On 21 April 2015, the Danish Parliament adopted a bill, which sets out to deal with certain potential abuses recently encountered by the tax authorities as well as the Danish enactment of the general international anti-abuse initiatives currently considered at EU and OECD level.
The new Danish GAAR will take effect as of 1 May 2015.
The new bill includes three main elements:
- Introduction of a new international anti-abuse tax rule (GAAR), which denies tax treaty and EU tax directive benefits in cases of deemed abuse
- Introduction of a new ”CFC type” rule for trusts
- Introduction of limited duration of tax rulings on exit tax values, targeting post-exit assets or business transfers
This newsletter will focus solely on the new GAAR.
New international anti-abuse tax rule
The act introduces a new general anti-abuse rule (GAAR) into Danish tax law. This is an early Danish attempt to adopt the 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) in Danish domestic law.
The new provision marks a notable change in the traditional Danish antiabuse tax legislation doctrine, which, in the past, has targeted specific practices which have been deemed to be abusive and therefore been countered by specific anti-abuse rules (SAAR).
The new rule in s. 3 of the Danish Tax Assessment Act (”ligningsloven”) 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 anti-abuse provision and the tax treaty anti-abuse provision.
The EU tax directive anti-abuse provision mainly attempts to implement the anti-abuse or misuse amendment to the Parent/Subsidiary Directive which was agreed at the meeting of the European Council held on 27 January 2015.
The Danish anti-abuse provision is in essence a verbatim translation of the wording of the amended Directive, thus 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 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 in the Parent/Subsidiary Directive, the Danish domestic provision is also intended – in addition to the Parent/ Subsidiary Directive – to apply as an anti-abuse rule to all EU Direct Tax Directives, specifically the EU Merger Directive (2009/133) and the Interest-Royalty Directive (2003/49).
The tax treaty anti-abuse provision aims at implementing the expected outcome of the BEPS project, specifically Action Point 6 regarding Preventing the Granting of Treaty Benefits in Inappropriate Circumstances. As the final report on Action Point 6 has not yet been released, it is arguably somewhat premature to introduce a provision which incorporates the outcome of the project.
However, the new GAAR is nevertheless explicitly applicable to both existing and new Danish tax treaties, based on the alleged general agreement among the OECD countries implying that states are not obliged to grant treaty benefits from participation in arrangements that entail abuse of treaty provisions. Questionable reasoning is provided in the commentary as to why it is legally justified also to apply the new Danish domestic GAAR and disqualify tax treaty benefits, including tax treaties not previously subject to a GAAR.
However, Danish tax authorities should not be expected to refrain from challenging perceived tax treaty abuse solely on the grounds that a tax treaty predates the GAAR or that the tax treaty itself does not contain a GAAR.
The new GAAR states that treaty benefits will not be granted if [our translation]: ”it is reasonable to establish, taking into account all relevant facts and circumstances, that obtaining the benefit is one of the most significant purposes of any arrangement or transaction which directly or indirectly leads to the benefit, unless it is established that granting the benefit under such circumstances would be in accordance with the content and purpose of the tax treaty provision in question.”
It is specifically mentioned in the commentary that the onus of proof regarding abuse lies with the tax authorities as they must establish whether a transaction falls within the scope of the GAAR, i.e. that one of the most significant purposes of the transaction or arrangement in question has been to achieve a tax advantage, taking into account all relevant facts and circumstances.
If, however, this criterion is deemed to be met, the tax payer must then substantiate that such advantage is nevertheless consistent with the content and purpose of the tax treaty, thus returning the transaction/ arrangement to its initial position outside the scope of the GAAR.
The new anti-abuse provision will take effect from 1 May 2015, meaning that a tax payer cannot claim tax treaty or EU directive benefits in the event of deemed abuse, if the benefit claimed concerns a payment to which the relevant party is entitled on or after 1 May 2015, or if a the restructuring on which tax treaty or EU directive benefits are claimed are adopted on or after 1 May 2015.
The new GAAR thus also applies to transactions/arrangements which have been initiated prior to 1 May, but where a part of the entire transaction/arrangement is concluded on or after 1 May 2015. No grandfathering rule will thus apply.
Since Denmark has not previously operated with a general anti-abuse provision and due to the very general nature of its wording, a level of uncertainty as to the obtaining of tax directive or tax treaty benefits will be introduced with the entering into force of the new proposed provisions, which has been heavily criticized during the enactment process, but without any visible impact. At least, uncertainty will exist pending specific administrative or court practice regarding the use of both provisions.
Accordingly, caution should be shown as to the application of such provisions, and specific tax advice thereon should be obtained, in particular when implementing financial or organisational structures, even if legitimate business reasons exist to implement the structure in question, in so far as they may also be deemed to be tax-motivated.