On May 31, 2018, the Denmark Ministry of Taxation issued draft proposals to implement provisions of the EU Anti-Tax Avoidance Directive (“ATAD 1”) (e.g., EU Directive 2016/1164). The proposals would also implement Directive 2017/952, which amends Directive 2016/1164 with respect to hybrid mismatches with third countries (“ATAD 2”).
Denmark proposes to implement the various provisions into national law by December 31, 2018, with effect from January 1, 2019. However, the deadline for implementation of the hybrid mismatch rules is December 31, 2019, with effect from January 1, 2020. Denmark will implement a specific provision on reverse hybrid mismatches on December 31, 2021, with effect from January 1, 2022.
The draft proposals define hybrid mismatches (see BEPS Action 2) as involving a company or association, where one of the following occurs (list is not exhaustive):
- Payment under a financial instrument is deducted, there is no inclusion within a reasonable period, and the mismatch is due to differences in the qualification of the instrument or the payment.
- Payment to a hybrid entity is deducted, there is no inclusion, and the mismatch results from differences in the allocation of payments to the hybrid entity under the laws of the jurisdiction in which the hybrid entity is established or registered.
- Payment to an entity with one or more permanent establishments (PEs) is deducted, there is no inclusion, and the mismatch results from differences in the allocation of payments between the entity and the PE, or between two or more PEs of the same entity, in accordance with the laws of the jurisdiction in which the entity operates.
- Payment made by a hybrid entity is deducted, there is no inclusion, and the payment is disregarded under the laws of the payee’s jurisdiction.
- Fixed internal payment between the entity and its PE, or between two or more PEs, is deducted, there is no inclusion, and the payment is disregarded under the laws of the payee’s jurisdiction.
- Double deduction.
Controlled foreign companies (CFCs)
Denmark proposes rules that would consider a subsidiary to be controlled if the parent company itself, or with associated persons: (1) has a direct or indirect interest of more than 50% of the voting rights, (2) owns directly or indirectly more than 50% of the capital, or (3) has the right to receive more than 50% of the subsidiary’s profits. See BEPS Action 3.
CFC taxation will continue to apply to all controlled subsidiaries, regardless of where the subsidiary is resident. A Danish parent company is treated equally, whether it owns a Danish or foreign subsidiary.
According to the draft proposals, there is no Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) rule in Danish tax law. However, Denmark has introduced other rules to prevent tax evasion through excessive interest rates, such as the thin capitalization rule, the interest rate rule, and the EBIT rule. Denmark proposes to maintain the current interest rate limitation rules on thin capitalization and the interest rate ceiling, but replace the EBIT rule with an EBITDA rule.
Denmark proposes that the EBITDA rule be designed so that certain companies, foundations, and associations can reduce taxable income, due to excessive borrowing costs, by up to 30% of EBITDA. It also proposes the introduction of a group rule where the Group’s EBITDA rate is applied. The Group’s total EBITDA rate is obtained by dividing the Group’s overall excessive borrowing costs to independent persons outside the Group with the Group’s total EBITDA income. The calculation uses information from consolidated financial statements. Finally, the draft proposals include an exemption from the EBITDA rule for financial companies (i.e., banks and insurance companies).
Under BEPS Action 4, the OECD recommends a fixed ratio rule that limits an entity’s net deductions for interest and payments economically equivalent to interest to a percentage of its EBITDA. The recommended approach includes possible ratios between 10% and 30%. The OECD also recommends a group ratio rule, alongside the fixed ratio rule, that would allow an entity with net interest expense above a country’s fixed ratio to deduct interest up to the level of the net interest/EBITDA ratio of its worldwide group.