Income Test ); and 3 the financial assets of the SubCo constitute more than 10% of the total assets of SubCo (the Financial Assets Test ). Interest deduction limitations The Danish interest deduction limitations consist of the Danish thin capitalisation rules as well as the newly introduced asset and EBIT limitation tests. Thin capitalisation As a general rule, interest paid by a Danish company is tax deductible. The deductibility of interest and capital losses on debt owed to a related legal entity ( Controlled Debt ) may, however, be restricted under the Danish thin capitalisation regime. The thin capitalisation regime applies to entities which are subject to (i) full Danish tax liability (Danish resident companies) or (ii) limited Danish tax liability (due to a permanent establishment). In the following, both types of entities are referred to as the Danish Debtor. Thin capitalisation restrictions will apply if all of the following four conditions are met: 1 The Danish Debtor has Controlled Debt; and 2 the Controlled Debt exceeds a de minimis threshold of DKK 10 million; and 3 the Danish Debtor s debt-to-equity ratio exceeds 4:1 at the end of the tax year; and 4 the Danish Debtor cannot prove that similar debt could be created with an unrelated party. Other restrictions on interest deductions Recently, a complicated set of tax rules was adopted which severely reduces interest deductions. Under the new rules, interest deductions are subject to two additional limitations, an asset limitation and an EBIT limitation. Under the asset limitation, net financing expenses will be limited to an amount corresponding to 7.0% (2008) of certain assets. Under the EBIT limitation, net financing expenses cannot exceed 80% of the EBIT. The existing thin capitalisation limitations with a 4:1 debt/equity ratio will continue to exist. In contrast to the thin capitalisation rules, the new limitations also affect debt owed to unrelated parties. Outbound dividends Outbound dividends from a Danish company ( DanishCo ) to a foreign parent company ( ParentCo ) will be exempt from Danish withholding tax if both of the following two conditions are met: 1 ParentCo holds at least 15% of the shares (10% as of 2009) of DanishCo for a continuous period of at least one year, and the dividends are declared within such holding period; and 2 ParentCo qualifies for an elimination or reduction of the Danish withholding tax by virtue of the EU Parent Subsidiary Directive (includes the EEA member states Norway, Iceland and Liechtenstein) or a tax treaty with the state in which ParentCo is resident. If both conditions are not met, a 28 or 15% withholding tax will be levied in Denmark (15% if ParentCo is resident in the state which has a tax treaty or other international agreement with Denmark regarding mutual administrative assistance in tax matters. The 15% tax rate will only apply if ParentCo owns less than 10% of the share capital in DanishCo. If ParentCo is resident outside the EU, the ParentCo and the group companies must in the aggregate own less than 10% of the share capital in DanishCo). The classification of the foreign parent as a corporate entity is made to apply Danish law on a case-by-case basis with no regard to the foreign classification. The significant criteria are that by law or constitution (i) the company is carrying on business for profit, (ii) the company has a fixed 10 SETTING UP IN DENMARK

share capital, (iii) none of the owners are personally liable for the obligations of the corporation and (iv) that the profit of the corporation is appropriated to the owners based on their participation in the share capital. Personal income tax An individual may be subject to either full Danish tax liability or limited tax liability, which will be explained in more detail below. Full tax liability Full tax liability entails that all income earned by an individual is subject to taxation in Denmark. This is called the global income principle. Full Danish tax liability may be established by Danish residency or by a stay in Denmark for six consecutive months. It thus becomes relevant to determine when a person is deemed resident in Denmark. It follows from the Danish tax regulations that an individual who acquires a domicile in Denmark will not become subject to full tax liability in Denmark before the individual also takes up residence in Denmark. An individual who has a domicile in Denmark will be deemed to have taken up residence in Denmark if: 1 he stays in Denmark for a period exceeding three consecutive months; 2 he stays in Denmark for 180 days or more within a 12-month period; or 3 his stay in Denmark is not a holiday or recreational in nature, e.g. work is performed during the stay (even if only for a short period of time). Consequently, an individual who acquires a domicile, i.e. summer residence in Denmark, and uses it solely for recreational purposes will not on that basis be deemed resident and thus be subject to full tax liability, provided the individual does not fulfil one of the conditions (1) through (3) above. According to practice, even a short period of work in Denmark entails that the individual is deemed to have taken up residence in Denmark. The individual will then be subject to full Danish tax liability. An individual leaving the country will remain taxable in Denmark until he has given up his residence in Denmark. Certain groups of foreign employees who remain in Denmark for more than six consecutive months may opt for a 25% or 33% tax on their gross cash salary (see below). Limited tax liability An individual who is not resident in Denmark for tax purposes and thus not subject to full tax liability may nevertheless be subject to limited tax liability. Limited tax liability means tax liability on certain income which derives from sources in Denmark. The main type of income subject to limited tax liability is income earned by an individual who has performed work in Denmark for a Danish employer. A number of other types of income are also subject to limited tax liability, for instance income from real property, dividends, royalties, etc. It should be noted that the provisions of various tax treaties may modify this tax liability. Inbound expatriates tax schemes Under the Danish 25% tax regime (the 25% Tax Regime ), inbound expatriates are eligible to pay Danish income tax at 25% (app. 31% including labour market contributions SETTING UP IN DENMARK 11

in Danish arbejdsmarkedsbidrag) of income for three years. The 25% Tax Regime is subject to a number of conditions, including the requirements that the expatriate becomes subject to unlimited tax liability to Denmark (some exceptions apply to researchers) at the commencement of his employment and that the employee is employed by a Danish company or a Danish branch of a foreign company. Unlimited taxation means that the individual will be taxable to Denmark on his or her worldwide income regardless of source (subject to exceptions under double tax treaties). The taxpayer must receive a minimum annual salary of app. DKK 800,000 (app. EUR 107,000) annually (not applicable to approved researchers). The taxpayer may not have been subject to Danish tax liability within the past three years. All lines of business qualify under the 25% Tax Regime. However, no deductions are available under the 25% Tax Regime. There are no nationality restrictions and, thus, Danes also qualify for tax treatment under the 25% Tax Regime provided that they fulfil the requirements. The 25% Tax Regime has to be compared to taxation under the regular Danish income taxation rules, which means taxation up to a maximum tax rate of 63% (including labour market contributions). In addition to the 25% Tax Regime, a parallel 33% tax regime (effectively 38.6% including social security contribution of 8%) has been introduced in 2008, which will be available for five years. The taxpayer will be able to choose between the two regimes. However, the choice must be made upon entering the reduced tax regime and may not later be altered. However, it appears to be possible to change to the other tax regime before the deadline for filing the income tax return for the first year for which the tax regime is elected. Taxes on capital and real estate There are no taxes on capital. Immovable property situated in Denmark may be subject to two types of real estate tax, land tax and property value tax. The Danish tax authorities make an annual land assessment of all title numbers and buildings in accordance with general price trends. This public assessment affects the taxes levied on real estate. Land tax is levied by local authorities at a rate of approximately 16 to 27.8. For land tax purposes the taxable base is the value of the land, but not the building. For property value tax purposes the taxable base is the value of the property. This tax amounts to 10 of the value of the property not exceeding DKK 3,040,000 (approx. EUR 407,879). If the value of the property exceeds DKK 3,040,000 (approx. EUR 407,879), the excess amount is taxed at a rate of 30. Certain local authorities also impose a special tax (supplemental commercial improvements assessment) on the value of properties used for commercial purposes such as offices, business, factories, hotels, etc. Real estate taxes are deductible for corporate income tax purposes. For individuals, real estate taxes are only deductible to the extent the property is used for business purposes. 12 SETTING UP IN DENMARK

Value added tax Value added tax (VAT) is paid at all levels of the production and distribution of goods and services. Deductions may be made for incoming VAT on most purchases related to the business. There is no right/limited right of deduction for certain business expenses such as cars, hotels, restaurants, gifts, costs and residence of staff, etc. Denmark has a standard VAT rate of 25%. The standard rate applies to all sales of non-exempt goods and services. Certain supplies of goods and services are exempt from VAT. The exempt services include health services, educational services unless on a commercial basis, insurances, financial services but excluding management and deposit of shares and bonds, credits and guaranties, passenger transport, sale and lease of immovable property, etc. No deduction is allowed for costs related to exempt supplies. Businesses performing VAT exempt supplies are normally subject to a special regime called payroll tax. This tax is based on the profit and/or amount of payroll of the business. A voluntary VAT registration may be obtained regarding the commercial lease of property and purchase and construction of immovable property in preparation for a future sale to a purchaser registered for VAT. The voluntary registration allows deduction of incoming VAT on purchases related to the property. Certain supplies of goods and services are zero-rated, i.e. the supplies are exempt from VAT but with the right to deduct incoming VAT related to the supplies. Examples of zero-rated supplies are supplies of goods for businesses registered for VAT in other EU countries, supplies of goods for countries outside the EU, required equipment for ships and the sale and hiring out of certain aircraft and ships. Businesses making supplies of non-exempt or zero-rated goods or services in Denmark must apply for a VAT registration. Application for registration must be submitted no later than eight days before taxable activities in Denmark are commenced. A business supplying goods and services in Denmark is generally liable to VAT to the tax authorities. A Danish business registered for VAT is also liable to pay Danish VAT on purchases of goods transported to Denmark from other countries and certain services purchased from suppliers in other countries. In Denmark, three tax periods apply depending on the annual taxable turnover. The tax periods are monthly, quarterly or bi-annual. Oil and gas taxation In 1982, the Danish HydroCarbon Tax Act (the Act ) was enacted (the Original Regime ). The Act introduced a separate tax rate for hydrocarbons of 70% in addition to the corporate income tax rate of 40% (now 25%) resulting in an effective tax rate of 82% (40% + (100% 40%(70%)). A hydrocarbon tax allowance equivalent to 25% annually of the investments for a period of ten years (total of 250%) was introduced. The hydrocarbon tax was designed to be progressive so as only to be effective when the income was extraordinarily high. The Original Regime was designed to be progressive in nature not only in relation to the taxation of profits but also in relation to the invested capital. This was facilitated by a combination of (i) separate income calculations and an investment-dependent deduction/allowance (the hydrocarbon tax allowance) for each field (ring fence), and (ii) non-field related expenses such as exploration and corporate income taxes deducted from the total income. The result is that hydrocarbon tax is only imposed if the income from one or more fields after depreciation covers the expenses for pre-development and exploration of new fields and corporate income tax. When the size of the hydrocarbon allowance was established, interest rates were at 20% and the inflation rate at approximately 10%. As the hydrocarbon tax allowance does not vary according to changes in interest and inflation rates, the decrease in the rate of inflation, interest and corporate tax has since the enactment of the Act resulted in a considerable increase of the actual and present value of the hydrocarbon tax allowance. In 2002, the Danish Tax Ministry performed an extensive survey of the existing Danish hydrocarbon tax regime. The survey concluded that the SETTING UP IN DENMARK 13

Original Regime was not effective no taxpayers had paid hydrocarbon tax since 1985 despite substantial increases in the extraction of oil. One of the conclusions was that because the hydrocarbon tax allowances were higher than the actual amount invested, the hydrocarbon tax allowance motivated investments that were not economically feasible and counterproductive for the society as a whole. In 2003, a new hydrocarbon tax regime (the New Regime ) was enacted effective for licenses issued on or after 1 January 2004. Under the New Regime, the hydrocarbon tax rate is reduced to 52% and the hydrocarbon allowances to 5% annually over six years (total of 30%) from the 25% annually over 10 years (total of 250%). The New Regime is intended to be effective parallel with the Original Regime, which will continue to be effective for licenses issued prior to 1 January 2004. Transfer pricing Under Danish law, transactions between related parties must be carried out in accordance with the arm s length principle. Danish law includes special rules on transfer pricing corresponding to the OECD s guidelines. The legislation is divided into substantive and formal law. The arm s length principle is defined in accordance with OECD guidelines and the Danish tax authorities recognise the methods set out in the guidelines. When filing its tax returns, a company must report the type and scope of inter-company transactions and demonstrate the transfer pricing method applied and conditions applicable in and to inter-company transactions. Section 2 of the Danish Tax Assessment Act covers all transactions between the parties mentioned above, including among others the sale and purchase of goods and services, licensing of intellectual property rights and financial agreements like loans. The Danish Tax Ministry has issued two administrative orders on documentation of the transfer pricing method applied in controlled transactions (Order No. 42 of 24 January 2006 and Order No. 582 of 5 June 2006) (the Orders ). The Orders specify the current requirements to transfer pricing documentation. The Orders most importantly include the introduction of penalties for non-compliance with the documentation requirements, the extension of documentation requirements to domestic controlled transactions (in addition to international transactions), and the enactment of explicit legal authority for tax authorities to request taxpayers to prepare benchmarks. The Orders specify the documentation requirements that will be applied in determining if a taxpayer is in non-compliance and is liable to a documentation related penalty of not less than twice the costs of preparing proper documentation. If proper documentation is subsequently prepared, the penalty may be reduced. As the penalty provision is new, no case law with respect to the size of any penalties imposed exists as of yet. In Denmark, the fee for preparing adequate transfer pricing documentation varies. Approximately DKK 100,000 / EUR 13,400 is not an unrealistic amount. The Orders list the specific items required for the transfer pricing documentation. From an over-all perspective, the information required for each item depends on the scope and complexity of the enterprise and its controlled transactions. Also, the information of a transfer pricing documentation file needs not follow the structure and sequence given in the Orders although the transfer pricing documentation must be coherent and information must be presented in a structured manner. As an alternative to complying with the Orders, taxpayers may prepare documentation using (i) the standards of the EU Code of Conduct on transfer pricing documentation for associated enterprises in the EU (once approved by the Council of the European Union) or (ii) the common standards agreed by non-eu Member States. Documentation may be prepared in the following languages: Danish, English, Norwegian and Swedish. This also applies to information requested by tax authorities in addition to the documentation listed in the Orders. Filing of tax returns Corporate tax returns Corporate tax returns must be filed no later than six months after the end of the fiscal year. Companies with a financial year ending between 1 January and 31 March must, however, file their tax returns not later than 1 July of the 14 SETTING UP IN DENMARK

same year. It is possible, before the expiry of the filing deadline, to request an extension. If a valid reason is given, a short extension is usually granted. If a tax return is not filed on time, the tax authorities may issue an estimated assessment and also levy penalties. A penalty of DKK 200 per day is automatically levied if a tax return is filed too late. The maximum penalty is limited, however, to DKK 5,000 (approximately EUR 670). Personal tax return Until recently, any individual subject to full Danish tax liability had to submit an annual tax return. As of the assessment year 2007, instead of sending an annual tax return to the taxpayers, the Danish tax authorities send an annual tax assessment which reflects the information that the tax authorities have received from Danish employers, banks, etc. amendments are necessary, the taxpayer must make the corrections by phone, on the Internet or by filling an information card. Some taxpayers receive the information card together with the annual tax assessment. If not, the information card may be ordered by phone. The time-limit for making the corrections to the annual tax assessment is 1 May of the following year, e.g. corrections to the annual tax assessment for 2007 must be made no later than 1 May 2008. Self-employed taxpayers and individuals who are subject to limited Danish tax liability by virtue of salary generated in Denmark must also submit an annual tax return. The timelimit for sending the annual tax return to the tax authorities is 1 July 2008. An annual tax assessment shows the taxpayer s total income, allowances, taxes, etc. for the preceding tax year. The taxpayer must check that the annual tax assessment contains the correct information. For the majority of taxpayers, no further information has to be added, and the taxpayer does not have to do anything. If additions or SETTING UP IN DENMARK 15

C O N TA C T Bech-Bruun is one of Denmark s leading law firms with approximately 230 fee earners, which places Bech-Bruun as one of the largest law firms in Denmark. Bech-Bruun has an outstanding list of international and Danish clients who regularly seek our assistance in relation to structured finance products and expertise in relation to M&A planning, group restructuring, strategic tax advising and transfer pricing. The M&A corporate group has 51 fee earners and the tax group now has 18 fee earners, which makes Bech-Bruun Tax the largest tax group among Danish law firms. Read more about M&A and tax at www.bechbruun.com or contact one of our specialists in Setting up Business in Denmark: Stig Bigaard Partner T +45 72 27 33 28 E sbi@bechbruun.com Nikolaj Bjørnholm Partner T +45 72 27 34 64 E nb@bechbruun.com Lars Terp Associate T +45 72 27 33 64 E lat@bechbruun.com Anders Oreby Hansen Partner T +45 72 27 36 02 E aoh@bechbruun.com Tina Øster Larsen Associate T +45 72 27 35 54 E tla@bechbruun.com Carsten Pals Partner T +45 72 27 34 77 E cpa@bechbruun.com 16 SETTING UP IN DENMARK

Contact Bech-Bruun T +45 72 27 00 00 E info@bechbruun.com www.bechbruun.com