Annual Tax Newsletter 2016

Transcription

1 Annual Tax Newsletter 2016 The most significant Danish tax news from September 2015 until July 2016.

2 2 Annual Tax Newsletter 2016 Contents Introduction 4 The limitation period for reclaiming dividend withholding tax reduced from five to three years 6 Status on the suspected fraud with Danish dividend withholding tax 7 Reduction of dividend withholding tax rate for non-danish companies 10 European Commission Proposal for Anti-Tax Avoidance Package 11 Political agreement on Anti-Tax Avoidance Directive 13 General anti-avoidance regulation in Denmark 17 BEPS Action Point 7 Amendments to article 5 of the OECD Model Tax Convention 19 Denmark introduces country-by-country reporting requirements 21 The European Commission to impose public reporting requirements on multinational companies 23 Revival of the tax-advantaged employee share schemes 25 Investment funds now to be considered independent taxpayers 27 The 2016 activity plan of the Danish tax authorities 28 Judgment disregards SKAT s interpretation of s. 10 of the Danish Taxation of Seafarers Act 30 First Danish judgment on the EC Arbitration Convention 31 New judgment: Special investment funds are more than just investment in securities 33 About Bech-Bruun 34

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4 4 Annual Tax Newsletter 2016 Introduction This Annual Tax Newsletter covers the issues we consider the most significant Danish tax news from September 2015 to July Accordingly, this newsletter includes a description of legislative amendments relevant to Danish and non- Danish individuals and businesses operating in Denmark. During the past year, the focus from a Danish tax law perspective has been on primarily international issues, such as the suspected fraud with the repayment of Danish dividend withholding tax, the publication of the OECD/G20 Base Erosion and Profit Shifting Project Reports (the BEPS Reports ) and the presentation of the European Commissions proposal for an Anti-Tax Avoidance Package (the Anti-Tax Avoidance Package ). Regarding the suspected fraud with Danish dividend withholding tax, SKAT, the Danish Custom and Tax Administration, suspended all repayments of Danish dividend withholding tax following the initial discovery in August The total fraudulent amount is currently expected to exceed DKK 9bn (approx. EUR 1.2bn) the reclaims presumed to have been based on falsified documentation. As of 1 January 2016, approximately 28,000 dividend withholding tax reclaims were pending. As a consequence of the suspected fraud and owing to the large number of dividend withholding tax reclaims pending, the Danish Ministry of Taxation and SKAT have launched a number of new initiatives aimed at preventing future fraud, including stricter documentation requirements, new specialised tax forces and a reduction in the limitation period for reclaiming dividend withholding tax from three to five years. Furthermore, in relation to Danish dividend withholding tax applicable to foreign entities, a new bill was passed on 2 June 2016, lowering the Danish dividend withholding tax rate to 22% for non-danish companies. Technically, Danish companies must continue to withhold 27% on dividend distributions to non-danish companies owning less than 10% of the shares, but the beneficial owners of the dividends may file a reclaim with SKAT. Bearing in mind the difficulties existing with the current reclaim scheme, it is somewhat surprising that SKAT would choose an option sure to add more filed reclaims to the pile. The international influence on Danish tax law has been especially impacted by the findings and recommendations reflected in the BEPS Reports, as well as the proposals contained in the Anti-Tax Avoidance Package. While the majority of the concepts and ideas set forth in both the BEPS Reports and the Anti-Tax Avoidance Package are already well known in Denmark, new legislation has nonetheless been adopted and implemented as a direct consequence of these two international initiatives. The first step to ensure such implementation came with the May 2015 incorporation of the international general anti-abuse tax rule ( GAAR ) into Danish tax law. The Danish GAAR marked a notable change in the traditional Danish anti-abuse tax legislation doctrine as it targeted not only specific practices which were deemed to be abuse, but also practices of a more general nature. While the Danish GAAR, at the time of incorporation, may well have been considered slightly beyond what was legally required, the OECD Report on Action Point 5 and the general anti-abuse rule contained in the new Anti-Tax Avoidance Directive may well put the Danish GAAR within its legal boundaries. Additionally, new requirements concerning country-by-country reporting has been implemented into Danish tax law as a direct consequence of the findings and recommendations of BEPS Report Action Point 13. The new requirements are already applicable to multinational entities with fiscal years beginning on or after 1 January You will also find a description of the most important VAT developments, most significantly the impact of the December 2015 decision by the EU Court of Justice in the Fiscale Eenheid-case (C ) in Denmark, regarding the scope of the VAT exemption for management of special investment funds.

5 Annual Tax Newsletter Furthermore, our Annual Tax Newsletter reflects on the very recent and noteworthy decision by the Danish Supreme Court concerning the interpretation of the concept of maritime transport in s. 10 of the Danish Taxation of Seafarers Act (sømandsbeskatningsloven). In its judgement, the Danish Supreme Court disregarded SKAT s interpretation and found that the concept of maritime transport in the Danish Act should be understood in accordance with the general EU concept of maritime transport. The case, which was argued before the Supreme Court by Bech-Bruun partner Kaspar Bastian on behalf of the taxpayer, is likely to have a significant impact on a number of cases pending in the administrative appeal system. As in previous years, you will also find a description of the key elements of SKAT s most recent activity plan, which is expected to be carried through to The main element in the activity plan is the focus on compliance performed by large and medium-sized enterprises, particularly with regard to transfer pricing. We expect the efforts of SKAT within transfer pricing to be expanded in the light of the initiatives contained in the BEPS initiative and the European Council s Anti-Tax Avoidance Package.

6 6 Annual Tax Newsletter 2016 The limitation period for reclaiming dividend withholding tax reduced from five to three years On 13 June 2016, SKAT, the Danish Customs and Tax Administration, published new tax directions (styresignal), according to which the limitation period for reclaiming excess dividend withholding tax is reduced from five to three years. This change is a distinct tightening of the previous interpretation of the provision in s. 67A of the Danish Withholding Tax Act (kildeskatteloven). Shorter limitation period Individuals and companies receiving dividends from Danish companies on which withholding tax has been levied at a rate exceeding that applicable under Council Directive 2011/96/EU (on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States) or a double taxation agreement are entitled to claim reimbursement of dividend tax. Until recently, such claims were, according to SKAT s interpretation, subject to s. 67A of the Danish Withholding Tax Act, which stipulates a five-year limitation period. According to its new, published tax directions, SKAT has revised its interpretation of the provision in s. 67A of the Danish Withholding Tax Act to the effect that the provision no longer comprises requests for reimbursement of excess dividend withholding tax. As a result of SKAT s revised interpretation, such claims will now be subject to the ordinary three-year limitation period. Commencement of the three-year limitation period The three-year limitation period for reclaiming excess dividend withholding tax will take effect three months after the publication of SKAT s tax directions, that is, at 13 September This means that claims for reimbursement of dividend tax withheld that reach SKAT by 12 September 2016 at the latest will be subject to a five-year limitation period, whereas any claim submitted on 13 September 2016 onwards will be timebarred after three years. Bech-Bruun Comments Individuals and companies entitled to a refund of excess dividend withholding tax and whose claims either date back longer than three years or may risk being time-barred subject to the new three-year limitation period should file their requests for reimbursement of excess dividend tax to SKAT without undue delay and no later than 12 September If they fail to do so and their claims date back longer than three years, the new and tighter practice entailed in the tax directions means that SKAT will consider their right to claim reimbursement as having lapsed. However, if a double taxation agreement stipulates a limitation period of more than three years, the period applicable under the double taxation agreement will continue to apply to potential claims for dividend tax refund.

7 Annual Tax Newsletter Status on the suspected fraud with Danish dividend withholding tax In August 2015, SKAT, the Danish Customs and Tax Administration, announced that they had uncovered suspected fraud with Danish dividend withholding tax in the amount of approx. DKK 6.2bn (approx. EUR 0.8bn). The case is currently under investigation by the Danish Public Prosecutor for Serious Economic Crime, and the extent of the fraudulent claims for repayment is now expected to exceed DKK 9bn (approx. EUR 1.2bn). On 6 August 2015, SKAT suspended all payments on claims for repayment of Danish dividend withholding tax due to a suspicion that a number of the claims for repayment were fraudulent. Following the suspension of reclaim payments, SKAT filed their first report with the Danish Public Prosecutor for Serious Economic Crime ( SEC ) on 24 August The report covered suspected fraud with Danish dividend withholding tax reclaims of approx. DKK 6.2bn (approx. EUR 0.8bn). SKAT s internal audit department released the results of its investigation of the fraudulent dividend withholding tax reclaims on 24 September According to the report, the main reasons for the payout of fraudulent dividend withholding tax reclaims are lack of control on the part of the tax authorities, the structure of the data reporting systems for dividends and insufficient management focus on the processing of claims for the refund of withholding tax. Following the report by the internal audit department, a new intersectorial task force was established with the purpose of investigating the current legislation and practice applicable to declaring and withholding Danish tax on dividends. The task force is comprised of members from the Danish Ministry of Taxation, SKAT, the Danish Ministry of Business and Growth, the Danish Business Authority and the Danish Financial Supervisory Authority. On 16 November 2015, SKAT announced that, on 15 November 2015, it had filed a follow-up report with SEC on fraud in the amount of DKK 2.9bn (approx. EUR 0.4bn), the total suspected fraudulent amount now exceeding DKK 9bn (approx. EUR 1.2bn). In the period 1 January 2010 to 5 August 2015, claims for repayment of Danish dividend withholding tax could be filed either with an approved bank ( Bankordning ) or directly with SKAT ( Blanketordning ).

8 8 Annual Tax Newsletter 2016 The DKK 9.1bn fraud discovered so far is based on reclaims filed utilising the Blanketordning. There is currently no information as to whether the Bankordning has also been used as part of the fraud. The tax fraud presumably involves companies reclaiming withholding tax on dividends on Danish shares which such companies had untruthfully and fictitiously stated that they owned. Allegedly, the documentation provided to SKAT as a basis for the claims for repayment was falsified. Based on information made available by the Danish media, it appears that SEC s investigation of the initial fraud in respect of DKK 6.2bn (approx. EUR 0.8bn) focused primarily on 12 specific companies and one British financier. As part of the ongoing investigation, SEC has conducted searches of a number of addresses in London. In addition, an amount of DKK 1.7bn (approx. EUR 0.23bn) believed to derive from the fraudulent dividend withholding tax reclaims has been confiscated from foreign bank accounts. The findings of the Danish Public Accounts Committee Following the investigation by SKAT s internal audit department, the Danish Public Accounts Committee requested the Danish National Audit Office to carry out an assessment of SKAT s administration and the Ministry of Taxation s supervision of payment of Danish dividend withholding tax during the period 1 January 2010 to 5 August The Danish National Audit Office submitted their report to the Danish Public Accounts Committee on 17 February The report was presented to the Danish Parliament on 24 February 2016 and subsequently released to the public. In its statements to the Danish National Audit Office report, the Danish Public Accounts Committee strongly criticises SKAT s completely inadequate control with the repayment of Danish dividend withholding tax, as well as the Danish Ministry of Taxation s supervision, which the Danish Public Accounts Committee found to be exceedingly flawed. Among the key findings in the Danish National Audit Office report are: SKAT refunded approximately DKK 3.2bn in dividend withholding tax after receiving information of suspected fraud, SKAT failed to carry out basic control of information on the reclaims, including information of ownership, verification that withholding tax had actually been withheld and whether the appropriate form had been approved by a competent authority. SKAT, without statutory power, had delegated the task of controlling reclaims filed to three separate banks without ensuring that the banks actually carried out the required control. Despite receiving numerous indications of possible risks, the Danish Ministry of Taxation failed to investigate the issue even though a simple analysis would have uncovered the problem. Among the most interesting points of the Danish National Audit Office report are the discoveries that Repayment of dividend withholding tax increased from DKK 0.8bn in all of 2010 to DKK 9.3bn in the first seven months of 2015, corresponding to an increase of approximately 1,300%. The suspected fraud currently estimated at DKK 9.1bn amounts to 2/3 of the total amount repaid under the blanketordningrepayment scheme. In 2014, SKAT repaid 111% of the dividend tax actually withheld for one single company. Although SKAT has implemented a control function to manage the repayment of withholding tax in excess, such function was disabled for a number of companies from 2013 until July The average amount covered by reclaims filed increased by 1,700% from DKK 37,113 in 2010 to DKK 681,007 in SKAT s initial report filed on suspected fraud covers 2,120 repayments totalling DKK 6.1bn, corresponding to an average repayment of DKK 3m for each of the reclaims made. Despite receiving and approving monthly accounts, the Danish Ministry of Taxation did not find cause for investigating the increase in dividend withholding repayments. Future initiatives Following the Danish National Audit Office report, the Danish Ministry of Taxation announced that it had identified two specific loopholes in Danish tax legislation, whereby otherwise taxable dividend payments could be reclassified as tax-free capital gains on shares. Whereas the Danish Ministry of Taxation said it was not aware of the loopholes having been used to evade Danish withholding tax on dividends, new legislative initiatives are underway to not only close the loopholes, but also to tighten the current legislative scheme in order to prevent any future risk of fraud. In addition to these legislative initiatives, the Danish Ministry of Taxation also announced a number of action points. The action points include (i) stricter documentation requirements (see list below), (ii) a task force carrying out random checks on the reclaimed dividend withholding tax (established at the end of 2015), (iii) a task force monitoring all types of dividend withholding tax reclaims (established in the spring of 2016), and (iv) an anti-

9 Annual Tax Newsletter fraud division analysing new trends and risks related to international tax fraud (established at the beginning of 2016). Furthermore, the Danish Ministry of Taxation has announced the establishment of a new supervisory authority within the Danish Ministry of Taxation, which is tasked with monitoring the ongoing risk assessment and ensuring that critical rapports are brought to the attention of the Danish Ministry of Taxation. In addition, the procedures concerning Early Warnings (an internal written report indicating possible issues) and approval of accounts of payments within the Danish Ministry of Taxation are tightened. Finally, the intersectorial task force established in September 2015 recommends the following criteria to be met in order to prevent any future fraudulent claims for repayment of Danish withholding tax, including: (i) no reclaim of dividend withholding tax based on shares in companies which had not declared dividends, (ii) the total amount repaid cannot exceed the dividend withholding tax levied on the specific shares in question, (iii) ensuring the rightful owner is taxed at the correct dividend withholding tax rate, and (iv) ensuring that withholding tax on share-based loans cannot be reclaimed. On 27 May 2016, the Danish Bankers Association submitted a proposed solution with the intersectorial task force which is based on a net dividend withholding scheme on the basis of the registration of shares with the Danish VP Securities Centre. Suspension of reclaim payments The processing of claims for repayment of dividend withholding tax was suspended on 6 August The Danish Ministry of Taxation announced that all reclaims would remain suspended until proper procedures had been established to prevent any future risk of fraud. As of 1 January 2016, approximately 28,000 dividend withholding tax reclaims were pending. The processing of dividend withholding tax reclaims was resumed by SKAT in March 2016 upon the establishment of new control functions. In addition to the procedures already initiated by the Danish Ministry of Taxation, we anticipate that all cases pertaining to the matter of reclaiming dividend withholding tax and the basis of these cases will be subject to in-depth consideration by SKAT. Furthermore, it is likely that the procedure may prolong and complicate the dividend withholding tax reclaim process. Documentation requirements SKAT has announced the implementation of stricter documentation requirements in connection with reclaim of Danish withholding tax. Apparently SKAT will now as a general rule request the following specific documentation in connection with a request for reclaim of dividend withholding tax: 1. If the claim is filed by an agent, power of attorney from the beneficial owner of the shares granting power to the agent to contact SKAT and claim the refund on behalf of the shareholders (in case of intermediate agents/ banks please power of attorneys covering all intermediate links) must be included. 2. Shareholder s proof of purchase regarding the shares of the distributing companies. 3. If the shares are part of shareholder s loan arrangements, the loan agreements and other relevant documents must be included. 4. Dividend note from distributing company related to the distribution. 5. Statement of account/deposit from shareholder s bank showing number of shares of the distributing companies at the time of the distribution. 6. Documentation of money transfers from the distributing companies via intermediate banks to the bank account of the beneficial owner of the shares.

10 10 Annual Tax Newsletter Reduction of dividend withholding tax rate for non-danish companies Until recently, the Danish withholding tax rate applicable to non-danish companies was contrary to the EU Treaty rules on free movement. To remedy this situation, the Minister of Taxation presented a new bill with the aim of bringing Danish taxation in line with EU legislation. The bill was passed by the Danish Parliament on 2 June 2016 and has now entered into force. Non-Danish companies receiving dividends from Danish companies were previously subject to a 27% tax rate, which, in some cases, has now been lowered to 22% on outbound dividend payments Reduction of corporation tax The new bill reduces the Danish withholding tax rate payable by non-danish companies from 27% to 22%. Danish companies must continue to withhold 27% on outbound dividend payments when the receiving foreign companies own less than 10% of the share capital in the Danish company. The difference may be reclaimed. Subject to a relevant double taxation treaty further reclaims may be possible. The reduction applies to all non- Danish companies subject to limited tax liability to Denmark pursuant to s. 2 of the Danish Corporation Tax Act (selskabsskatteloven) irrespective of whether they are domiciled inside or outside the EU and EEA. Violation of EU legislation Taxation of non-danish companies receiving dividends from Denmark subject to tax at a higher tax rate than that applying to resident companies is now deemed to be in violation of EU law. The new bill brings the dividend withholding tax rate imposed on non-danish companies subject to limited tax liability in line with the corporation tax rate applicable to Danish companies, which is 22% as from Retroactive effect The new bill has retroactive effect as from 1 January 2007 for outbound dividends received by non-danish companies residing in the EU or EEA, whereas the bill entered into effect at 1 July 2016 for non-danish companies residing outside of the EU or EEA. Bech-Bruun Comments Danish and non-danish shareholders in Danish companies benefit from the adopted bill having been granted an equal tax position. However, one might wonder why this initiative to adjust the differential treatment of taxpayers has not been taken at an earlier stage. In 2007, for instance, the corporation tax rate was lowered from 28% to 25%, whereas the withholding tax rate applicable to foreign and Danish shareholders remained unchanged. Furthermore, it is doubtful whether this new legislation actually solves the conflict with EU law. Given the quite severe problems that SKAT, the Danish Customs and Tax Administration, have had handling the reclaims of dividend withholding tax, one might also reflect on the fact that the tax authorities have now set up a system under which reclaims are to be made constantly. It would have been preferable and far more practical for both the internal revenue and the taxpayers had the withholding tax rate simply been equal to the maximum tax rate.

11 Annual Tax Newsletter European Commission Proposal for Anti-Tax Avoidance Package On 28 January 2016, the European Commission presented its new Anti- Tax Avoidance Package containing measures to fight certain types of tax avoidance. The Anti-Tax Avoidance Package presented by the European Commission on 28 January 2016, rests on three key pillars, which in unison are to guarantee efficient and growthstimulating taxation in the EU, including effective taxation in the EU, improved tax transparency and fair tax competition among EU Member States. The proposed measures submitted by the European Commission are based on the action plan presented on 17 June 2015 for fair and efficient corporate taxation, in which the Commission, among other things, announced a re-launch of the common consolidated corporate tax base (CCCTB). Moreover, the proposed package is greatly influenced by the work performed under the auspices of the OECD as part of the OECD s base erosion and profit shifting (BEPS) project presented in October As such, the proposal mirrors the European Commission s request for action before the new CCCTB is ready and its agenda for a uniform implementation of the BEPS principles in all EU Member States. The work on implementing the proposals of the Package has moved quite quickly in the past months. On 21 June 2016 (midnight June 20), the EU Council agreed on the wording of the Anti-Tax Avoidance Directive (the ATT Directive ), while, on 25 May 2016, the EC Council adopted rules amending Council Directive 2011/16/ EU as regards mandatory automatic exchange of information in the field of taxation (the CbCr Directive ). The ATT Directive Ensuring effective taxation in the EU Compared with the initial proposal for the ATT Directive, which was put out for public consultation by the Danish Ministry of Taxation in February 2016, the agreed wording of the ATT Directive contains a number of changes, including the deletion of the proposed switchover rule and a simplification of the rules on hybrid mismatch. The ATT Directive is a minimum harmonisation directive and the general implementation deadline is 31 December Whereas the ATT Directive also contains a general anti-avoidance rule, the declared purpose of the measures contained in the ATT Directive is to counteract four specific common taxation setups whose purposes are to shift profits to jurisdictions subject to looser tax regimes or none at all. The preventive measures are: Rules on taxation of income in a controlled foreign company (CFC rules); the CFC rules will apply if a controlled foreign company is registered in a third country in which the effective tax rate is more than 50% lower than the corporation tax rate in the Member State receiving the income. Exit taxation; exit tax will be levied to prevent companies from relocating their assets with unrealised profits to low-tax countries without a change of ownership and from selling these assets once they have been relocated. Such taxation will have an impact on the relocation and sale of intellectual property rights in particular since the company will have enjoyed the rights to deduct development costs from profits in the first place. Interest limitation; companies should be able to deduct up to 30% of the earnings before interest, tax, depreciation and amortisation (EBITDA) or an amount of EUR 3,000,000, whichever is the higher. The objective is to make artificial loan arrangements less attractive by setting an upper limit on deductions. Rules on hybrid mismatch; in a double deduction situation, only the Member State where the payment has its source, shall grant a deduction (meaning the other Member State shall deny deduction). Correspondingly, in a situation of deduction without inclusion, the Member State of the payer shall deny deduction of such payment. A rule against tax planning and tax avoidance; the role of the so-called general anti-abuse rule (GAAR) is to act as a safety net in cases where the four measures listed above, fails to cover any arrangement of aggressive tax planning or tax avoidance or the like, and applies solely to artificial arrangements set up primarily to gain tax benefits in contravention with applicable tax law. On the whole, the ATT Directive aims at securing taxation of the companies income in the country of origin. The ATT Directive is to counteract exploitation of loopholes in Member States national tax laws in relation to the tax laws of third coun-

12 12 Annual Tax Newsletter 2016 tries and to protect the tax bases of the Member States. The CbCr Directive ensuring greater tax transparency The purpose of the CbCr-Directive is to ensure consistent implementation by Member States of the required country-by-country reporting ( CbCr ) included in the OECD s BEPS report. The rules were formally adopted on 25 May 2016 after an agreement was reached on 8 March The wording of the CbCr Directive is similar to the wording of the OECD standard transposed into Danish law by Act no of 29 December Consequently, Danish multinational enterprises with an annual global revenue of no less than DKK 5.6bn (approximately EUR 0.75bn) and with a fiscal year starting 1 January 2016 or later, are already subject to the country-by-country requirement. In addition to the requirements agreed upon for CbCr and contained in the CbCr Directive, the Commission proposed an amendment to the Accounting Directive 2013/34/EU on 12 April 2016, which will require large multinational enterprises operating in EU and generating an annual global revenue of no less than DKK 5.6bn (approximately EUR 0.75bn), to publicly disclose key information on where they make their profits and where they pay their tax. The information must be disclosed on a country-by-country basis. Ensuring fair terms of competition One of the Commission s measures to ensure fair tax competition is to prepare a list of third countries whose tax systems are assessed to be used by companies for aggressive tax planning. The Commission also proposes that the actions taken to extend good tax governance standards to third countries (outside the EU) be increased. The key measures should be consistently applied by all Member States in their approach to external tax law cooperation. Bech-Bruun Comments The proposal of the European Commission does not actually contain any system promoting initiatives as far as the current Danish tax situation is concerned. With regard to the provisions of the ATT Directive, we expect the greatest challenge to be implementing the controlled foreign company rule as Denmark already has a so-called CFC rule. The scope of the Danish rule is, however, slightly different, to the extent that the Danish rule applies only to controlled financial companies. Despite the differences between the two definitions, we expect that Denmark will choose to amend the current Danish provision on controlled financial companies to correspond with the controlled foreign company rule in the ATT Directive. The ATT Directive safety net, in the form of the general anti-abuse rule, was implemented in Danish tax law in July 2015 and is applied both in relation to our EU-based legislation and in our application of double taxation treaties. As for the CbCr rules described in the CbCR Directive, Denmark has already implemented similar rules in national law whereby Danish multinational enterprises are already subject to these reporting requirements. While the tax avoidance measures reflected in the Anti-Tax Avoidance Package are principles primarily already known in Denmark and, to a certain extent, already incorporated into Danish tax law, certain non- Danish companies may be impacted significantly as their tax conditions will increasingly become aligned with those of the Danish companies, which ceteris paribus may lead to an improvement of Danish companies conditions of competition because of consistent and fair tax systems throughout the EU. However, the conclusive effect of the two Directives cannot be determined until they have been implemented by the Member States and whatever slight differences that may occur from the Member States implementation of the two Directives have become evident. The Commission s proposal of a common approach to tax matters in the EU and the introduction of a higher degree of common rules must be considered positive measures that may hopefully result in fewer incidents of two tax authorities classifying tax issues differently. In this respect, the Community law elements may contribute to a clarification of the rules. However, we are still awaiting amendments to be made to the EU arbitration convention, which entail securing, to a higher degree than what is presently the case, uncomplicated and fair reference in circumstances where countries during a mutual agreement procedure (MAP) cannot reach or have no intention of reaching an agreement, for instance in connection with increases in transfer pricing.

13 Annual Tax Newsletter Political agreement on Anti-Tax Avoidance Directive On 20 June 2016, the European Council reached political agreement on the Anti-Tax Avoidance Directive, making one of the proposed measures of the Anti-Tax Avoidance Package a reality. As a result of the European Council formally agreeing on the wording of the Anti-Tax Avoidance Directive (the Directive ), the second of the measures proposed by the European Commission in its Anti-Tax Avoidance Package has become a reality. On the whole, the Directive aims at securing the taxation of companies income in the country of origin. The Directive is to counteract exploitation of loopholes in Member States national tax laws in relation to the tax laws of third countries and to protect the tax bases of the Member States. The wording and content of the Directive are somewhat different from the initial proposal of the European Commission, as a number of changes were made, including the elimination of the proposed switch-over clause as well as a significant change to the proposed solution mechanism on hybrid mismatch. The Directive, which is a minimum harmonisation directive, contains five preventive measures. The Directive Article 4; Interest limitation The objective of the interest limitation rule is to make artificial loan arrangements less attractive by setting an upper limit on deductions. This rule applies only to companies which are part of a group, as standalone companies clearly cannot use debt to shift profits. The interest limitation rule provides that net borrowing costs (interest expenses) may be deducted by up to 30% of the earnings before interest, tax, depreciation and amortisation (EBITDA) or by way of derogation an amount of EUR 3,000,000, whichever is the higher. The exceeding borrowing costs may be calculated at group level. Subject to certain conditions, a group company may be granted the right to either: I. fully deduct its exceeding borrowing costs provided the ratio of the company s equity over its total assets is equal to (meaning a negative difference of no more than 2 percentage points) or higher than the equivalent ratio of the group. In addition, all assets and liabilities must be valued using the same method. II. deduct exceeding borrowing costs at an amount in excess of 30% provided (a) the group ratio is determined by dividing the exceeding borrowing costs of the group vis-à-vis third parties over the EBITDA of the group and (b) the group ratio is multiplied by the EBITDA of the tax payer. Further, Member States may adopt rules providing for either: I. the carrying forward, without time limitation, of exceeding borrowing costs which cannot be deducted in the current tax period; or II. the carrying forward, without time limitation, and back, for a maximum of three years, of exceeding borrowing costs which cannot be deducted in the current tax period; or

14 14 Annual Tax Newsletter 2016 III. the carrying forward, without time limitation, of exceeding borrowing costs and, for a maximum of five years, unused interest capacity, which cannot be deducted in the current tax period. Finally, Member States may exclude financial undertakings from the interest limitation rule. The interest limitation rule does not distinguish between third party and related party interest. The rule does, however, include a grandfather clause whereby Member States may exclude, inter alia, debt established prior to 17 June 2016 from the scope of the rule. Member States which already have rules equivalent to those in the Directive will be allowed to continue with those rules until the OECD recommends a minimum standard of interest limitation rules, or at the latest until 1 January The interest limitation rule must be adopted by the Member States no later than 31 December 2018 and will be applicable from 1 January Article 5; Exit taxation The objective of the exit tax rule is to prevent companies from relocating their assets with unrealised profits to low-tax countries without a change of ownership and from selling these assets once they have been relocated. The exit tax will have an impact on the relocation and sale of intellectual property rights in particular, since the company will have enjoyed the rights to deduct development costs from profits in the first place. The Directive provides Member States with the opportunity to assess an exit tax, calculated as the difference between market value and tax value. If the assets are transferred to another Member State, the other Member State must accept the market value of the original Member State, thus allowing for a step-up on the assets starting value for tax purposes. Subject to the Directive, the exit tax will be triggered by: I. Transfer of assets from the head office to a permanent establishment in another Member State or third country (assuming the head office no longer has the right to tax the transferred asset); II. Transfer of assets from a permanent establishment to its head office or another permanent establishment (PE) located in another Member State or third country; III. Transfer of tax residence to another Member State or third country (assuming the assets do not remain connected with a PE in the Member State of origin); IV. Transfer of the activities carried out in a PE out of a Member State. With regard to Community law, the Directive includes an option for companies to defer the payment of exit tax and settle debt by instalments over a five-year period. The option to defer, however, only applies in the following circumstances and with regard to EEA states, only if the EEA state has concluded an agreement with either the Member State or the EU, equivalent to the assistance provided for by Directive 2010/24/EU: I. Transfer of assets from head office to PE in another Member State or EEA state. II. Transfer of assets from PE in a Member State to head office in another Member State or EEA state. III. Transfer of tax residence to another Member State or EEA state. IV. Transfer of activities carried out by its PE to another Member State or EEA state. Subject to national legislation, the Member State may charge interest on any deferred amount. If there is an actual risk of non-recovery, the Member State may also require the taxpayer to provide security as a condition for deferring the payment. The deferred amount becomes immediately payable if: I. The transferred assets or the PE are sold or otherwise disposed of; II. The transferred assets are subsequently transferred to a third country; III. The taxpayer s tax residence or the PE is subsequently transferred to a third country; IV. The taxpayer goes bankrupt or is wound up; V. The taxpayer fails to honour its obligations in relation to the instalments and does not correct its situation over a reasonable period of time, which must not exceed 12 months. The exit tax rule must be adopted by the Member States no later than 31 December 2019 and will be applicable from 1 January Article 6; General anti-abuse rule The objective of the general antiabuse rule ( GAAR ) is to act as a safety net in cases where the four other measures contained in the Directive fail to cover any arrangement of (too) aggressive tax planning, tax avoidance or similar. Subject to the GAAR, Member States must ignore arrangements or a series of arrangements which are set up for the primary purpose of obtaining a tax advantage that defeats the object or purpose of applicable tax law, or are not genuine with regard to all relevant facts and circumstances. An arrangement will be considered non-genuine if it is not implemented for valid commercial reasons that reflect economic reality. The wording of the GAAR in the Directive corresponds to the GAAR in the 2015 EU Parent/Subsidiary

15 Annual Tax Newsletter Directive, with the exemption that application of the Directive GAAR exceeds application of the GAAR in the EU Parent/Subsidiary Directive. The general anti-abuse rule must be adopted by the Member States no later than 31 December 2018 and will be applicable from 1 January Article 7; Controlled foreign company rule The objective of the controlled foreign company ( CFC ) rule on taxation of income is to prevent multinational groups from shifting profits from a high-tax Member State to a low or no-tax third country. An entity or a permanent establishment is considered a CFC if the following conditions are met: I. The entity is controlled by an EU entity, meaning that the EU entity, either alone or together with associated enterprises; a. directly or indirectly holds more than 50% of the voting rights; or b. directly or indirectly owns more than 50% of the capital; or c. is entitled to receive more than 50% of the profit. II. The actual corporate tax rate paid on the profit by the entity or permanent establishment in the third country, is less than 50% of the actual corporate tax rate that would have been charged by the Member State in which the parent company is registered. If the CFC rule applies, the Member State must include non-distributed income of the CFC, in the tax base of the EU entity. The income is calculated in proportion to the parent company s participation in the CFC. The two following approaches to including non-distributed income of the CFC entity are available to Member States: a. inclusion of non-distributed income derived from certain categories, including interest, royalties, dividends, income from financial leasing, etc. CFCs carrying out substantive economic activities are generally exempt; however, the Member State may refrain from applying the substantive economic activity exemption if the CFC is not a resident of or situated in a Member State or EEA state. Additional exemptions may apply if no more than one third of the income of the CFC is comprised by the categories mentioned above. The included income will be calculated in accordance with the provisions of the corporate tax law of the Member State where the parent company is located. Losses will not be included but may be carried forward in accordance with national law. b. inclusion of non-distributed income arising from non-genuine arrangements established for the essential purpose of obtaining tax advantages, e.g. where the CFC does not own the assets or would not have undertaken specific risks were it not control led by a company in which the significant people functions relevant to those assets and risks are performed and are instrumental in generating the controlled company s income. Member States may exclude CFCs where (1) accounting profits do not exceed EUR 750,000 and non-trading does not exceed EUR 75,000, or (2) accounting profits do not exceed 10% of operating costs for the tax period. The included income will be limited to amounts generated through assets and risks which are linked to significant people functions performed by the controlling company. The attribution of CFC income will be calculated in accordance with the arm s length principle. The Member State of the parent company must provide double taxation relief, allowing the tax paid by the CFC to be deducted from the tax liability of the parent company. The deduction will be calculated in accordance with national law. The controlled foreign company rule must be adopted by the Member States no later than 31 December 2018 and will be applicable from 1 January Article 9; Rules on hybrid mismatch The objective of the hybrid mismatch rule is to remove this risk of double taxation or double non-taxation, as a result of a company or a payment transaction being classified differently by two Member States. Compared with the initial draft proposed by the European Commission in the Anti-Tax Avoidance Package, this is the rule which has been subject to the largest change (with the exception of the proposed switchover rule, which was abandoned). Whereas the draft directive changed the general qualification of the hybrid entity, the newly approved Directive does not change the qualification of the hybrid entity but instead simply specifies which Member States may either grant or deny a deduction. To the extent a hybrid mismatch results in a double deduction, only the Member State in which the payment has its source shall grant a deduction (meaning the other Member State must deny deduction). Correspondingly, to the extent a hybrid mismatch results in a deduction without inclusion, the Member State of the payer shall deny deduction of such payment. The rules only apply to hybrid mismatch between Member States. The EU Council has, however, requested that the European Commission present a proposal for the solution of hybrid mismatch with non-eu countries, expected no later than October 2016.

16 16 Annual Tax Newsletter 2016 The hybrid mismatch rule must be adopted by the Member States no later than 31 December 2018 and will be applicable from 1 January Bech-Bruun Comments The Directive is generally not expected to cause significant changes to the overall tax situation of Danish companies, as the majority of the initiatives are already established principles in Denmark. The introduction of a higher degree of common rules must be considered positive as it will hopefully result in fewer incidents of two tax authorities classifying tax issues differently. In this respect, the Community law elements may contribute to a clarification of the rules. Regarding the rule on interest limitation, this will in our assessment require only minor amendments to Danish tax law, as Denmark has already established rules. The amendments will primarily focus on (i) adjusting financial thresholds; (ii) amending the basis for calculating deductions (as the current Danish limit is calculated on the basis of earnings before interest and taxes (EBIT) while the EU-rule calculates on the basis of earnings before interest, tax, depreciation and amortisation (EBITDA); and (iii) implementing the specific exemptions contained in the Directive. The Directive s rule on exit tax in Article 5 as well as the general antiavoidance rule in Article 6 is generally consistent with the corresponding provisions in existing Danish law. As such, we do not expect any revision of these provisions as a consequence of the Directive. The new controlled foreign company rule in Article 7 may present some challenges, as Denmark already applies a CFC concept in relation to controlled financial companies. The primary differences between the two may be summarised in table the below. Taking into account that the Danish CFC rule was amended in 2007 as a consequence of the EU Court s decision in the Cadbury-Schweppes case (C-196/04) as the extent of the decision was not known at the time, we expect that an additional amendment to the Danish CFC rule will be the most likely outcome. Finally, the consequence of the hybrid mismatch provision in Article 9 of the Directive leads somewhat to the same result as the current Danish rule on hybrid companies in article 2B of the Danish Corporation Tax Act. The provision in the Directive does, however, extend slightly beyond the current Danish provision, and we expect the Directive may lead to minor amendments to the Danish provision. The new controlled foreign company rule: Primary differences Categories of income Minimum financial income Requirements for taxation level Requirements to country of residence Danish rule Financial, e.g. interest, capital gains, dividends and income from the disposal of shares, certain royalties, income from financial leasing and gains from the sale of CO 2 quotas and credits. Minimum 10% of the controlled company s assets and minimum 50% of the controlled company s annual income must be classified as financial assets/income. No, applies regardless of the taxation level in the country of the controlled company. No, applies to all controlled companies registered in a different country than the parent company. Directive rule The Member States may choose between including non-distributed income (i) from certain categories or (ii) arising from non-genuine arrangements. The Member States may opt not to treat a controlled company as a CFC if one third or less of the income falls within the categories or derives from transactions with the company or its associated enterprises. Yes, applies only if the actual corporate tax rate paid by the controlled company on the profit is less than 50% of the actual corporate tax rate which would have been charged in the Member State in which the parent company is registered. If the controlled company is registered in a foreign state which is not party to the EEA Agreement, and the Member State has chosen to include non-distributed income based on categories, the Member State may apply the rule even if the controlled company performs substantive economic activities in the country of residence.

17 Annual Tax Newsletter General anti-avoidance regulation in Denmark International anti-abuse tax rules Effective from 1 May 2015, the international general anti-abuse tax rule ( GAAR ), which denies tax treaty and EU tax benefits in cases of deemed abuse, was incorporated into Danish tax law. The adoption of the GAAR by the Danish Parliament was an early Danish attempt to implement the then recent amendments to the EU Parent/Subsidiary Directive (2011/96) as well as the perceived reasoning behind Action Point 6 of the BEPS initiative (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances). Additionally, the Danish GAAR marked a notable change in the traditional Danish anti-abuse tax legislation doctrine, which, in the past, had targeted specific practices deemed to be abusive and, therefore, countered by specific antiabuse rules (SAAR). The Danish GAAR is incorporated into s. 3 of the Danish Tax Assessment Act (ligningsloven) and contains two elements: (i) an EU tax directive anti-abuse provision and (ii) a tax treaty anti-abuse provision. Despite differences in the wording, no specific difference in the contents is envisaged between the directive antiabuse provision and the tax treaty anti-abuse provision. The element incorporating the EU tax directive anti-abuse provision into Danish tax law mainly attempted to implement the anti-abuse or misuse amendment to the Parent/Subsidiary Directive, which was agreed at the meeting of the European Council held in January The provision incorporated into s. 3(1) of the Danish Tax Assessment Act generally mirrors the wording of the amended Parent/Subsidiary Directive, stating that Denmark: shall not grant the benefits of this Directive to 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 this Directive, are not genuine having regard to all relevant facts and circumstances.. Furthermore, the provision states that an arrangement or a series of arrangements shall be regarded as not genuine to the extent that they are not put into place for valid commercial reasons which reflect economic reality. Unlike the anti-abuse provision included in the Parent/Subsidiary Directive, the Danish EU tax directive anti-abuse provision in addition to the Parent/Subsidiary Directive also applies to all EU Direct Tax Directives, in particular the EU Merger Directive (2009/133) and the Interest-Royalty Directive (2003/49). Originally, at the time of incorporation, the Danish implementation of the EU tax directive anti-abuse provision may have been extended beyond what was legally required. However, on 21 June 2016, the EU Council agreed upon the wording of a new Anti-Tax Avoidance Directive which not only contains a general anti-abuse rule very similar to that contained in the Parent/Subsidiary Directive, it also extends beyond the reach of EU directives. When we compare the wording of the general anti-abuse rule in the new Anti-Tax Avoidance Directive and the wording of the general antiabuse in the Parent/Subsidiary Directive, it is apparent that the only difference in wording between the two GAAR-provisions is that the Anti-Tax Avoidance Directive requires Members States to ignore the relevant arrangements when calculating the corporate tax liability. As such, the GAAR in the Anti-Tax Avoidance Directive extends to the entire domestic corporate tax law of a given Member State. The purpose of the Danish tax treaty anti-abuse provision is to implement the outcome of the BEPS project, more specifically Action Point 6 on Preventing the Granting of Treaty Benefits in Inappropriate Circumstances into Danish tax law. At the time of its incorporation into Danish tax law, the final report on Action Point 6 had not yet been released, thereby making it arguably somewhat premature to introduce a provision which incorporates the then still unpublished outcome of the project. While questionable reasoning was provided in the commentary as to why it was legally justified to apply the new Danish tax treaty anti-abuse provision to disqualify tax treaty benefits, including tax treaties not previously subject to a GAAR, the Danish tax treaty anti-abuse provision now applies to both existing and new Danish tax treaties. As such, SKAT, the Danish Customs and Tax Administration, should not be expected to refrain from challenging perceived tax treaty abuse solely on the grounds that a tax treaty predates the Danish tax treaty antiabuse provision or that the tax treaty itself does not contain a GAAR. The Danish tax treaty anti-abuse provision states that treaty benefits will not be granted if [our translation]: