5 June 2018 Global Tax Alert Denmark publishes draft bill to implement EU ATAD NEW! EY Tax News Update: Global Edition EY s new Tax News Update: Global Edition is a free, personalized email subscription service that allows you to receive EY Global Tax Alerts, newsletters, events, and thought leadership published across all areas of tax. Access more information about the tool and registration here. Also available is our EY Global Tax Alert Library on ey.com. Executive summary On 31 May 2018, the Danish Minister of Taxation published a draft bill intended to implement the European Union s (EU s) anti-tax avoidance directive (Council directives (EU) 2016/1164 and (EU) 2017/952) (the ATAD) into Danish law. Following a public hearing in June, the Minister is expected to present a final bill in Parliament in October 2018 to be passed before the end of 2018. The main rules addressed by the draft bill address: Controlled foreign company (CFC) taxation Interest limitation Exit taxation General anti-avoidance rule (GAAR) Hybrid mismatches This Alert summarizes the key aspects of these rules.
2 Global Tax Alert Detailed discussion CFC taxation The ATAD provides Member States with two options for CFC taxation: Model A: CFC taxation of non-distributed financial income Model B: CFC taxation of non-distributed income resulting from non-genuine arrangements put in place for the essential purpose of obtaining a tax advantage Existing Danish CFC taxation is based on model A although the entire income of the CFC is subject to taxation. CFC taxation requires that more than 50% of the income is of a financial nature and that more than 10% of the assets are of a financial nature. The existing rule is applicable irrespective of the level of taxation for the CFC. The proposal retains model A. The following main changes are proposed: The asset test is abolished. The income test is lowered from 50% to 33.3%. The concept of financial income is expanded to cover other income generated from intellectual property (IP). According to the proposal, this rule may capture profits from the sale of goods and services that are based on IP. In this context goodwill is not treated as IP. In order to carry out the income test it will thus be necessary to divide the income of a CFC into the following categories: ordinary income, goodwill income and other income generated from IP. Consequently, this process will be complicated and burdensome for taxpayers. The proposal does not call for the introduction of the exception outlined in the ATAD under which no CFC taxation should occur where the CFC carries on a substantive economic activity supported by staff, equipment, assets and premises, as evidenced by relevant facts and circumstances. The expansion of CFC taxation to cover other income generated from IP may be burdensome for Danish companies because the rules are applicable irrespective of the level of taxation at the level of the CFC, and because the exception for genuine business activities is not introduced. For example, if a Danish company acquires an IP-rich German company, the income of the German company may easily be subject to Danish taxation assuming. If rules on CFC taxation are implemented as outlined in the draft bill, the whole purpose of CFC taxation will be obscured because: (a) the income will not be low taxed; (b) the income has not been transferred from another group company to the CFC; and (c) the income is solely generated based on the economic substance of the CFC. Arguably, the Danish law will be contrary to EU law as evidenced by European Court of Justice decision in Cadbury Schweppes (C-196/04). The new CFC rules will be applicable from income years starting 1 January 2019 and thereafter. Interest limitation Existing Danish tax law contains the following rules limiting the deductibility of interest and other financing expenses: Thin capitalization rule applying a debt:equity ratio of 4:1. Interest ceiling rule limiting the deductibility of net financing expenses to 2.9% of the tax basis in qualifying assets with a safe harbor of DKK21.3 million. Earnings before interest and taxes (EBIT) rule limiting the deductibility of net financing expenses to 80% of EBIT with a safe harbor of DKK21.3 million. The proposal will retain the rules on thin capitalization and interest ceiling. However, the EBIT rule will be substituted by an earnings before interest, taxes, depreciation and amortization (EBITDA) rule in accordance with the ATAD. The proposed EBITDA rule will provide: Exceeding borrowing costs may only reduce EBITDA with up to 30% Safe harbor of DKK22.3 million (equal to 3 million) Companies subject to mandatory joint taxation must apply the rule on a consolidated basis Exceeding borrowing costs which are disallowed may be carried forward without time limitation Unused interest capacity may be carried forward for a maximum of five years The 30% ratio may be replaced by the actual EBITDA ratio of the consolidated group Financial institutions are outside of the scope of the rule Foundations and associations are within the scope of the rule The new EBITDA rule will be applicable from income years starting 1 January 2019 and thereafter.
Global Tax Alert 3 Exit taxation Existing Danish tax law calls for exit taxation in the following situations: Transfer of assets and liabilities from a Danish company to a permanent establishment in another jurisdiction Transfer of place of effective management to another jurisdiction under a tax treaty Transfer of legal seat of a Danish company to another jurisdiction Taxpayers can request that payment of exit taxes be deferred for up to seven years, if the company or assets are moved to another EU or European Economic Area country. The proposal will mean that the maximum period of deferral will be five years. Under existing rules the tax basis for assets that are brought into Danish tax jurisdiction must often be calculated on the basis of the original purchase price which is deemed to have been subject to maximum depreciation according to Danish tax rules from the time of acquisition and until the time they enter Danish tax jurisdiction. Under the proposal, Denmark will recognize the arm s-length price of the assets as tax basis when the assets are brought under Danish tax jurisdiction. The new rules will be applicable from income years starting 1 January 2020 and thereafter. GAAR Existing Danish tax law contains a court-based anti-avoidance rule with a limited scope. The proposal will introduce a GAAR in accordance with Article 6 of the ATAD that will apply to both resident and nonresident companies. The wording of the rule is: 1. For the purposes of calculating the corporate tax liability, a Member State shall ignore an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law, are not genuine having regard to all relevant facts and circumstances. An arrangement may comprise more than one step or part. 2. For the purposes of paragraph 1, an arrangement or a series thereof shall be regarded as non-genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality. 3. Where arrangements or a series thereof are ignored in accordance with paragraph 1, the tax liability shall be calculated in accordance with national law. The GAAR will be applicable from 1 January 2019. Hybrid mismatches Existing Danish tax law contains several rules that address hybrid mismatches including the following provisions of the Corporate Tax Act: Section 2 A: A company is recharacterized as a permanent establishment for Danish tax purposes if the company is disregarded by a foreign parent company (hybrid entities). Section 2 B: Controlled debt is recharacterized as equity for Danish tax purposes if it receives equity treatment in the hands of a group company (hybrid financing). Section 2 C: A Danish branch office or partnership is recharacterized as a company for Danish tax purposes, if the entity is treated as corporation in the country of residence of controlling direct owners, or if the controlling owners are tax resident in country outside of the EU with which Denmark has no tax treaty (hybrid entities). The proposal will abolish section 2 A and section 2 B whereas the scope of section 2 C will be expanded. The rules on hybrid mismatches in the ATAD will be introduced as new sections 8 C 8 E of the Corporate Tax Act addressing: Double deductions Deductions without inclusion Deductions without inclusion regarding hybrid entities and permanent establishments Double non-taxation of disregarded permanent establishments and reverse hybrid companies Taxpayers should carefully analyze whether the change from the existing rules to the new rules on hybrid mismatches will cause any changes in the Danish taxation. The new rules will be applicable from 1 January 2020.
4 Global Tax Alert For additional information with respect to this Alert, please contact the following: Ernst & Young P/S, Copenhagen Jens Wittendorff Vicki From Jørgensen Ernst & Young P/S, Aarhus Søren Næsborg Jensen jens.wittendorff@dk.ey.com vicki.from.joergensen@dk.ey.com soeren.n.jensen@dk.ey.com Ernst & Young LLP, Nordic Tax Desk, New York Antoine Van Horen antoine.vanhoren@ey.com Susanne Hamre Skoglund susanne.skoglund@ey.com Nicole Maser nicole.maser1@ey.com
EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. 2018 EYGM Limited. All Rights Reserved. EYG no. 03421-181Gbl 1508-1600216 NY ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com