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13.5. Other Anti-Avoidance Rules

Hybrid Mismatches

Denmark has adopted mismatch rules in line with the EU Anti-Tax Avoidance Directive (ATAD 1 and 2). The hybrid mismatch rules prevent entities that are liable to tax in Denmark from being able to avoid taxation or obtain a double non-taxation benefit, by exploiting differences between the tax treatment of entities and instruments across different countries (i.e., between an entity and its permanent establishment or between associated entities).

Effective 1 January 2020, Denmark adopted the new hybrid mismatch rules. The new rules expand the existing rules on the recharacterization of a Danish branch office or partnership as a company, if the entity is treated as a corporation in the jurisdiction of residence of the controlling entity, or if the controlling owners are tax resident in a jurisdiction outside of the EU with which Denmark has no tax treaty (hybrid entities). Further, the new ATAD 2 rules regarding double deductions, deductions without inclusion (including in relation to hybrid entities and permanent establishments), and double non-taxation of permanent establishments and reverse hybrid companies are introduced.

If a mismatch arises, it is neutralized by:

  • Disallowance of deduction of expenditure under the hybrid arrangement to the extent that the corresponding income is not included in the tax base or is deducted twice; and
  • Inclusion of the income arising from hybrid arrangement as taxable income to the extent that it is deductible for the payer.

Tax Information Exchange Agreements (TIEAs)

Tax Information Exchange Agreements (TIEAs) provide for the exchange of information on tax matters, and Denmark has concluded TIEAs with 37 countries, including Andorra, Anguilla, Antigua and Barbuda, Aruba,  Bahamas, Belize, Bermuda, British Virgin Islands, Barbados, Bahrain, Cayman Islands, Cook Islands, Costa Rica, Dominica, Guatemala, Gibraltar, Grenada, Guernsey, Isle of Man, Jersey, Liberia, Liechtenstein, Mauritius, Macao, Marshal Islands, Monaco, Montserrat, Netherlands Antilles, San Marino, Seychelles, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Samoa, Turks and Caicos, Uruguay, Vanuatu.

Exchange of Cross-Border Tax Rulings and Advance Pricing Arrangements

In line with BEPS Action 5 and the EU directive on mutual administrative assistance, Denmark has adopted various measures in its domestic laws to enable the exchange of information on cross-border tax rulings and advance pricing agreements (APAs) beginning from 1 January 2017.

The information to be exchanged includes:

  • Identifying details of the taxpayer, and if applicable, its group;
  • Date of issuance, amendment, or renewal of the ruling;
  • Income years covered;
  • Type of ruling;
  • Description of the relevant transaction(s);
  • Reason for the exchange;
  • Information on other countries the information is exchanged with; and
  • Information on relevant parties’ resident in the receiving jurisdiction.

Automatic exchange applies to the following cross-border tax rulings and APAs:

  • Issued, amended, or renewed after 31 December 2016; and
  • Issued, amended, or renewed after 31 December 2012 but before 1 January 2017 provided it was still valid on 1 January 2014.  However, specified persons or groups of persons with a group-wide annual net turnover of less than EUR 40 million could be excluded, under certain conditions, from such mandatory automatic exchange.

Financial Account Information Reporting and Exchange

Denmark has adopted measures to implement the automatic exchange of financial account information with the EU Member States pursuant to Council Directive 2014/107/EU of 9 December 2014, which synchronized EU rules with the global standard for exchange of information developed by the OECD under the Common Reporting Standard (CRS). Denmark is also a party to the OECD Mutual Assistance Convention and the related Multilateral Competent Authority Agreement, and as such exchanges financial account information under CRS with qualifying non-EU countries. Finally, Denmark concluded an Intergovernmental Agreement (IGA) with the US for the implementation of the U.S. Foreign Account Tax Compliance Act (FATCA).

Reportable Cross-Border Tax Arrangements (DAC6/MDR)

Denmark has published the law implementing the EU Council Directive (DAC6), which requires the reporting of cross-border tax planning arrangements and exchange of information with the other EU Member States. The reporting requirement primarily applies to intermediaries that design, market, organize, or manage the implementation of a reportable arrangement. However, the reporting requirements are shifted to the taxpayer in certain cases, including where an intermediary is subject to confidentiality obligations or where a taxpayer has designed an arrangement without external intermediaries.

The requirements apply from 1 July 2020, and reportable transactions must be disclosed within a period of 30 days from the date the arrangement was first put in place. However, under a transitional regime, reportable transactions first put in place in the period 25 June 2018 to 30 June 2020 must be disclosed by 31 August 2020.

Filing of incorrect or misleading information may attract fines of up to DKK 400,000 for intermediaries, and fines of up to DKK 200,000 may apply for taxpayers. Failure to meet the reporting deadlines attracts fines of at least DKK 50,000 for intermediaries and DKK 25,000 for taxpayers.

COVID-19 Emergency Measures

Due to the COVID-19 pandemic, the EU Council adopted a 6-month optional deferral for DAC6 reporting. Denmark adopted the deferral option and postponed the DAC6 reporting as follows:

  • Reportable arrangements between 25 June 2018 and 30 June 2020 to be reported by 28 February 2021 (instead of 31 August 2020);
  • The standard 30-day reporting begins from 1 January 2021 (instead of 1 July 2020), including for arrangements that became reportable between 1 July and 31 December 2020; and
  • The first periodic reporting for marketable arrangements is due no later than 30 April 2021.

Further, intermediaries and relevant taxpayers that are required to report must be registered by 8 January 2021, although the option to register from 1 July 2020 is still available.

Exit Tax Rules

Exit tax arises when a taxpayer transfers its fiscal domicile or assets and liabilities to another country. The taxpayer may avail of an election to spread the payment of the exit tax over up to 5 years (see Sec. 11.).

Non-Cooperative Jurisdictions

Effective from 1 July 2021, Denmark has introduced new anti-avoidance rules (defensive measures) based on the EU list of non-cooperative jurisdictions. The measures include:

  • Restriction on the deduction of payments made to persons located in non-cooperative jurisdictions (see Sec. 6.3.); and
  • Increased withholding tax rate of 44% on dividends paid to persons resident or registered in non-cooperative jurisdictions (see Sec. 8.2.2.).

The list of non-cooperative jurisdictions as last amended by the EU Council on 12 October 2021 is as follows:

American Samoa Anguilla (removed effective 12 October 2021) Dominica (removed effective 12 October 2021) Fiji
Guam Palau Panama Samoa
Seychelles (removed effective 12 October 2021) U.S. Virgin Islands Vanuatu Trinidad and Tobago (effective 1 January 2022)

Note:

The Danish blacklist excluded Trinidad and Tobago because of the existence of a tax treaty between both countries. However, Trinidad and Tobago has been included in the EU blacklist effective from 1 January 2022, and the tax treaty between Denmark and Trinidad and Tobago is terminated effective from the same date. Therefore, Trinidad and Tobago is included in the Danish blacklist effective from 1 January 2022.

Beneficial Ownership Register

Denmark has introduced new disclosure requirements for an ultimate beneficial ownership register.

Danish legal entities are required to electronically disclose the identity of their ultimate beneficial owners on an annual basis, including the following information:

  • The name and address of the ultimate beneficial owner;
  • The date the person became an ultimate beneficial owner;
  • The share capital and votes held by the ultimate beneficial owner in the case of direct ownership;
  • Indication as a beneficial owner in the case of share ownership or indirect ownership; and
  • The initial disclosure was to be made by 1 December 2017.

Denial of Withholding Tax Exemption

On 3 May 2021, the Eastern High Court of Denmark issued two judgments denying withholding tax exemption for payment of dividends following the principle laid down by CJEU in cases - C 116/16 and C 117/16 (the “Danish cases”, see Sec 8.2.2.). In the first case, the Danish company distributed dividends of DKK 566 million and DKK 92 million in 2005 and 2006 to its parent company in Cyprus. In the second case, the Danish company distributed dividends amounting to DKK 1.05 billion to its parent company in Luxembourg. In both cases, the Danish tax authorities sought to deny the withholding tax exemption on dividend payments made to the parent companies as they were "flow-through companies" and were not the ultimate beneficial owners of the dividends.

In the first case, the Court held that the dividend payment of DKK 566 million in 2005 would be eligible for withholding tax exemption as the taxpayer had proved that the amount had been passed to the ultimate parent company in the US and exemption would have been available even if the payment was made directly to the US company under the Denmark-US tax treaty. However, for the payment of DKK 92 million in 2006, the taxpayer was unable to prove that the dividends were passed to the US company, and hence the withholding tax exemption under the EU parent-subsidiary directive or any tax treaty should be denied.

In the second case, the Court held that the amount received by the Luxembourg company was transferred to private equity funds in various countries, which would not have qualified for a withholding tax exemption in the relevant tax treaties with Denmark. Therefore, the withholding tax exemption otherwise available under the EU directive should be denied.

Both cases predate the introduction in 2015 of specific anti-abuse measures under domestic law to deny the exemption. Nevertheless, the Court followed the CJEU ruling, which held that Denmark had not only the right to refuse the exemption under the directive but also the obligation to do so, in cases of abuse, even though there are no specific anti-abuse measures under the domestic laws.