In Denmark ordinary business expenses are deductible in calculating a company's taxable income. This includes interest payments and other financing costs, although, the deductibility of such costs is subject to certain rules and limitations.
The limitations are primarily contained in the following sets of rules:
- thin capitalisation rules;
- the interest ceiling rule; and
- the EBIT rule
The three sets of rules must be applied in the order listed above. Restricted interest costs and capital losses due to thin capitalisation are not included in the calculation of limitations under the other two sets of rules.
Thin capitalisation rules
The thin capitalisation rules apply to companies and branches with intra-group debt exceeding DKK 10 million (approximately €1.34 million). If the debt-equity ratio exceeds 4:1 at year end, tax deduction is denied for interest payments and capital losses on the part of the debt exceeding the 4:1 ratio. However, if the company or branch is able to demonstrate that similar financing could be obtained from an independent party the rules do not apply.
The Interest Ceiling Rule
For Danish companies “net financing costs” are tax deductible only to the extent the expenses do not exceed a cap calculated as a standard rate of return (adjusted annually - 3.5% in 2012) on the tax base of the company's assets less certain financial assets.
Net financing costs are defined as the negative sum of interest income and interest expenses, deductible and taxable loan commissions, gains and losses on debt claims and financial contracts (with certain exceptions), the interest element of financial leasing and taxable dividends, taxable capital gains and offset losses on shares. Net financing costs include interest irrespective of whether the interest derives from intra-group debt or external debt.
The limitation applies only to net financing costs exceeding DKK 21.3 million (approximately €2.85 million). Any net financing costs exceeding the threshold will be lost permanently and cannot be carried forward. However, capital losses may be off-set against capital gains in the following three income years.
The EBIT Rule
The EBIT rule limits the tax deductibility of net financing costs to 80% of EBIT. However, net financing costs not exceeding DKK 21.3 million are always deductible. Net financing costs restricted under the EBIT rule can be carried forward for tax deduction in the following years and are not time-limited.