On January 29, 2016, the Danish tax authorities (SKAT) issued Legal Guidance 2016-1, which provides background information on Denmark’s tax system and its application, including its Controlled Foreign Company (CFC) rules (OECD BEPS Action 3), transfer pricing rules (BEPS Actions 8-10), and transfer pricing documentation rules (OECD BEPS Action 13).
Each of the foregoing topics is addressed in turn below.
CFC Rules – BEPS Action 3
Section CD4.1 of Legal Guidance 2016-1 discusses Denmark’s CFC rules (Section 32 of the Corporate Tax Act (CTA)), which require Danish companies to include income earned by subsidiaries (both foreign and domestic), where the subsidiary is treated as a CFC under the Danish rules. The CFC rules also apply to foreign permanent establishments (PEs).
Specifically, a subsidiary is treated as a CFC when all of the following conditions are met (Section CD4.1.2):
- The Danish parent company, together with other group members, directly (or indirectly) owns more than 50% of the capital or controls more than 50% of the voting rights in the subsidiary;
- More than half of the subsidiary’s taxable profits determined under Danish tax laws are derived from passive forms of income(e.g. interest, royalty, capital gains, etc.); and
- During the tax year, the subsidiary’s CFC assets (i.e., assets that generate passive income) make up more than 10% of the subsidiary’s total assets.
Section CD4.1 also provides an overview of notable CFC decisions by the Danish Tax Board.
Transfer Pricing Rules – BEPS Actions 8-10
Section CD11 of Legal Guidance 2016-1 describes Denmark’s transfer pricing rules and their application, and lists notable transfer pricing decisions by the Danish Tax Board.
Denmark’s transfer pricing rules (Section 2 of the Tax Assessment Act and Section 3B of the Tax Control Act) apply to transactions between related parties, regardless of whether the related parties are Danish residents. A party is related when it is at least 50% owned by the other party. Denmark’s transfer pricing rules generally follow the 2010 OECD Transfer Pricing Guidelines.
Section CD11.2.4 discusses Cost Contribution Arrangements (CCAs), which are permitted in Denmark based on its adherence to Chapter VIII of the 2010 OECD Transfer Pricing Guidelines. A CCA is an agreement between two or more companies to share the costs and risks associated with the development, production or acquisition of assets, services or rights. CCAs are covered by the OECD BEPS Action 8 recommendations.
Transfer Pricing Documentation – BEPS Action 13
Section CD11.4 of Legal Guidance 2016-1 describes Denmark’s transfer pricing documentation rules (e.g. Form 05.022) and the Country-by-Country (CbC) reporting requirements enacted into law on December 18, 2015 (Section 1(2) of L 46 Bill) as part of the 2016 Budget.
Section CD184.108.40.206 discusses the newly-enacted CbC rules found in Section 3B of the Danish CTA. Section 3B is modeled off of the OECD BEPS Action 13 recommendations, and supplements Denmark’s previous documentation rules as from January 1, 2016. While the December 18, 2015 legislation does not address master and local file requirements included among the BEPS Action 13 recommendations, Denmark’s Minister of Taxation has indicated that regulations will address the master and local file requirements.
The following companies will have to submit a CbC report to SKAT, pursuant to Section 3B(11) of the CTA:
- Ultimate parent companies of multinational groups that are Danish tax residents, with consolidated turnover exceeding DKK (Danish Kroner) 5.6 billion (about € 750 million) in the previous tax year; or
- Group companies of multinational groups that are Danish tax residents with consolidated turnover exceeding DKK 5.6 billion in the previous tax year, and that meet one of the following conditions:
- The ultimate parent company of the group is not obligated to submit a CbC report in its country of residence;
- There is no automatic exchange of CbC reports between Denmark and the country of residence of the ultimate parent company; or
- There is a “systemic failure” regarding the country of residence (meaning suspension of automatic exchange of information or failure to provide CbC reports) of the ultimate parent company, and SKAT has notified the Danish group company to that effect.
A Danish group company will not be required to submit a CbC report if the multinational group submits such a report through a ‘surrogate parent company’ to the tax authorities of its country of residence, and all of the following conditions are met (Section 3B(13) of the CTA):
- The country of residence of the surrogate parent company requires CbC reporting;
- The country of residence of the surrogate parent company has concluded an agreement with Denmark regarding exchange of information and exchange of CbC reports is made according to an agreement between the competent authorities;
- There is no systemic failure regarding the country of residence of the surrogate parent company or the SKAT has not given notification of such to the group company;
- The country of residence of the surrogate parent company has received notification that the company is a surrogate parent company; and
- The Danish group company has notified SKAT regarding the company that is required to submit a CbC report, as well as the company’s country of tax residence.
Pursuant to the December 18th legislation, the CbC report will contain certain information relating to the global allocation of the multinational enterprise’s income and taxes paid in addition to certain indicators of the location of economic activity within the multinational enterprise group.
Section 3B(15) defines ‘revenue’ as ‘arising in connection with a company’s ordinary operations, including sales, provision of services, fees, interest, dividends and royalties.’ The last three items (i.e. interest, dividends and royalties) are not included in the OECD BEPS Action 13 recommendations.
Automatic Exchange of CbC Report Information
Denmark is one of 31 countries that signed on to the OECD Multilateral Competent Authority Agreement (MCAA) for the automatic exchange of CbC reports on January 27, 2016. Under the MCAA, signatories may exchange CbC reports with other signatories if they have CbC reporting requirements in place and are a party to the OECD Convention on Mutual Administrative Assistance in Tax Matters (the ‘OECD Convention’). The OECD Convention includes provisions regarding the exchange of information on request, spontaneous information exchange, tax examinations in other countries, simultaneous tax examinations and assistance in tax collection.
Additional Documentation Requirements
Section 4 of Order No. 42 (issued on January 24, 2006) requires Danish companies to document the following information similar to the Local File requirements included in the OECD BEPS Action 13 recommendations:
- A description of the Group’s legal structure, including indication of the consolidated entity and the geographical location;
- A description of the organizational structure, including the identification of the primary business activity of the taxpayer as well as related parties that have entered into controlled transactions with taxpayer;
- A table showing the previous 3 years of revenue and profit from ordinary activities of the taxpayer as well as related parties that have entered into controlled transactions with taxpayer;
- A brief history of the group and the company, a description of any restructuring and change in essential functions and risks, as well as an explanation of any deficit; and
- A brief description of trade-related issues for the Group, including identification of the main competitive parameters.
Section 5 of Order No. 42 requires Danish companies to further document the following information on controlled transactions:
- The value transferred between related parties;
- Products (goods, services, assets, intangible assets, etc.) and property;
- A functional analysis (functions, assets and risks.);
- Contractual terms;
- Economic circumstances;
- Business strategies;
- Cost sharing arrangements; and
- Any other matters that are specifically considered relevant to an arm’s length
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