On 26 February 2014, the Danish Parliament adopted bill no. L98. L98 brings about a harmonisation of the legislation concerning exit tax as individual business owners now are entitled to a deferral scheme on payment of exit tax. The newly adopted Bill also amends the statute regarding companies’ limitation on deductible interests. Furthermore, L98 implements taxation on dividend from a subsidiary within the EU to a parent company, if the subsidiary can deduct the payment of dividend.

Exit tax on individuals’ business activities

Previously, individual business owners were not entitled to a deferral scheme on payment of exit tax.

In order to comply with a ruling of the European Court of Justice, L98 introduces a deferral scheme for individual business owners on the same basis as the deferral scheme already in place for companies. Individual business owners, who are taxable within the EU, can choose to enter into a deferral scheme, if the tax concerns assets which are transferred to or found in an EU member state. The assets of the individual business owner will, in connection with his exit, be regarded as sold at market value at the time of exit.    

The deferral scheme must include all assets that are no longer taxable in Denmark. The balance of the deferral scheme corresponds to the market value of the assets that are no longer taxable in Denmark. Interest is paid on the balance, and the balance is payable within seven years, and as a result the minimum payment is 1/7 of the total balance of the deferral scheme. 

The enactment of L98 expands the scope of assets subject to exit tax, as it is no longer a requirement that the assets have been used in a taxable business in Denmark. 

The provision became effective on 1 March 2015.  

Interest limitation

L 98 changes section 11B (the asset test) in the Danish Company Taxation Act. According to the preparatory work to L98, well-consolidated groups of companies may in some situations unintendedly be comprised by the asset-test.  These well-consolidated groups of companies may in the last couple of years have been subject to market-to-market taxation of taxable capital gains on bonds as a consequence of the declining interest level.  When interest levels increase again, these groups of companies will, all else being equal, be subject to capital losses on the bonds. Before the changes to section 11B in the Danish Company Taxation Act, the well-consolidated groups of companies could at a later time be comprised by interest limitation on such capital losses.  

Following the changes of the abovementioned rule, companies will no longer be affected by the interest limitation rule, provided the net financial expenses consist of net capital losses that exceed the net interest income of the income year. The new rule ensures that net capital losses on debt are not comprised by the interest limitation.  The net capital losses on debt will instead be carried forward and set off against future net capital gains on receivables and net interest income. 

The new rule will take effect for income years beginning 1 March 2015 or later. 

Taxation on dividends from foreign subsidiaries

Before L98 was adopted by the Danish Parliament, Danish parent companies were taxable on dividends from subsidiary shares, if the subsidiary or a subsidiary at a lower level had been able to deduct the dividends for tax purposes.  The received dividends would, however, not be taxable, if the taxation was exempt under the parent/subsidiary directive.   

On 25 November 2013, the EU Commission proposed amendments to the parent/subsidiary directive. The objective of the proposed amendments was to ensure that the parent/subsidiary directive did not lead to unintended tax cuts.

When L98 was adopted, the amendments to the parent/subsidiary directive were implemented into Danish law. According to the new rules, a Danish parent company can only receive tax exempt dividends from an underlying subsidiary, if the subsidiary cannot deduct the dividends for tax purposes. The rule will apply no matter where the subsidiary is a tax resident. 

The new rule applies to dividends distributed 1 March 2015 or later.

Concluding remarks

It is now possible for business owners to use the deferral scheme on payment of exit tax and the Danish tax legislation now complies with EU law.  

The amendments of the asset test entail a more expedient taxation of well-consolidated groups or companies.

The current rules regarding the taxation of dividends from foreign subsidiaries that have deducted the expense will, going forward, also include dividends covered by the parent/subsidiary directive.