Recently, the Supreme Court established that expenses in the form of salaries to employees working with the acquisition of enterprises are not tax deductible.

Decision has now been made in a case concerning two banks' option of deducting for tax purposes payroll costs relating to the acquisitions of enterprises, including unsuccessful attempts at such. The decision is likely to increase the administrative burden on the individual enterprises.

Deductible operating costs Under Danish law, an enterprise may deduct operating costs. Operating costs are costs spent on obtaining, securing and maintaining the income. Consequently, an enterprise may, for instance, not deduct capital expenditure incurred as a result of attempts to generate a new income base in the form of an extension of the existing enterprise. Facts of the case The case before the Supreme Court concerned two banks and whether they were allowed to deduct expenses for salaries to their own employees having worked with acquisition of enterprises.

The High Court of Eastern Denmark had found that, as a statutory presumption, capital expenditure comprising this type of expenses could not be deducted. However, the High Court of Eastern Denmark granted the banks the right to deduct the expenses as the High Court found that SKAT's (the Danish tax authorities) practice at the time of payment of the relevant expenses (2009 and 2010) allowed for such deductions to be made, and that SKAT was in no position to change its practice without clear prior notice to the public. Supreme Court's decision The Supreme Court agreed with the High Court of Eastern Denmark that the costs of employees working with acquisitions should be regarded as non-deductible capital expenditure. However, the Supreme Court did not find that it had been adequately proved that SKAT had used a practice according to which SKAT had granted the right to deduct payroll costs for an enterprise's own employees working with acquisitions. The Supreme Court stated that the fact that SKAT, in practice, had not taken a stance against such costs being deducted did not imply that SKAT had a positive practice of such costs being deductible.

The Government wants to secure tax deductibility Prior to the Supreme Court's decision of the cases, the Government announced that it intends to secure enterprises' rights to deduct all types of own employee payroll costs. The Government's general opinion is that the administrative burden on enterprises caused by their not being able to deduct all payroll costs but instead having to calculate in detail how much time the individual employees have spent on non-deductible activities must be dismissed.

Comments by Bech-Bruun With the Supreme Court's decision, it has been established that an enterprise may not – and have not previously been able to – deduct payroll costs not relating to an existing enterprise's ordinary operations.

On the basis of the Government's announcement of 11 April 2017, it may be expected that the Government will propose a bill to (re-)establish that salaries to employees should be deductible as ordinary operating costs, regardless of whether it concerns setting up or extending an enterprise. The bill is expected to be proposed when the new parliamentary year begins in October at the earliest. It will be particularly interesting to find out whether the bill will affect the future only, or if it may have a retrospective effect.

The Supreme Court's decision involves considerable administrative challenges for the enterprises which, for the present, will have to break down costs into deductible payroll costs (operating costs) and non-deductible payroll costs. Enterprises will also have to consider how they may handle this type of costs in their tax returns for at least the previous three income years for assessment purposes.