Facts on Taxation in Denmark

Transcription

1 Facts on Taxation in Denmark Updated by Njord Law Firm, December

2 Contents Corporate taxation... 2 Tax liability for different corporate forms... 2 Full or limited tax liability... 2 Branch vs. company... 3 Dividends outbound... 3 Incoming dividends... 4 Capital gains... 4 Joint taxation... 5 Deduction and depreciation... 6 Losses... 6 Cash credit for R&D losses... 6 Capital taxation... 6 Payroll taxation... 6 Anti-avoidance rules... 7 Transfer pricing... 7 Thin capitalization... 7 Other restrictions on interest reductions... 7 Controlled foreign company taxation (CFC taxation)... 7 Double taxation relief... 8 Social security contributions... 8

3 Facts about Taxation in Denmark Denmark has a favorable tax climate; a corporate tax rate of 22%, an extensive network of tax treaties, and attractive tax rules for expatriates. Below, you will find brief information about corporate taxation in Denmark. Corporate Taxation Corporate income less deductions and depreciations is subject to corporate tax. The Danish corporate tax rate is 22%. However, the effective rate might be lower, as business expenses and depreciations are tax deductible. Denmark levies no capital duty, trade tax, share transfer duty, nor wealth taxes. Dividends from subsidiaries shares may generally be received/distributed without tax/withholding tax subject to few conditions. Also, Denmark is one of the countries in the world which has entered into most tax treaties to avoid double taxation. Danish transfer pricing legislation is in accordance with OECD guidelines. From an employer point of view, it is worth noting that Danish employers pay virtually no social security contributions as opposed to many other countries. Tax Liability for Different Corporate Forms All companies registered in Denmark, such as A/S (public limited liability company) and ApS (private limited liability company) and the new start-up company form (IVS) are subject to corporate taxation. As a main rule foreign companies and the European company (SE Company), having their effective management in Denmark or carrying on business activities through a permanent establishment in Denmark, are also subject to corporate tax in Denmark. Partnerships are in most cases transparent for tax purposes, meaning that only the partners are subject to tax. Other specific entities, such as foundations may also be subject to tax in Denmark. Full or Limited Tax Liability The Danish corporate income tax system distinguishes between resident and non-resident entities. Resident companies are subject to taxation according to a modified territorial principle which means that all income derived from Denmark is subject to Danish taxation. Income from permanent establishments

4 and real property located in foreign jurisdictions is as a principal rule not subject to Danish taxation for Danish companies. This makes Denmark an attractive location for a regional head quarter since double taxation among the head quarter and its branches is totally avoided. Foreign companies with a permanent establishment (branch) in Denmark are subject to limited tax liability of income deriving from the permanent establishment. Certain types of income from sources in Denmark, such as income from real estate etc. are also subject to limited tax liability in Denmark. Branch vs. Company In Denmark, establishing a company is often chosen in favor of establishing a branch (permanent establishment). A company is a separate tax entity and is only subject to tax in Denmark. As opposed to this, a branch in Denmark is part of the foreign parent company and is generally subject to double taxation in both Denmark and abroad. Double taxation may be avoided by applying a double treaty, however, implying cost and administration. If a Danish company is chosen as regional head quarter, double taxation with its foreign branches can be avoided applying the unique Danish tax rule without cost and administration. A representation office is not subject to taxation and shall not be registered for corporate purposes. Registration for other purposes may be required. However, the activity in a representation office may only be of limited preparatory nature such as general marketing etc. Accordingly, the use of a representation office is very limited. Dividends Outbound A Danish company may, generally, pay dividends free of any withholding tax to other foreign companies, if the shares in the distributing company qualify as subsidiary shares 1 or group shares 2 and the foreign company is domiciled in an EU/EAA country or another state with which Denmark has concluded an 1 Subsidiary shares are defined as shares where 1) a company owns at least 10 per cent of the nominal share capital of the company, and the company is a Danish company, or, the company is a foreign company and the taxation of dividends paid by the company must be waived or reduced under the EC Parent Subsidiary Directive or a tax treaty between Denmark and the country in which the subsidiary is resident. 2 Group shares are defined as shares where the shareholder and the company are subject to mandatory Danish national joint taxation or could opt for a Danish international joint taxation. The general requirement for mandatory Danish national joint taxation or for opting for international joint taxation is that the parent company, directly or indirectly, controls more than 50 per cent of the votes of the company. Certain anti-avoidance rules apply for both subsidiary shares and Group shares, cf. below under Anti-Avoidance rules.

5 applicable double tax treaty; and the receiving company is able to claim a reduction of the taxation on dividends under a tax treaty or under the EU Parent Subsidiary Directive. Accordingly, most foreign companies may receive dividends tax exempted from their fully owned Danish subsidiary, provided they are the beneficial owner of the shares. If the shares in the distributing company qualify as neither subsidiary shares nor group shares, and the receiving company is domiciled in a country with which Denmark has concluded a treaty under which the countries are obligated to share information regarding the taxation, the withholding tax is in most cases 15%. Otherwise, dividends are subject to 27% withholding tax. Incoming Dividends Dividends are generally tax-exempt in Denmark, provided that the shares in the distributing company are qualified as subsidiary shares 1 or as group shares 2. If the distributing company is a foreign company, it is a condition that the distributing company cannot deduct the dividends from its taxable income, unless the taxation abroad shall be waived or reduced according to the EC Parent Subsidiary Directive. Capital Gains For corporate shareholders, capital gains on the sale of shares in unlisted companies are generally tax exempted. Capital gains on the sale of listed shares are tax exempted, provided the shares can be defined as either subsidiary shares 1 or group shares 2. Capital gains from listed non-group/non subsidiary shares are taxed at the corporate tax rate of 22%. This gain is taxed annually on a mark-to market basis. Capital gains on bonds and debts are generally taxed at corporate tax rate if owned by a company. Foreign shareholders are not subject to Danish capital gain tax on shares in Danish companies however, distributions of liquidation proceeds in the calendar year in which a company is dissolved is considered a taxable dividend, if the shares are subsidiary shares 1 or group shares 2 and the recipient is a resident in a state outside the EU/EAA, the Faroe Islands, Greenland or in a country with which Denmark has not entered into a double tax treaty under which the recipient can claim reduction of taxation on dividends.

6 Anti-avoidance rules apply in connection with sales of shares under which a sale of shares will be treated as a (taxable) dividend distribution. Anti-avoidance rules Intermediate Companies In order to avoid structures where shareholders do not meet the 10% capital requirement for subsidiary shares 1 or the 50% voting power requirement for group shares 2, but pool their shares in a joint holding company to meet the 10% threshold, anti-avoidance rules apply: If the following conditions are all satisfied: The primary function of the holding company is to own shares in the subsidiary; The holding company does not carry out genuine economic business with respect to the shares; The intermediate company does not hold the entire share capital in the company or does own the entire share capital in a company not tax liable to Denmark and from where dividends are not tax exempted according to the EU parent/sub Directive or according to a double tax treaty; More than 50% of the shares in the holding company are, directly or indirectly, owned by Danish resident companies or a Danish PE of a foreign company that would not qualify for tax-exempt dividends in case of direct ownership of the shares; and The shares in the holding company are not listed on a regulated market or a multilateral trading facility. The 50% test mentioned above must be made separately for each shareholder in the subsidiary. Joint Taxation A Danish company shall be mandatorily taxed jointly with Danish group companies and Danish permanent establishments/real estate controlled by the same group. Losses in one Danish company can be set off against taxable income in another Danish company or permanent establishment/real estate under the joint taxation group. Loss from a Danish permanent establishment can only be offset against income in other Danish entities if the loss cannot be offset against income in the foreign head office. Hence, if the foreign company is taxed according to a global income principle, deduction of the loss will not be possible. International joint taxation with foreign affiliated companies and branches is optional.

7 If chosen, the joint taxation must on a global basis include all companies and branches within the Group and it must generally apply for a 10-year period. Group entities under a joint taxation must reimburse the loss-making company for utilization of the losses. Moreover, group companies are jointly liable for tax payments under the joint taxation. Deduction and Depreciation Business expenses are generally deductible. Machinery and equipment is generally depreciated at the rate of 25%. The depreciation on some assets with a long life span e.g. ships, airplanes, etc. is reduced from 25% to 15%. The depreciation on assets classified as infrastructure facilities is 7%, and buildings and installations are generally depreciated at a rate of up to 4%. Goodwill and other intangibles may be depreciated on a straight line over 7 years. Losses Losses may be carried forward indefinitely. However, the annual amount deductible is limited to approx. DKK 7.8 million; the remaining losses carried forward can only reduce the residual income with 60 percent. Cash Credit for R&D Losses Loss-making companies may receive a cash tax credit for losses which relate to R&D costs. Accordingly, companies with R&D activities can receive payment from the Danish tax authorities equal to the tax value i.e. 22% of the loss-making R&D costs. The cash credit amount is maximized to the tax value of DKK 25 million. Capital Taxation Denmark has no net wealth tax, no share transfer duty and there are no capital duties. Payroll Taxation Payroll taxation in Denmark only applies to companies carrying out specific VAT exempted activities. Different rates apply for different VAT exempted activities such as financial activities, import and publishing of newspapers etc.

8 Anti-avoidance Rules There is no statutory general anti-avoidance rule, but the Danish courts have applied a kind of substance over form principle. There are specific anti-avoidance rules applicable in specific situations. Transfer Pricing Transactions between associated companies are subject to the arm s length principle, which applies to entities controlled by another entity, group-related companies and the relation between a head office and a permanent establishment. Denmark generally applies the OECD Transfer Pricing Guidelines. Larger groups are required to prepare and keep documentation on transfer prices and conditions. Thin Capitalization Thin capitalization may apply for a group if controlled debt exceeds DKK 10 million and debt to equity ratio exceeds 4:1 at the end of the year. Other Restrictions on Interest Reductions If net financial expenses on a group basis exceed DKK 21.3 million (2014-rate), restrictions on tax deductibility may apply. Under the interest-ceiling limitation, the financial expenses are maximized to an amount determined as a standard rate (4.2% for 2014) of the Group s taxable value of all assets safe from financial assets. Under the EBIT restrictions, net financial expenses in excess of 80% of taxable income before financial expenses are not tax deductible in the year but are eligible for carry forward to future years. Controlled Foreign Company Taxation (CFC Taxation) CFC taxation rules apply to financial companies controlled by a Danish company. A company is defined as a financial company if more than 50% of the income is financial and if at least 10% of the assets are financial. When a company commands the majority of the voting rights in a subsidiary it is regarded as a controlling company. If CFC taxation applies, the total income of the subsidiary is subject to Danish tax.

9 Double Taxation Relief If the taxpayer is subject to tax on the same income both in Denmark and abroad, such double tax may be relieved according to one of the many tax treaties Denmark has concluded. If double taxation occurs with a non-tax treaty country, a tax credit may be granted according to specific Danish rules. Social Security Contributions Employers Employers are not obliged to pay social security contributions. Only the Danish labour market supplementary pension scheme (ATP) and similar contributions are payable at a total cost of approx. EUR 1.000per employee per year. Employees Employees are liable to a social security tax of 8%. The payment is deductible for tax purposes, thus the effective rate is approximately 3-4%. The taxable base is the gross salary including certain fringe benefits such as company car, pension contribution made by the employees etc. Foreigners living and working in Denmark are generally covered by the Danish social security system regardless of whether they are subject to said social security tax or not.

10 About Invest in Denmark Invest in Denmark provides your company with a tailor-made solution for locating your business in Denmark. We measure our success by how well we contribute to yours. So, if your company is considering setting up a business or expanding your activities in Denmark, make us your first stop. Our specialized staff across the globe has the corporate background, industry insight and well-connected networks to advise you on every aspect of locating in Denmark. Not just when you set up, but also as your business grows. Our tailor-made solutions include connecting companies with key local contacts, arranging fact-finding tours and providing comprehensive benchmark analyses. We make sense of local legislation and advantages of locating in Denmark all free of charge and in full confidentiality. We Look Forward to Hearing from You Headquarters Invest in Denmark, Ministry of Foreign Affairs, DK-1448 Copenhagen , indk@um.dk Asia-Pacific Shanghai Beijing Tokyo Bangalore Seoul Taipei Europe Paris Munich London Istanbul Barcelona North America New York Silicon Valley Toronto This fact sheet has been made in cooperation with independent experts in our service provider network. The information stated here may contain errors or omissions. Invest in Denmark and our partners disclaim any and all liability for any loss or damage caused by such errors or omissions. In cooperation with: Updated by Njord Law Firm, December