Annual Tax Newsletter 2016 The most significant Danish tax news from September 2015 until July 2016. 2 Annual Tax Newsletter 2016 Contents Introduction 4 The limitation period for reclaiming dividend withholding tax reduced from five to three years 6 Status on the suspected fraud with Danish dividend withholding tax 7 Reduction of dividend withholding tax rate for non-Danish companies 10 European Commission Proposal for Anti-Tax Avoidance Package 11 Political agreement on Anti-Tax Avoidance Directive 13 General anti-avoidance regulation in Denmark 17 BEPS Action Point 7 – Amendments to article 5 of the OECD Model Tax Convention 19 Denmark introduces country-by-country reporting requirements 21 The European Commission to impose public reporting requirements on multinational companies 23 Revival of the tax-advantaged employee share schemes 25 Investment funds now to be considered independent taxpayers 27 The 2016 activity plan of the Danish tax authorities 28 Judgment disregards SKAT’s interpretation of s. 10 of the Danish Taxation of Seafarers Act 30 First Danish judgment on the EC Arbitration Convention 31 New judgment: Special investment funds are more than just investment in securities 33 About Bech-Bruun 34 Annual Tax Newsletter 2016 3 4 Annual Tax Newsletter 2016 Introduction This Annual Tax Newsletter covers the issues we consider the most significant Danish tax news from September 2015 to July 2016. Accordingly, this newsletter includes a description of legislative amendments relevant to Danish and nonDanish individuals and businesses operating in Denmark. During the past year, the focus from a Danish tax law perspective has been on primarily international issues, such as the suspected fraud with the repayment of Danish dividend withholding tax, the publication of the OECD/G20 Base Erosion and Profit Shifting Project Reports (the ”BEPS Reports”) and the presentation of the European Commissions proposal for an Anti-Tax Avoidance Package (the ”Anti-Tax Avoidance Package”). Regarding the suspected fraud with Danish dividend withholding tax, SKAT, the Danish Custom and Tax Administration, suspended all repayments of Danish dividend withholding tax following the initial discovery in August 2015. The total fraudulent amount is currently expected to exceed DKK 9bn (approx. EUR 1.2bn) – the reclaims presumed to have been based on falsified documentation. As of 1 January 2016, approximately 28,000 dividend withholding tax reclaims were pending. As a consequence of the suspected fraud and owing to the large number of dividend withholding tax reclaims pending, the Danish Ministry of Taxation and SKAT have launched a number of new initiatives aimed at preventing future fraud, including stricter documentation requirements, new specialised tax forces and a reduction in the limitation period for reclaiming dividend withholding tax from three to five years. Furthermore, in relation to Danish dividend withholding tax applicable to foreign entities, a new bill was passed on 2 June 2016, lowering the Danish dividend withholding tax rate to 22% for non-Danish companies. Technically, Danish companies must continue to withhold 27% on dividend distributions to non-Danish companies owning less than 10% of the shares, but the beneficial owners of the dividends may file a reclaim with SKAT. Bearing in mind the difficulties existing with the current reclaim scheme, it is somewhat surprising that SKAT would choose an option sure to add more filed reclaims to the pile. The international influence on Danish tax law has been especially impacted by the findings and recommendations reflected in the BEPS Reports, as well as the proposals contained in the Anti-Tax Avoidance Package. While the majority of the concepts and ideas set forth in both the BEPS Reports and the Anti-Tax Avoidance Package are already well known in Denmark, new legislation has nonetheless been adopted and implemented as a direct consequence of these two international initiatives. The first step to ensure such implementation came with the May 2015 incorporation of the international general anti-abuse tax rule (”GAAR”) into Danish tax law. The Danish GAAR marked a notable change in the traditional Danish anti-abuse tax legislation doctrine as it targeted not only specific practices which were deemed to be abuse, but also practices of a more general nature. While the Danish GAAR, at the time of incorporation, may well have been considered slightly beyond what was legally required, the OECD Report on Action Point 5 and the general anti-abuse rule contained in the new Anti-Tax Avoidance Directive may well put the Danish GAAR within its legal boundaries. Additionally, new requirements concerning country-by-country reporting has been implemented into Danish tax law as a direct consequence of the findings and recommendations of BEPS Report Action Point 13. The new requirements are already applicable to multinational entities with fiscal years beginning on or after 1 January 2016. You will also find a description of the most important VAT developments, most significantly the impact of the December 2015 decision by the EU Court of Justice in the Fiscale Eenheid-case (C-595-13) in Denmark, regarding the scope of the VAT exemption for management of special investment funds. Annual Tax Newsletter 2016 5 Furthermore, our Annual Tax Newsletter reflects on the very recent and noteworthy decision by the Danish Supreme Court concerning the inter - pretation of the concept of ”maritime transport” in s. 10 of the Danish Taxation of Seafarers Act (sømands - beskatningsloven). In its judgement, the Danish Supreme Court disregarded SKAT’s interpretation and found that the concept of ”maritime transport” in the Danish Act should be understood in accordance with the general EU concept of maritime transport. The case, which was argued before the Supreme Court by Bech-Bruun partner Kaspar Bastian on behalf of the taxpayer, is likely to have a significant impact on a number of cases pending in the administrative appeal system. As in previous years, you will also find a description of the key elements of SKAT’s most recent activity plan, which is expected to be carried through to 2017. The main element in the activity plan is the focus on compliance performed by large and medium-sized enterprises, particular - ly with regard to transfer pricing. We expect the efforts of SKAT within transfer pricing to be expanded in the light of the initiatives contained in the BEPS initiative and the Euro - pean Council’s Anti-Tax Avoidance Package. 6 Annual Tax Newsletter 2016 The limitation period for reclaiming dividend withholding tax reduced from five to three years On 13 June 2016, SKAT, the Danish Customs and Tax Administration, published new tax directions (styresignal), according to which the limitation period for reclaiming excess dividend withholding tax is reduced from five to three years. This change is a distinct tightening of the previous interpretation of the provision in s. 67A of the Danish Withholding Tax Act (kildeskatteloven). Shorter limitation period Individuals and companies receiving dividends from Danish companies on which withholding tax has been levied at a rate exceeding that applicable under Council Directive 2011/96/EU (on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States) or a double taxation agreement are entitled to claim reimbursement of dividend tax. Until recently, such claims were, according to SKAT’s interpretation, subject to s. 67A of the Danish Withholding Tax Act, which stipulates a five-year limitation period. According to its new, published tax directions, SKAT has revised its interpretation of the provision in s. 67A of the Danish Withholding Tax Act to the effect that the provision no longer comprises requests for reimbursement of excess dividend withholding tax. As a result of SKAT’s revised interpretation, such claims will now be subject to the ordinary three-year limitation period. However, if a double taxation agreement stipulates a limitation period of more than three years, the period applicable under the double taxation agreement will continue to apply to potential claims for dividend tax refund. Commencement of the three-year limitation period The three-year limitation period for reclaiming excess dividend withholding tax will take effect three months after the publication of SKAT’s tax directions, that is, at 13 September 2016. This means that claims for reimbursement of dividend tax withheld that reach SKAT by 12 September 2016 at the latest will be subject to a five-year limitation period, whereas any claim submitted on 13 September 2016 onwards will be timebarred after three years. Bech-Bruun Comments Individuals and companies entitled to a refund of excess dividend withholding tax and whose claims either date back longer than three years or may risk being time-barred subject to the new three-year limitation period should file their requests for reimbursement of excess dividend tax to SKAT without undue delay and no later than 12 September 2016. If they fail to do so and their claims date back longer than three years, the new and tighter practice entailed in the tax directions means that SKAT will consider their right to claim reimbursement as having lapsed. Annual Tax Newsletter 2016 7 Status on the suspected fraud with Danish dividend withholding tax In August 2015, SKAT, the Danish Customs and Tax Administration, announced that they had uncovered suspected fraud with Danish dividend withholding tax in the amount of approx. DKK 6.2bn (approx. EUR 0.8bn). The case is currently under investigation by the Danish Public Prosecutor for Serious Economic Crime, and the extent of the fraudulent claims for repayment is now expected to exceed DKK 9bn (approx. EUR 1.2bn). On 6 August 2015, SKAT suspended all payments on claims for repayment of Danish dividend withholding tax due to a suspicion that a number of the claims for repayment were fraudulent. Following the suspension of reclaim payments, SKAT filed their first report with the Danish Public Prosecutor for Serious Economic Crime (”SEC”) on 24 August 2015. The report covered suspected fraud with Danish dividend withholding tax reclaims of approx. DKK 6.2bn (approx. EUR 0.8bn). SKAT’s internal audit department released the results of its investigation of the fraudulent dividend withholding tax reclaims on 24 September 2015. According to the report, the main reasons for the payout of fraudulent dividend withholding tax reclaims are lack of control on the part of the tax authorities, the structure of the data reporting systems for dividends and insufficient management focus on the processing of claims for the refund of withholding tax. Following the report by the internal audit department, a new intersectorial task force was established with the purpose of investigating the current legislation and practice applicable to declaring and withholding Danish tax on dividends. The task force is comprised of members from the Danish Ministry of Taxation, SKAT, the Danish Ministry of Business and Growth, the Danish Business Authority and the Danish Financial Supervisory Authority. On 16 November 2015, SKAT announced that, on 15 November 2015, it had filed a follow-up report with SEC on fraud in the amount of DKK 2.9bn (approx. EUR 0.4bn), the total suspected fraudulent amount now exceeding DKK 9bn (approx. EUR 1.2bn). In the period 1 January 2010 to 5 August 2015, claims for repayment of Danish dividend withholding tax could be filed either with an approved bank (”Bankordning”) or directly with SKAT (”Blanketordning”). 8 Annual Tax Newsletter 2016 The DKK 9.1bn fraud discovered so far is based on reclaims filed utilising the Blanketordning. There is currently no information as to whether the Bankordning has also been used as part of the fraud. The tax fraud presumably involves companies reclaiming withholding tax on dividends on Danish shares which such companies had untruthfully and fictitiously stated that they owned. Allegedly, the documentation provided to SKAT as a basis for the claims for repayment was falsified. Based on information made available by the Danish media, it appears that SEC’s investigation of the initial fraud in respect of DKK 6.2bn (approx. EUR 0.8bn) focused primarily on 12 specific companies and one British financier. As part of the ongoing investigation, SEC has conducted searches of a number of addresses in London. In addition, an amount of DKK 1.7bn (approx. EUR 0.23bn) believed to derive from the fraudulent dividend withholding tax reclaims has been confiscated from foreign bank accounts. The findings of the Danish Public Accounts Committee Following the investigation by SKAT’s internal audit department, the Danish Public Accounts Committee requested the Danish National Audit Office to carry out an assessment of SKAT’s administration and the Ministry of Taxation’s supervision of payment of Danish dividend withholding tax during the period 1 January 2010 to 5 August 2015. The Danish National Audit Office submitted their report to the Danish Public Accounts Committee on 17 February 2016. The report was presented to the Danish Parliament on 24 February 2016 and subsequently released to the public. In its statements to the Danish National Audit Office report, the Danish Public Accounts Committee strongly criticises SKAT’s ”completely inadequate” control with the repayment of Danish dividend withholding tax, as well as the Danish Ministry of Taxation’s supervision, which the Danish Public Accounts Committee found to be exceedingly flawed. Among the key findings in the Danish National Audit Office report are: • SKAT refunded approximately DKK 3.2bn in dividend withholding tax after receiving information of suspected fraud, • SKAT failed to carry out basic control of information on the reclaims, including information of ownership, verification that withholding tax had actually been withheld and whether the appropriate form had been approved by a competent authority. • SKAT, without statutory power, had delegated the task of controlling reclaims filed to three separate banks without ensuring that the banks actually carried out the required control. • Despite receiving numerous indications of possible risks, the Danish Ministry of Taxation failed to investigate the issue even though a simple analysis would have uncovered the problem. Among the most interesting points of the Danish National Audit Office report are the discoveries that • Repayment of dividend withholding tax increased from DKK 0.8bn in all of 2010 to DKK 9.3bn in the first seven months of 2015, corresponding to an increase of approximately 1,300%. • The suspected fraud – currently estimated at DKK 9.1bn – amounts to 2/3 of the total amount repaid under the blanketordningrepayment scheme. • In 2014, SKAT repaid 111% of the dividend tax actually withheld for one single company. • Although SKAT has implemented a control function to manage the repayment of withholding tax in excess, such function was disabled for a number of companies from 2013 until July 2015. • The average amount covered by reclaims filed increased by 1,700% from DKK 37,113 in 2010 to DKK 681,007 in 2015. SKAT’s initial report filed on suspected fraud covers 2,120 repayments totalling DKK 6.1bn, corresponding to an average repayment of DKK 3m for each of the reclaims made. • Despite receiving and approving monthly accounts, the Danish Ministry of Taxation did not find cause for investigating the increase in dividend withholding repayments. Future initiatives Following the Danish National Audit Office report, the Danish Ministry of Taxation announced that it had identified two specific loopholes in Danish tax legislation, whereby otherwise taxable dividend payments could be reclassified as tax-free capital gains on shares. Whereas the Danish Ministry of Taxation said it was not aware of the loopholes having been used to evade Danish withholding tax on dividends, new legislative initiatives are underway to not only close the loopholes, but also to tighten the current legislative scheme in order to prevent any future risk of fraud. In addition to these legislative initiatives, the Danish Ministry of Taxation also announced a number of action points. The action points include (i) stricter documentation requirements (see list below), (ii) a ”task force” carrying out random checks on the reclaimed dividend withholding tax (established at the end of 2015), (iii) a ”task force” monitoring all types of dividend withholding tax reclaims (established in the spring of 2016), and (iv) an anti- Annual Tax Newsletter 2016 9 fraud division analysing new trends and risks related to international tax fraud (established at the beginning of 2016). Furthermore, the Danish Ministry of Taxation has announced the establishment of a new supervisory authority within the Danish Ministry of Taxation, which is tasked with monitoring the ongoing risk assessment and ensuring that critical rapports are brought to the attention of the Danish Ministry of Taxation. In addition, the procedures concerning Early Warnings (an internal written report indicating possible issues) and approval of accounts of payments within the Danish Ministry of Taxation are tightened. Finally, the intersectorial task force established in September 2015 recommends the following criteria to be met in order to prevent any future fraudulent claims for repayment of Danish withholding tax, including: (i) no reclaim of dividend withholding tax based on shares in companies which had not declared dividends, (ii) the total amount repaid cannot exceed the dividend withholding tax levied on the specific shares in question, (iiI) ensuring the rightful owner is taxed at the correct dividend withholding tax rate, and (iv) ensuring that withholding tax on share-based loans cannot be reclaimed. On 27 May 2016, the Danish Bankers’ Association submitted a proposed solution with the intersectorial task force which is based on a net dividend withholding scheme on the basis of the registration of shares with the Danish VP Securities Centre. Suspension of reclaim payments The processing of claims for repayment of dividend withholding tax was suspended on 6 August 2015. The Danish Ministry of Taxation announced that all reclaims would remain suspended until proper procedures had been established to prevent any future risk of fraud. As of 1 January 2016, approximately 28,000 dividend withholding tax reclaims were pending. The processing of dividend withholding tax reclaims was resumed by SKAT in March 2016 upon the establishment of new control functions. In addition to the procedures already initiated by the Danish Ministry of Taxation, we anticipate that all cases pertaining to the matter of reclaiming dividend withholding tax and the basis of these cases will be subject to in-depth consideration by SKAT. Furthermore, it is likely that the procedure may prolong and complicate the dividend withholding tax reclaim process. Documentation requirements SKAT has announced the implementation of stricter documentation requirements in connection with reclaim of Danish withholding tax. Apparently SKAT will now as a general rule request the following specific documentation in connection with a request for reclaim of dividend withholding tax: 1. If the claim is filed by an agent, power of attorney from the beneficial owner of the shares granting power to the agent to contact SKAT and claim the refund on behalf of the shareholders (in case of intermediate agents/ banks please power of attorneys covering all intermediate links) must be included. 2. Shareholder’s proof of purchase regarding the shares of the distributing companies. 3. If the shares are part of shareholder’s loan arrangements, the loan agreements and other relevant documents must be included. 4. Dividend note from distributing company related to the distribution. 5. Statement of account/deposit from shareholder’s bank showing number of shares of the distributing companies at the time of the distribution. 6. Documentation of money transfers from the distributing companies via intermediate banks to the bank account of the beneficial owner of the shares. 10 Annual Tax Newsletter 201610 Reduction of dividend withholding tax rate for non-Danish companies Until recently, the Danish withholding tax rate applicable to non-Danish companies was contrary to the EU Treaty rules on free movement. To remedy this situation, the Minister of Taxation presented a new bill with the aim of bringing Danish taxation in line with EU legislation. The bill was passed by the Danish Parliament on 2 June 2016 and has now entered into force. Non-Danish companies receiving dividends from Danish companies were previously subject to a 27% tax rate, which, in some cases, has now been lowered to 22% on outbound dividend payments Reduction of corporation tax The new bill reduces the Danish withholding tax rate payable by non-Danish companies from 27% to 22%. Danish companies must continue to withhold 27% on outbound dividend payments when the receiving foreign companies own less than 10% of the share capital in the Danish company. The difference may be reclaimed. Subject to a relevant double taxation treaty further reclaims may be possible. The reduction applies to all nonDanish companies subject to limited tax liability to Denmark pursuant to s. 2 of the Danish Corporation Tax Act (selskabsskatteloven) – irrespective of whether they are domiciled inside or outside the EU and EEA. Violation of EU legislation Taxation of non-Danish companies receiving dividends from Denmark subject to tax at a higher tax rate than that applying to resident companies is now deemed to be in violation of EU law. The new bill brings the dividend withholding tax rate imposed on non-Danish companies subject to limited tax liability in line with the corporation tax rate applicable to Danish companies, which is 22% as from 2016. Retroactive effect The new bill has retroactive effect as from 1 January 2007 for outbound dividends received by non-Danish companies residing in the EU or EEA, whereas the bill entered into effect at 1 July 2016 for non-Danish companies residing outside of the EU or EEA. Bech-Bruun Comments Danish and non-Danish shareholders in Danish companies benefit from the adopted bill having been granted an equal tax position. However, one might wonder why this initiative to adjust the differential treatment of taxpayers has not been taken at an earlier stage. In 2007, for instance, the corporation tax rate was lowered from 28% to 25%, whereas the withholding tax rate applicable to foreign and Danish shareholders remained unchanged. Furthermore, it is doubtful whether this new legislation actually solves the conflict with EU law. Given the quite severe problems that SKAT, the Danish Customs and Tax Administration, have had handling the reclaims of dividend withholding tax, one might also reflect on the fact that the tax authorities have now set up a system under which reclaims are to be made constantly. It would have been preferable – and far more practical for both the internal revenue and the taxpayers – had the withholding tax rate simply been equal to the maximum tax rate. Annual Tax Newsletter 2016 11 European Commission Proposal for Anti-Tax Avoidance Package On 28 January 2016, the European Commission presented its new AntiTax Avoidance Package containing measures to fight certain types of tax avoidance. The Anti-Tax Avoidance Package presented by the European Commission on 28 January 2016, rests on three key pillars, which in unison are to guarantee efficient and growthstimulating taxation in the EU, including effective taxation in the EU, improved tax transparency and fair tax competition among EU Member States. The proposed measures submitted by the European Commission are based on the action plan presented on 17 June 2015 for fair and efficient corporate taxation, in which the Commission, among other things, announced a re-launch of the common consolidated corporate tax base (CCCTB). Moreover, the proposed package is greatly influenced by the work performed under the auspices of the OECD as part of the OECD’s base erosion and profit shifting (BEPS) project presented in October 2015. As such, the proposal mirrors the European Commission’s request for action before the new CCCTB is ready and its agenda for a uniform implementation of the BEPS principles in all EU Member States. The work on implementing the proposals of the Package has moved quite quickly in the past months. On 21 June 2016 (midnight June 20), the EU Council agreed on the wording of the Anti-Tax Avoidance Directive (the “ATT Directive”), while, on 25 May 2016, the EC Council adopted rules amending Council Directive 2011/16/ EU as regards mandatory automatic exchange of information in the field of taxation (the “CbCr Directive”). The ATT Directive – Ensuring effective taxation in the EU Compared with the initial proposal for the ATT Directive, which was put out for public consultation by the Danish Ministry of Taxation in February 2016, the agreed wording of the ATT Directive contains a number of changes, including the deletion of the proposed switchover rule and a simplification of the rules on hybrid mismatch. The ATT Directive is a minimum harmonisation directive and the general implementation deadline is 31 December 2018. Whereas the ATT Directive also contains a general anti-avoidance rule, the declared purpose of the measures contained in the ATT Directive is to counteract four specific common taxation setups whose purposes are to shift profits to jurisdictions subject to looser tax regimes or none at all. The preventive measures are: • Rules on taxation of income in a controlled foreign company (CFC rules); the CFC rules will apply if a controlled foreign company is registered in a third country in which the effective tax rate is more than 50% lower than the corporation tax rate in the Member State receiving the income. • Exit taxation; exit tax will be levied to prevent companies from relocating their assets with unrealised profits to low-tax countries without a change of ownership and from selling these assets once they have been relocated. Such taxation will have an impact on the relocation and sale of intellectual property rights in particular since the company will have enjoyed the rights to deduct development costs from profits in the first place. • Interest limitation; companies should be able to deduct up to 30% of the earnings before interest, tax, depreciation and amortisation (EBITDA) or an amount of EUR 3,000,000, whichever is the higher. The objective is to make artificial loan arrangements less attractive by setting an upper limit on deductions. • Rules on hybrid mismatch; in a double deduction situation, only the Member State where the payment has its source, shall grant a deduction (meaning the other Member State shall deny deduction). Correspondingly, in a situation of deduction without inclusion, the Member State of the payer shall deny deduction of such payment. • A rule against tax planning and tax avoidance; the role of the so-called general anti-abuse rule (GAAR) is to act as a safety net in cases where the four measures listed above, fails to cover any arrangement of aggressive tax planning or tax avoidance or the like, and applies solely to artificial arrangements set up primarily to gain tax benefits in contravention with applicable tax law. On the whole, the ATT Directive aims at securing taxation of the companies’ income in the country of origin. The ATT Directive is to counteract exploitation of loopholes in Member States’ national tax laws in relation to the tax laws of third coun- 12 Annual Tax Newsletter 2016 tries and to protect the tax bases of the Member States. The CbCr Directive – ensuring greater tax transparency The purpose of the CbCr-Directive is to ensure consistent implementation by Member States of the required country-by-country reporting (“CbCr”) included in the OECD’s BEPS report. The rules were formally adopted on 25 May 2016 after an agreement was reached on 8 March 2016. The wording of the CbCr Directive is similar to the wording of the OECD standard transposed into Danish law by Act no. 1884 of 29 December 2015. Consequently, Danish multinational enterprises with an annual global revenue of no less than DKK 5.6bn (approximately EUR 0.75bn) and with a fiscal year starting 1 January 2016 or later, are already subject to the country-by-country requirement. In addition to the requirements agreed upon for CbCr and contained in the CbCr Directive, the Commission proposed an amendment to the Accounting Directive 2013/34/EU on 12 April 2016, which will require large multinational enterprises operating in EU and generating an annual global revenue of no less than DKK 5.6bn (approximately EUR 0.75bn), to publicly disclose key information on where they make their profits and where they pay their tax. The information must be disclosed on a country-by-country basis. Ensuring fair terms of competition One of the Commission’s measures to ensure fair tax competition is to prepare a list of third countries whose tax systems are assessed to be used by companies for aggressive tax planning. The Commission also proposes that the actions taken to extend good tax governance standards to third countries (outside the EU) be increased. The key measures should be consistently applied by all Member States in their approach to external tax law cooperation. Bech-Bruun Comments The proposal of the European Commission does not actually contain any system promoting initiatives as far as the current Danish tax situation is concerned. With regard to the provisions of the ATT Directive, we expect the greatest challenge to be implementing the controlled foreign company rule as Denmark already has a so-called CFC rule. The scope of the Danish rule is, however, slightly different, to the extent that the Danish rule applies only to controlled financial companies. Despite the differences between the two definitions, we expect that Denmark will choose to amend the current Danish provision on controlled financial companies to correspond with the controlled foreign company rule in the ATT Directive. The ATT Directive safety net, in the form of the general anti-abuse rule, was implemented in Danish tax law in July 2015 and is applied both in relation to our EU-based legislation and in our application of double taxation treaties. As for the CbCr rules described in the CbCR Directive, Denmark has already implemented similar rules in national law whereby Danish multinational enterprises are already subject to these reporting requirements. While the tax avoidance measures reflected in the Anti-Tax Avoidance Package are principles primarily already known in Denmark and, to a certain extent, already incorporated into Danish tax law, certain nonDanish companies may be impacted significantly as their tax conditions will increasingly become aligned with those of the Danish companies, which – ceteris paribus – may lead to an improvement of Danish companies’ conditions of competition because of consistent and fair tax systems throughout the EU. However, the conclusive effect of the two Directives cannot be determined until they have been implemented by the Member States and whatever slight differences that may occur from the Member States’ implementation of the two Directives have become evident. The Commission’s proposal of a common approach to tax matters in the EU and the introduction of a higher degree of common rules must be considered positive measures that may hopefully result in fewer incidents of two tax authorities classifying tax issues differently. In this respect, the Community law elements may contribute to a clarification of the rules. However, we are still awaiting amendments to be made to the EU arbitration convention, which entail securing, to a higher degree than what is presently the case, uncomplicated and fair reference in circumstances where countries during a mutual agreement procedure (MAP) cannot reach or have no intention of reaching an agreement, for instance in connection with increases in transfer pricing. Annual Tax Newsletter 2016 13 Political agreement on Anti-Tax Avoidance Directive On 20 June 2016, the European Council reached political agreement on the Anti-Tax Avoidance Directive, making one of the proposed measures of the Anti-Tax Avoidance Package a reality. As a result of the European Council formally agreeing on the wording of the Anti-Tax Avoidance Directive (the ”Directive”), the second of the measures proposed by the European Commission in its Anti-Tax Avoidance Package has become a reality. On the whole, the Directive aims at securing the taxation of companies’ income in the country of origin. The Directive is to counteract exploitation of loopholes in Member States’ national tax laws in relation to the tax laws of third countries and to protect the tax bases of the Member States. The wording and content of the Directive are somewhat different from the initial proposal of the European Commission, as a number of changes were made, including the elimination of the proposed switch-over clause as well as a significant change to the proposed solution mechanism on hybrid mismatch. The Directive, which is a minimum harmonisation directive, contains five preventive measures. The Directive Article 4; Interest limitation The objective of the interest limitation rule is to make artificial loan arrangements less attractive by setting an upper limit on deductions. This rule applies only to companies which are part of a group, as standalone companies clearly cannot use debt to shift profits. The interest limitation rule provides that net borrowing costs (interest expenses) may be deducted by up to 30% of the earnings before interest, tax, depreciation and amortisation (EBITDA) or by way of derogation an amount of EUR 3,000,000, whichever is the higher. The exceeding borrowing costs may be calculated at group level. Subject to certain conditions, a group company may be granted the right to either: I. fully deduct its exceeding borrowing costs provided the ratio of the company’s equity over its total assets is equal to (meaning a negative difference of no more than 2 percentage points) or higher than the equivalent ratio of the group. In addition, all assets and liabilities must be valued using the same method. II. deduct exceeding borrowing costs at an amount in excess of 30% provided (a) the group ratio is determined by dividing the exceeding borrowing costs of the group vis-à-vis third parties over the EBITDA of the group and (b) the group ratio is multiplied by the EBITDA of the tax payer. Further, Member States may adopt rules providing for either: I. the carrying forward, without time limitation, of exceeding borrowing costs which cannot be deducted in the current tax period; or II. the carrying forward, without time limitation, and back, for a maximum of three years, of exceeding borrowing costs which cannot be deducted in the current tax period; or 14 Annual Tax Newsletter 2016 Subject to the Directive, the exit tax will be triggered by: I. Transfer of assets from the head office to a permanent establishment in another Member State or third country (assuming the head office no longer has the right to tax the transferred asset); II. Transfer of assets from a permanent establishment to its head office or another permanent establishment (PE) located in another Member State or third country; III. Transfer of tax residence to another Member State or third country (assuming the assets do not remain connected with a PE in the Member State of origin); IV. Transfer of the activities carried out in a PE out of a Member State. With regard to Community law, the Directive includes an option for companies to defer the payment of exit tax and settle debt by instalments over a five-year period. The option to defer, however, only applies in the following circumstances and with regard to EEA states, only if the EEA state has concluded an agreement with either the Member State or the EU, equivalent to the assistance provided for by Directive 2010/24/EU: I. Transfer of assets from head office to PE in another Member State or EEA state. II. Transfer of assets from PE in a Member State to head office in another Member State or EEA state. III. Transfer of tax residence to another Member State or EEA state. IV. Transfer of activities carried out by its PE to another Member State or EEA state. Subject to national legislation, the Member State may charge interest on any deferred amount. If there is an actual risk of non-recovery, the Member State may also require the taxpayer to provide security as a condition for deferring the payment. The deferred amount becomes immediately payable if: I. The transferred assets or the PE are sold or otherwise disposed of; II. The transferred assets are subsequently transferred to a third country; III. The taxpayer’s tax residence or the PE is subsequently transferred to a third country; IV. The taxpayer goes bankrupt or is wound up; V. The taxpayer fails to honour its obligations in relation to the instalments and does not correct its situation over a reasonable period of time, which must not exceed 12 months. The exit tax rule must be adopted by the Member States no later than 31 December 2019 and will be applicable from 1 January 2020. Article 6; General anti-abuse rule The objective of the general antiabuse rule (”GAAR”) is to act as a ”safety net” in cases where the four other measures contained in the Directive fail to cover any arrangement of (too) aggressive tax planning, tax avoidance or similar. Subject to the GAAR, Member States must ignore arrangements – or a series of arrangements – which are set up for the primary purpose of obtaining a tax advantage that defeats the object or purpose of applicable tax law, or are not genuine with regard to all relevant facts and circumstances. An arrangement will be considered non-genuine if it is not implemented for valid commercial reasons that reflect economic reality. The wording of the GAAR in the Directive corresponds to the GAAR in the 2015 EU Parent/Subsidiary III. the carrying forward, without time limitation, of exceeding borrowing costs and, for a maximum of five years, unused interest capacity, which cannot be deducted in the current tax period. Finally, Member States may exclude financial undertakings from the interest limitation rule. The interest limitation rule does not distinguish between third party and related party interest. The rule does, however, include a grandfather clause whereby Member States may exclude, inter alia, debt established prior to 17 June 2016 from the scope of the rule. Member States which already have rules equivalent to those in the Directive will be allowed to continue with those rules until the OECD recommends a minimum standard of interest limitation rules, or at the latest until 1 January 2024. The interest limitation rule must be adopted by the Member States no later than 31 December 2018 and will be applicable from 1 January 2019. Article 5; Exit taxation The objective of the exit tax rule is to prevent companies from relocating their assets with unrealised profits to low-tax countries without a change of ownership and from selling these assets once they have been relocated. The exit tax will have an impact on the relocation and sale of intellectual property rights in particular, since the company will have enjoyed the rights to deduct development costs from profits in the first place. The Directive provides Member States with the opportunity to assess an exit tax, calculated as the difference between market value and tax value. If the assets are transferred to another Member State, the other Member State must accept the market value of the original Member State, thus allowing for a step-up on the assets’ starting value for tax purposes. Annual Tax Newsletter 2016 15 Directive, with the exemption that application of the Directive GAAR exceeds application of the GAAR in the EU Parent/Subsidiary Directive. The general anti-abuse rule must be adopted by the Member States no later than 31 December 2018 and will be applicable from 1 January 2019. Article 7; Controlled foreign company rule The objective of the controlled foreign company (”CFC”) rule on taxation of income is to prevent multinational groups from ”shifting” profits from a high-tax Member State to a low or no-tax third country. An entity or a permanent establishment is considered a CFC if the following conditions are met: I. The entity is controlled by an EU entity, meaning that the EU entity, either alone or together with associated enterprises; a. directly or indirectly holds more than 50% of the voting rights; or b. directly or indirectly owns more than 50% of the capital; or c. is entitled to receive more than 50% of the profit. II. The actual corporate tax rate paid on the profit by the entity or permanent establishment in the third country, is less than 50% of the actual corporate tax rate that would have been charged by the Member State in which the parent company is registered. If the CFC rule applies, the Member State must include non-distributed income of the CFC, in the tax base of the EU entity. The income is calculated in proportion to the parent company’s participation in the CFC. The two following approaches to including non-distributed income of the CFC entity are available to Member States: a. inclusion of non-distributed income derived from certain categories, including interest, royalties, dividends, income from financial leasing, etc. CFCs carrying out substantive economic activities are generally exempt; however, the Member State may refrain from applying the ”substantive economic activity” exemption if the CFC is not a resident of or situated in a Member State or EEA state. Additional exemptions may apply if no more than one third of the income of the CFC is comprised by the categories mentioned above. The included income will be calculated in accordance with the provisions of the corporate tax law of the Member State where the parent company is located. Losses will not be included but may be carried forward in accordance with national law. b. inclusion of non-distributed income arising from non-genuine arrangements established for the essential purpose of obtaining tax advantages, e.g. where the CFC does not own the assets or would not have undertaken specific risks were it not control led by a company in which the significant people functions relevant to those assets and risks are performed and are instrumental in generating the controlled company’s income. Member States may exclude CFCs where (1) accounting profits do not exceed EUR 750,000 and non-trading does not exceed EUR 75,000, or (2) accounting profits do not exceed 10% of operating costs for the tax period. The included income will be limited to amounts generated through assets and risks which are linked to significant people functions performed by the controlling company. The attribution of CFC income will be calculated in accordance with the arm’s length principle. The Member State of the parent company must provide double taxation relief, allowing the tax paid by the CFC to be deducted from the tax liability of the parent company. The deduction will be calculated in accordance with national law. The controlled foreign company rule must be adopted by the Member States no later than 31 December 2018 and will be applicable from 1 January 2019. Article 9; Rules on hybrid mismatch The objective of the hybrid mismatch rule is to remove this risk of double taxation or double non-taxation, as a result of a company or a payment transaction being classified differently by two Member States. Compared with the initial draft proposed by the European Commission in the Anti-Tax Avoidance Package, this is the rule which has been subject to the largest change (with the exception of the proposed ”switchover rule”, which was abandoned). Whereas the draft directive changed the general qualification of the hybrid entity, the newly approved Directive does not change the qualification of the hybrid entity but instead simply specifies which Member States may either grant or deny a deduction. To the extent a hybrid mismatch results in a double deduction, only the Member State in which the payment has its source shall grant a deduction (meaning the other Member State must deny deduction). Correspondingly, to the extent a hybrid mismatch results in a deduction without inclusion, the Member State of the payer shall deny deduction of such payment. The rules only apply to hybrid mismatch between Member States. The EU Council has, however, requested that the European Commission present a proposal for the solution of hybrid mismatch with non-EU countries, expected no later than October 2016. 16 Annual Tax Newsletter 2016 The hybrid mismatch rule must be adopted by the Member States no later than 31 December 2018 and will be applicable from 1 January 2019. Bech-Bruun Comments The Directive is generally not expected to cause significant changes to the overall tax situation of Danish companies, as the majority of the initiatives are already established principles in Denmark. The introduction of a higher degree of common rules must be considered positive as it will hopefully result in fewer incidents of two tax authorities classifying tax issues differently. In this respect, the Community law elements may contribute to a clarification of the rules. Regarding the rule on interest limitation, this will in our assessment require only minor amendments to Danish tax law, as Denmark has already established rules. The amendments will primarily focus on (i) adjusting financial thresholds; (ii) amending the basis for calculating deductions (as the current Danish limit is calculated on the basis of earnings before interest and taxes (EBIT) while the EU-rule calculates on the basis of earnings before interest, tax, depreciation and amortisation (EBITDA); and (iii) implementing the specific exemptions contained in the Directive. The Directive’s rule on exit tax in Article 5 as well as the general antiavoidance rule in Article 6 is generally consistent with the corresponding provisions in existing Danish law. As such, we do not expect any revision of these provisions as a consequence of the Directive. The new controlled foreign company rule in Article 7 may present some challenges, as Denmark already applies a CFC concept in relation to controlled financial companies. The primary differences between the two may be summarised in table the below. Taking into account that the Danish CFC rule was amended in 2007 as a consequence of the EU Court’s decision in the Cadbury-Schweppes case (C-196/04) as the extent of the decision was not known at the time, we expect that an additional amendment to the Danish CFC rule will be the most likely outcome. Finally, the consequence of the hybrid mismatch provision in Article 9 of the Directive leads somewhat to the same result as the current Danish rule on hybrid companies in article 2B of the Danish Corporation Tax Act. The provision in the Directive does, however, extend slightly beyond the current Danish provision, and we expect the Directive may lead to minor amendments to the Danish provision. Danish rule Directive rule Categories of income Financial, e.g. interest, capital gains, dividends and income from the disposal of shares, certain royalties, income from financial leasing and gains from the sale of CO2 quotas and credits. The Member States may choose between including non-distributed income (i) from certain categories or (ii) arising from non-genuine arrangements. Minimum financial income Minimum 10% of the controlled company’s assets and minimum 50% of the controlled company’s annual income must be classified as financial assets/income. The Member States may opt not to treat a controlled company as a CFC if one third or less of the income falls within the categories or derives from transactions with the company or its associated enterprises. Requirements for taxation level No, applies regardless of the taxation level in the country of the controlled company. Yes, applies only if the actual corporate tax rate paid by the controlled company on the profit is less than 50% of the actual corporate tax rate which would have been charged in the Member State in which the parent company is registered. Requirements to country of residence No, applies to all controlled companies registered in a different country than the parent company. If the controlled company is registered in a foreign state which is not party to the EEA Agreement, and the Member State has chosen to include non-distributed income based on categories, the Member State may apply the rule even if the controlled company performs substantive economic activities in the country of residence. The new controlled foreign company rule: Primary differences Annual Tax Newsletter 2016 17 General anti-avoidance regulation in Denmark International anti-abuse tax rules Effective from 1 May 2015, the international general anti-abuse tax rule (”GAAR”), which denies tax treaty and EU tax benefits in cases of deemed abuse, was incorporated into Danish tax law. The adoption of the GAAR by the Danish Parliament was an early Danish attempt to implement the then 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). Additionally, the Danish GAAR marked a notable change in the traditional Danish anti-abuse tax legislation doctrine, which, in the past, had targeted specific practices deemed to be abusive and, therefore, countered by specific antiabuse rules (SAAR). The Danish GAAR is incorporated into s. 3 of the Danish Tax Assessment Act (ligningsloven) and 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 antiabuse provision and the tax treaty anti-abuse provision. The element incorporating the EU tax directive anti-abuse provision into Danish tax law mainly attempted to implement the anti-abuse or misuse amendment to the Parent/Subsidiary Directive, which was agreed at the meeting of the European Council held in January 2015. The provision incorporated into s. 3(1) of the Danish Tax Assessment Act generally mirrors the wording of the amended Parent/Subsidiary Directive, 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, the provision states 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 included in the Parent/Subsidiary Directive, the Danish EU tax directive anti-abuse provision – in addition to the Parent/Subsidiary Directive – also applies to all EU Direct Tax Directives, in particular the EU Merger Directive (2009/133) and the Interest-Royalty Directive (2003/49). Originally, at the time of incorporation, the Danish implementation of the EU tax directive anti-abuse provision may have been extended beyond what was legally required. However, on 21 June 2016, the EU Council agreed upon the wording of a new Anti-Tax Avoidance Directive which not only contains a general anti-abuse rule very similar to that contained in the Parent/Subsidiary Directive, it also extends beyond the reach of EU directives. When we compare the wording of the general anti-abuse rule in the new Anti-Tax Avoidance Directive and the wording of the general antiabuse in the Parent/Subsidiary Directive, it is apparent that the only difference in wording between the two GAAR-provisions is that the Anti-Tax Avoidance Directive requires Members States to ignore the relevant arrangements when calculating the corporate tax liability. As such, the GAAR in the Anti-Tax Avoidance Directive extends to the entire domestic corporate tax law of a given Member State. The purpose of the Danish tax treaty anti-abuse provision is to implement the outcome of the BEPS project, more specifically Action Point 6 on Preventing the Granting of Treaty Benefits in Inappropriate Circumstances into Danish tax law. At the time of its incorporation into Danish tax law, the final report on Action Point 6 had not yet been released, thereby making it arguably somewhat premature to introduce a provision which incorporates the then still unpublished outcome of the project. While questionable reasoning was provided in the commentary as to why it was legally justified to apply the new Danish tax treaty anti-abuse provision to disqualify tax treaty benefits, including tax treaties not previously subject to a GAAR, the Danish tax treaty anti-abuse provision now applies to both existing and new Danish tax treaties. As such, SKAT, the Danish Customs and Tax Administration, should not be expected to refrain from challenging perceived tax treaty abuse solely on the grounds that a tax treaty predates the Danish tax treaty antiabuse provision or that the tax treaty itself does not contain a GAAR. The Danish tax treaty anti-abuse provision states that treaty benefits will not be granted if [our translation]: 18 Annual Tax Newsletter 2016 ”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 SKAT 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 Danish GAAR became effective on 1 May 2015. This means that a tax payer thus 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 became entitled on or after 1 May 2015, or if the restructuring on which tax treaty or EU directive benefits are claimed is adopted on or after 1 May 2015. The Danish GAAR also applies to transactions/arrangements initiated prior to 1 May 2015, but where a part of the entire transaction/ arrangement is concluded on or after 1 May 2015. No grandfathering rule will thus apply. Bech-Bruun Comments Since Denmark has not operated with a general anti-abuse provision prior to 1 May 2015, and considering the very general nature of its wording, the obtaining of tax directive or tax treaty benefits is subject to some uncertainty. This circumstance was heavily criticised during the enactment process, but without any visible impact. At the least, uncertainty about the use of both provisions is pending specific administrative or court practice. Accordingly, tax payers must be cautious as to the application of such provisions and should obtain specific tax advice thereon, in particular when implementing financial or organisational structures, even if legitimate business reasons justify implementing such structure, in so far as they may also be deemed to be tax-motivated. The GAAR contained in the new Anti-Tax Avoidance Directive must be implemented by the member states by 31 December 2018 and applied from 1 January 2019. Annual Tax Newsletter 2016 19 BEPS Action Point 7 – Amendments to article 5 of the OECD Model Tax Convention On 5 October 2015, the OECD published its final report on Action Point 7 of the BEPS initiative (Preventing the Artificial Avoidance of Permanent Establishment Status), which entails a significant change to the current definition of permanent establishment (PE) in article 5 of the OECD Model Tax Convention. The purpose of the redefined definition is to prevent the use of certain strategies to circumvent the PE status, resulting in a shift of profits from the place of sale to a foreign jurisdiction. The changes will be reflected directly in the updated version of the OECD Model Tax Convention. According to the final report on BEPS Action Point 7, two of the most commonly used arrangements to prevent the creation of a PE are (i) facilitating commissionaire arrangements and thus circumventing the ”dependent agent rule”, or (ii) applying the exemption relating to ”preparatory and auxiliary” activities included in article 5(4) of the OECD Model Tax convention (2014). Thus, BEPS Action Point 7 contains two main amendments which directly address those two arrangements: I. Amendments to article 5(5) regarding the ”dependent agent rule” II. Amendments to article 5(4) concerning the ”preparatory and auxiliary” exemption Amendments to the ”dependent agent rule” Subject to the current definition of a PE in article 5(5) of the OECD Model Tax Convention, an enterprise will be treated as having a PE in a state if a person, under certain conditions, is acting on behalf of that enterprise in that particular state. Article 5(5) of the OECD Model Tax Convention determines that only persons having the authority to conclude contracts may lead to a permanent establishment for the enterprise. Such persons are considered ”dependent agents”. They may be either individuals or companies, and they need not be residents of or have a place of business in the state in which they act on behalf of the enterprise. Because article 5(5) of the OECD Model Tax convention relies on the formal conclusion of a contract in the name of the foreign enterprise, some enterprises have utilised commissionaire arrangements to bypass the formal requirement. In a commissionaire arrangement, the contract itself is formally considered as concluded by the person acting as a commissionaire and is therefore not considered binding on the foreign enterprise. As such, the use of commissionaire arrangements enables the enterprise 20 Annual Tax Newsletter 2016 to sell its goods in a foreign state without having to create a PE in that particular state. In Action Point 7 of the BEPS report, the scope of the PE definition is extended to include situations where the contracts are entered into by a person who ”habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts”. Such activity will constitute a PE of the foreign enterprise, provided ”that [the contracts] are routinely concluded without material modification by the enterprise”. According to the amended commentary to the redefined article 5(5), the quoted phrase is aimed specifically at situations where the conclusion of the contract is a direct result of the activity performed in a state by that person acting on behalf of the foreign enterprise. Furthermore, the situations in which a person may be considered an ”independent agent” (i.e. s(he) does not constitute a PE) have been narrowed down. As such, a person will not be considered an independent agent if the person acts exclusively or almost exclusively for one or more enterprises to which the agent is ”closely related”. Subject to the redefined article 5(5), a person will be considered ”closely related” to an enterprise if the person or the enterprise possesses, directly or indirectly, more than 50% of the beneficial interest in the other party. Amendments to the ”preparatory and auxiliary” exemption Article 5(4) of the OECD Model Tax Convention (2014) contains a list of specific activity exceptions, according to which a PE may be deemed not to have been created. Generally, activities of a preparatory or auxiliary nature (for example the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise) are not deemed to include the creation of a PE. The final report on BEPS Action Point 7 contains an amendment to the actual definition of article 5(4) but, more importantly, it also introduces the new article 5(4)(1). The new article 5(4)(1) provides that the activities of related parties must be viewed as a whole, rather than on an enterprise-by-enterprise basis, when determining whether the ”preparatory and auxiliary” exception is applicable. Consequently, an enterprise will have a difficult time arguing that the work carried out in a state falls within the ”preparatory and auxiliary” exemption, if that same enterprise – or a closely related enterprise – has a PE in the state in question. Bech-Bruun Comments The amendments to article 5 of the OECD Model Tax Convention contained in the OECD Final Report on Action Point 7 will undoubtedly enhance the scope of situations in which the activities of an enterprise will constitute a PE. It will therefore be necessary to conduct a thorough review of the activities performed by an enterprise in a foreign state in order to prevent unintended tax consequences stemming from the new definitions of article 5. Since the final report was published, a draft discussion on attribution of profits to a permanent establishment has been put forth. This draft discussion is not meant to cover the definition of a permanent establishment, only to define the attribution of profit. As such, it will not provide guidance on this issue but will give indications in the question as to the placement of profit which in turn will help provide some insight into the overall regulation of permanent establishments. Annual Tax Newsletter 2016 21 Denmark introduces country-by-country reporting requirements On 18 December 2015, the Danish Parliament passed Bill no. L46, which includes an amendment to section 3B of the Danish Tax Control Act (skattekontrolloven). The purpose of the amendment was to implement Action Point 13 of the BEPS Initiative (Guidance on Transfer Pricing Documentation and Country-by-Country Reporting) into Danish law. With the new amendment in force, the requirement of transfer pricing documentation is extended from the current ”two-tiered structure” to a ”three-tiered structure” consisting of (i) a master file containing standardised information relevant for all multinational enterprise group members; (ii) a local file referring specifically to material transactions of the local taxpayer; and (iii) a country-bycountry report. Furthermore, it is made apparent from the annotation to the bill that the transfer pricing documentation itself must be prepared in accordance with the new OECD guidelines on documentation. In this regard the new amendment has been incorporated into the executive order on documentation requirements. The amendment is a direct implementation of the OECD recommendation of BEPS Action Point 13, and although the country-by-country reporting requirement is new, the OECD standard to be used is very similar to the EU standard already being used by many Danish companies. The country-by-country report must, for example, contain information I. relating to the global allocation of the multinational enterprise’s income and taxes paid together with certain indicators of the location of financial activity within the multinational enterprise group; II. on the multinational enterprise’s total employment, capital, retained earnings and tangible assets in each tax jurisdiction; and 22 Annual Tax Newsletter 2016 III. identifying each entity within the group doing business in a particular tax jurisdiction and providing an indication of the business activities performed by each entity. As a main rule, Danish companies will, however, only be required to submit a country-by-country report if (a) the Danish company is the ultimate parent of a multinational enterprise group and (b) the multinational enterprise group has an annual global revenue of at least DKK 5.6bn (approx. EUR 0.75bn) in the 12-month period for which the report must be filed. A Danish company which is not the ultimate parent may, however, still be required to submit a country-bycountry report if (a) the foreign ultimate parent company is not legally obliged to complete and file a country-by-country report in its resident jurisdiction; (b) no automatic exchange of information takes place between the parent company’s resident jurisdiction and Denmark, or (c) a systematic error exists in the parent company’s resident jurisdiction. Prior to the amendment, Danish legislation regarding transfer pricing documentation required that Danish companies with controlled transactions prepare transfer pricing documentation. However, whereas such Danish companies must disclose the existence of controlled transactions in the company’s annual tax returns, the Danish companies are not required to submit the documentation to SKAT, the Danish Customs and Tax Administration, unless specifically requested to do so. The amendment stipulates, however, that the country-by-country report must be submitted to SKAT no later than 12 months after the last day of the income year covered by the report and as such it is a new rule on mandatory reporting unlike the previous transfer pricing legislation. The purpose of the amendment is to provide SKAT with a better opportunity to easily identify situations where multinational groups have reported taxable income in a country different from the country in which the activity given rise to the taxable income took place. This topic is expected to be a focus area in the years to come, and enterprises should prepare themselves accordingly. The new reporting requirement came into effect on 1 July 2016, but is applicable to fiscal years beginning on or after 1 January 2016. As for Danish subsidiaries subject to reporting requirements as substitution for their parent companies, the requirement will apply to fiscal years beginning on or after 1 January 2017. The Danish Minister of Taxation is expected to provide detailed provisions in respect of the information to be contained in the country-bycountry report. A public consultation on a government order was launched by the Danish Minister of Taxation on 6 April 2016 with a consultation deadline of 2 May 2016, however the actual government order is still pending. Based on the current proposal, the report is expected to include country specific information regarding, inter alia, the group turnover, profit before tax, corporate tax paid, corporate tax calculated, number of employees, group material assets in each jurisdiction, etc. Annual Tax Newsletter 2016 23 The European Commission to impose public reporting requirements on multinational companies On 12 April, the European Commission presented its proposed new rules for multinational companies’ publication of key tax information. The proposal supplements the Commission’s proposal made in January about the introduction of new rules for country-by-country reporting applicable to European multinational groups. With its new proposal, the Commission ventures one step further requiring that all multinational companies operating within the borders of the EU and generating annual global revenue of more than EUR 0.75bn must publish certain financial figures. In January 2016, the European Commission presented its proposed Anti-Tax Avoidance Package, which is to guarantee efficient and growthstimulating taxation in the EU and to confine the multinational groups’ scope of tax planning. As a supplement to its proposed implementation of country-by-country reporting for European multinational groups, the Commission tabled its proposal for new rules on multinationals’ publication of key tax information. The proposal implies an amendment to the Accounting Directive 2013/34/EU. The proposal In its proposal, the European Commission suggests that multinational groups required to prepare countryby-country reporting subject to EU legislation, that is, multinational groups registered in the EU with annual global revenue exceeding EUR 0.75bn, should make part of their country-by-country reporting available to the public. Moreover, the European Commission also intends to apply these requirements to non-European multinational groups. According to the proposed amendment, the multinational groups, whose main offices are located outside the EU, may be subject to the publication requirement if their annual global revenue exceeds EUR 0.75bn. Generally, however, the publication requirement will apply only if the group has either a branch in Europe generating net revenue in excess of EUR 8m or a subsidiary in the EU, the activities of which exceed at least two of the following three criteria: (a) net revenue of EUR 8m; (b) balance-sheet total of EUR 4m; and/or (c) an average of 50 or more employees on the payroll during a financial year. According to the Commission’s proposal, the information to be disclosed will form part of the information that is available from the group’s country-by-country reporting. Consequently, not all the report will be disclosed. 24 Annual Tax Newsletter 2016 The information will be disclosed by the company in the multinational group responsible for carrying out the disclosure formalities by submitting the information to the authorities of the relevant Member State and by making the information available on the company’s website for a period of at least five years. The information must be disclosed separately for every EU country in which the company is active and for the so-called tax havens. For other countries, the information will be disclosed as aggregate figures. The information must include: • A brief description of the nature of the activities • The number of employees • The total net revenue (including intra-group revenue) • Profit (loss) before corporation tax • Corporation tax calculated and due for the current year • Corporation tax actually paid for the current year • Accumulated earnings The EU companies, alternatively their branches’ administrative management, will be responsible for the transparency requirement being met. Non-compliance may be subject to penalties provided for in the Directive. At national level, authorities and courts of law would be entitled to impose fines on the companies, the fines having to be ”effective, proportionate and dissuasive.” Banks and other financial institutions that are already subject to sectoral country-by-country reporting requirements pursuant to Directive 2013/36/EU will not be covered by the new transparency requirements. So any bank or other financial institution covered by this Directive will not be required to prepare and publish separate reports. Groups operating in the extractive and logging industries, on the other hand, will not only have to prepare and publish a sectoral country-bycountry report subject to the current rules, they will also have to prepare and publish a report to satisfy the requirements made by the new proposed public tax transparency rules as the current and new rules differ from each other. Bech-Bruun Comments When it comes to the question of disclosing corporate financial figures, including tax information, it is vital to keep in mind that such information may be used by other parties for purposes quite different than those originally intended by the European Commission when introducing the publication requirement. By stating this, we should like to point out that, although the reasoning behind the proposed publication requirement is sound, its consequences may still have quite the opposite effect. Such adverse situation would arise if a group has to publish detailed financial information on its activities in order to comply with the publication requirement whereas its competitor is not subjected to the same requirement. If so, the competitor would gain access to detailed information about the group’s strategies and activities and thus gain a competitive advantage. To ensure that the groups subject to the new tax transparency rules are not being edged out inappropriately, it ought to be considered whether it is necessary for a guaranteed efficient and growth-stimulating taxation in the EU to allow private individuals to access the financial information made available to the public as proposed by the EU, or whether access may be restricted to specific control organisations. As for the current state of Danish public tax transparency, the financial statements of Danish groups (consolidated financial statements) already include the vast majority of the information categories covered by the Commission’s proposed amendment. And since the financial statements of Danish companies and consolidated financial statements are made available to the public, private individuals may already ”properly scrutinise multinational companies”, which is what the European Commission intends with its proposed amendment. As Danish (consolidated) financial statements typically include consolidated figures for the group and the parent company, the proposed amendment will affect primarily the categories laid down by the Commission, under which information is to be disclosed separately for each EU country and those tax jurisdictions designated as tax havens. The amendments must be implemented in each individual Member State. Consequently, it is crucial for the rules’ success how they are transposed into national legislation by the individual Member States. Finally, it will be most interesting to find out to what extent the Member States decide to enforce the rules at national level, especially in the case of non-compliance. Annual Tax Newsletter 2016 25 Revival of the tax-advantaged employee share schemes On 1 July 2016, Bill no. L149B reintroducing the rules governing employee share schemes entered into force. The new provision included as s.7P of the Danish Tax Assessment Act (ligningsloven) will affect agreements on the granting of shares, etc., signed after 1 July 2016 and changes made to previous ones. A review of the new section 7P, reveals that it is basically a revival of the previous provision of s. 7H of the Tax Assessment Act governing individual employee shares. The new provision in section 7P affects agreements on the granting of shares, RSUs, PSUs, purchase rights and subscription rights signed on 1 July 2016 or later as well as agreements being amended after this date Taxation Companies are now able to grant their employees employee shares (shares, RSUs, PSUs, purchase rights and subscription rights) at no cost or at a favourable price without the employees being taxed at the time of grant/exercise. The taxation is instead postponed until the employee sells the shares, at which point any realised gains will be taxed as share income (maximum 42%) instead of ordinary salary income (maximum 56%). The company is at liberty to decide whether the shares should be granted to all of its employees or only to certain employees. The cost relating to the benefits of a qualifying section 7P scheme are non-deductible for the Danish employer. However, costs relating to the implementation etc. of the scheme are deductible for the employer company. Certification by auditor or lawyer no longer required Compared with the previous provision of s. 7H of the Tax Assessment Act, the new provision of s. 7P does not include the requirement of an auditor or lawyer certifying that the agreements have been signed in compliance with applicable tax exemption rules. Such certificates, therefore, need not be submitted to SKAT, the Danish Customs and Tax Administration, in the future. The company granting the shares will be under an obligation to report on the granting and exercising of purchase and subscription rights and on any acquisition of shares from the company to the income register. 26 Annual Tax Newsletter 2016 s. 7P s. 28 Includes Shares, RSU’s, PSU’s, purchase rights and subscription rights Purchase rights and subscription rights Taxation of employees Granting No taxation No taxation Vesting No taxation No taxation Exercise No taxation Income tax on the spread between the fair market value of the shares and exercise price, less the consideration paid, if any Sale of shares Share income tax on the spread between the selling price and the exercise price, less the consideration paid, if any Share income tax on the spread between the selling price and the fair market value of the shares at the time of exercise Taxation of the employer company Deduction of expense No right to deduction The spread between the share value and the exercise price is deductible Brief overview of the differences Conditions In accordance with the new section 7P, a number of criteria must be met in order for the new rules on employee share schemes to be applicable: • The employee and the employer company must agree on the granting of shares being subject to s. 7P; • The value of the granted shares may never exceed 10% of the employee’s annual salary at the time of signing the agreement; • The shares must be granted by the employer company or a consolidated company as part of an employment relationship, for which reason board members cannot qualify as eligible grantees, • Shares granted under employee share schemes must not make up a special class of shares; • Purchase and subscription rights may not be assigned to any third party. Comparison The table below gives a brief overview of the differences between the ordinary employee share scheme in section 28 of the Danish Tax Assessment act and the new taxadvantaged scheme in section 7P. Bech-Bruun Comments In consideration of the 10% criterion and the assessment challenges it poses combined with the scheme being non-deductible, we believe it is doubtful that the s. 7P provision will gain the foothold anticipated by the legislators. Annual Tax Newsletter 2016 27 Investment funds now to be considered independent taxpayers A Danish Tax Council ruling led SKAT, the Danish Customs and Tax Administration, to issue new tax directions (styresignal) on 24 February 2016. Under the new tax directions, Danish as well as non-Danish investment funds will be considered independent entities liable to taxation. Following Bech-Bruun’s update of 19 January 2016 on the new draft tax directions on taxation of investment funds, SKAT published the final version of the tax directions on 24 February 2006 (SKM2016.98.SKAT). With the exception of one specific clarification about asset disposal taxation, the final version of the tax directions does not contain any material changes in relation to the draft version referred to above. The tax directions and SKAT’s change of practice are the result of the Danish Tax Council’s conclusions made in one of its binding advance rulings (SKM2016.6.SR), in which the Tax Council found that a Swedish investment fund was to be treated as an independent taxpayer and that the Danish investors were consequently to be taxed subject to s. 19 of the Danish Capital Gains Tax Act (aktieavancebeskatningsloven). Classification of investment funds The tax directions lay down that, in future, investment funds, including certain UCITS funds, are generally to be considered independent taxpayers. Accordingly the classification of investment funds under Danish tax law will differ from the classification under Danish civil law, pursuant to which investment funds are not considered independent legal persons. The investment funds may therefore seek to be covered by the rules governing undertakings for collective investments in securities subject to minimum taxation (minimumsbeskattede investeringsinstitutter). If granted, reporting to the tax authorities subject to s. 10E of the Danish Tax Control Act (skattekontrolloven) cannot be maintained. If an investment fund changes its status from a fiscally transparent entity to an independent taxpayer (investment company), the investors’ shares of the investment fund will be subject to asset disposal taxation. The value of the shares will be calculated at the point in time at which the investment fund changes it nature for tax purposes. If the investment fund qualifies for taxation under the rules governing undertakings for collective investments in securities subject to minimum taxation, the change will not entail asset disposal taxation. Non-Danish investment funds Non-Danish investment funds should also be considered subject to limited tax liability in Denmark if they qualify as independent taxpayers, the income of which will be covered by limited tax liability. The decision as to whether a non-Danish investment fund is an independent taxpayer must be made subject to Danish law. The relevant, underlying assessments will consider whether the investors are personally liable; the profits are distributed according to the value of the individual investments; the investment fund has drawn up its own independent fund rules; and whether there is a possibility of extending the group of shareholders. The tax directions also provide that the managers of a non-Danish investment fund managed from Denmark by a Danish investment management or administration company must basically be deemed to be placed in Denmark. SKAT explains its directions by reasoning that investment funds do not have any governing bodies, for which reason all investment fund resolutions are made by the management company/manager. Effective date The tax directions will apply to investment funds benefitting from the change of classification to independent taxpayer as from 15 December 2015 (the date of the Tax Council Ruling in SKM 2016.6.SR). Investment funds on which the change will be a burden will not be covered by the tax directions until the publication of the directions (on 24 February 2016). The proposed change in the nature of investment funds managed from Denmark will take effect as from the publication of the tax directions (on 24 February 2016). 28 Annual Tax Newsletter 2016 The 2016 activity plan of the Danish tax authorities According to the activity plan released last March by SKAT, the Danish Customs and Tax Administration, SKAT intends to step up efforts and increase resources deployed in specific areas such as transfer pricing, car leasing, dividend distribution, etc. Compliance by large companies and multi-national groups will also remain a focus area. In 2016, SKAT has continued to keep an eye on medium-sized and large enterprises, that is, enterprises generating revenue of between DKK 14m and DKK 500m or total annual payroll costs exceeding DKK 4m. To date, activities in 2016 have included focusing on consolidated enterprises, compliance by principal shareholders and enterprises achieving revenue exceeding DKK 100m as well as giving increased attention to VAT issues, involving both medium-sized and large enterprises. This includes targeted checks and monitoring and area-specific analyses. The VAT initiatives are focused on industries which, according to empirical studies, often entail VAT revenue losses and which, owing to new legislation and complex circumstances, cause such losses to exceed average losses. One such focus area will be on enterprises carrying on crossborder transactions within the EU. The largest corporations According to the activity plan, SKAT will, as far as possible, continue its ongoing activities in 2016 in relation to the largest corporations in Denmark. The activities have been scheduled to run for several years mirroring the often very protracted proceedings. This means that the largest groups, whose corporate structures may be quite complex, will still be subject to special attention. In 2016, SKAT’s focus on enterprises will extensively be based on and broken down by industry. The activity plan covers various specific areas, such as the oil industry and the financial sector, which will experience increased control measures. According to the activity plan, SKAT will sustain its focus on issues involving withholding tax on dividends, interest and royalties. The collaboration between SKAT and the largest groups in Denmark must be strengthened further to generally improve compliance and reduce the risk of errors. This collaboration is to help identify the reasons for errors, among other things, so that relevant measures may be initiated. SKAT intends furthermore to carry out a compliance review of the largest corporations. Withholding tax on dividends, interest and royalties In its activity plan, SKAT states that focus will also remain on withholding tax on dividends, interest and royalties. Focus on this area is to help ensure correct withholding tax on cash flows made to tax havens or other relevant countries. Large flows of dividends, equity fund takeovers and large Danish company acquisitions will be the primary object of the increased control measures. This focus area is a continuation of last year’s activity, to which SKAT has decided to give higher priority, among other things as a result of the incident in 2015 concerning fraudulent dividend tax refunds to the tune of DKK 9.1bn – in all probability granted on the wrong basis. Following this incident, a special task force was set up, among other things, to keep check on claims for refund of dividend withholding tax. International taxation and Base Erosion and Profit Shifting (”BEPS”) Moreover, SKAT will have special focus on international taxation and BEPS. According to the activity plan, the object is to identify the applicability of BEPS within current legislation. The project will be aimed at cross-border transactions made by multinational groups with a view to exploiting tax loopholes or avoiding tax. Work in this focus area is a continuation of last year’s efforts. However, BEPS has subsequently been complemented with a proposal tabled by the European Commission for harmonised implementation of the rules in the EU. Accordingly SKAT’s work is most likely to entail a review of the Danish rules compared to the Commission’s proposal and work. Transfer pricing In 2016, SKAT will continue focusing on transfer pricing, the number of such cases having increased steadily over the past years. According to the activity plan, SKAT will seek to combine its comprehensive approach to cross-industry issues and sizes of enterprises with specific, large projects. As a result of this, focus will be increased in areas requiring attention owing to the sizes and frequencies of errors. During 2016, SKAT will pay particular attention to intellectual property rights and multinational group financing. SKAT continues to work with a special valuation unit, which is to increase the correctness of the estimated valuations made in transfer pricing cases. Annual Tax Newsletter 2016 29 SKAT’s continuing focus on transfer pricing in combination with BEPS and the European Commission’s proposed implementation of BEPS should induce all enterprises doing business within a multinational group to be particularly careful about ensuring that applicable legislation is complied with. Considerations should also be made as to whether there are any issues in the past that need to be addressed in future in this area. Car leasing Acknowledging the fact that car leasing has become more popular and the income from vehicle registration fees has dropped since 2008, SKAT will continue to list cars as a focus area in 2016 as well. Measures will be taken in the form of increased control to ensure correct registration and taxation of cars. Focus will be directed primarily on the formalities of registration, closely followed by the valuation of cars as the latter forms the basis for fixing the registration fees. As a new initiative in this area, SKAT will initiate an analysis in 2016 of the registration fee refunds made for cars to be exported and registered abroad. This analysis is the result of a high number of queries made to SKAT about this subject in particular. SKAT will be working closely together with the trade associations representing the car industry (sale and leasing). Their goal is to map out the challenges and possible solutions so that the issues in this area may be addressed more specifically than is the case today. Individuals and companies leasing their cars may expect increased control. Concluding comments On the basis of its 2016 activity plan, we expect that SKAT will maintain its focus on companies with large revenue and on multinational groups, including Danish enterprises owned by equity funds. Such companies are governed by the most complex part of Danish tax legislation, and, on top of that, Danish tax rules are generally considered to be some of the most complex ones globally. In order to be able to counter some of these complex situations, SKAT has introduced new procedures and practice for changing income years for assessment purposes and for currency translations of income and losses. Moreover, SKAT’s focus on crossborder tax issues intensifies increasingly, and any future international regulation will add yet another element to the state of complexity. The growing number of control measures and regulation, owing to, for instance, OECD’s guidelines in the BEPS initiative, have already implied the introduction of new rules governing spontaneous exchange of information on certain advanced tax rulings and APAs (unilateral advance transfer pricing arrangements). In an announcement dated 30 June 2016, SKAT explained how these rules will affect Danish issues. The various focus areas mean that medium-sized, large and the largest enterprises may still expect having to factor in considerable resource spending on responding to inquiries made by SKAT and to ensure that compliance is satisfactory not only with Danish and international rules in general, but also with transfer pricing regulation in particular. Specifically during the past year, new measures have been introduced in the transfer pricing area, most recently in April when SKAT issued an executive order on new documentation requirements in transfer pricing cases. Moreover, the Minister of Taxation has contemplated reducing the processing time of transfer pricing cases and, being inspired by Great Britain’s example, seeking to find a new mediation process to facilitate matters for the involved enterprises. As for SKAT’s increased focus on car leasing, the Danish parliament, adopted new rules on 31 May 2016, under which it is no longer required to obtain permission from SKAT to amend leases. However, this easing of practice is ”offset” by a tightening of practice elsewhere as, in future, the tax basis of new parallel-imported vehicles must be calculated on the basis of the fair value in Denmark and the purchase price abroad. Finally, the focus areas of SKAT’s 2016 activity plan imply in particular that principal shareholders i medium-sized and large corporations should consider whether the relationships between the enterprises and their repsective principal shareholders are in compliance with current tax legislation. 30 Annual Tax Newsletter 2016 Judgment disregards SKAT’s interpretation of s. 10 of the Danish Taxation of Seafarers Act The Danish Supreme Court’s judgment of 27 May 2016 disregards SKAT’s, the Danish Customs and Tax Administration’s, interpretation of the maritime transport concept as laid down in s. 10 of the Danish Taxation of Seafarers Act (sømandsbeskatningsloven). The case In May and June of 2009, the shipping company Peter Madsen Rederi A/S assisted GEO, a firm of consulting engineers, with the latter’s investigations of the seabed soil initiated in view of the projected offshore wind farm at Anholt. The investigations were carried out by GEO’s own staff, who used their own equipment. The task performed by the shipping company for GEO consisted in transporting GEO’s staff and their equipment to specific destinations at sea and placing GEO’s equipment, which the staff had carried along, on the seabed using the vessel’s crane operated by the vessel’s crew. The shipping company used the vessel M/S Merete Chris to perform these activities. M/S Merete Chris is a specially constructed vessel with a gross tonnage exceeding 20 tonnes and suitable for dredging and other activities. The issue of the case was to establish whether the activities performed were to be regarded, in full or in part, as ”maritime transport” as specified in s. 10 of the Danish Taxation of Seafarer’s Act, and if so, whether they would make the shipping company eligible for reimbursement under this provision. SKAT and the Danish National Tax Tribunal had both found that the activities performed for GEO were not to be regarded as maritime transport since they were performed onboard the vessel, and the various activities constituting the overall task had to be assessed as a whole. The High Court of Western Denmark upheld the decision of the National Tax Tribunal. The judgment of the Danish Supreme Court The Danish Supreme Court found that the concept of maritime transport as described in s. 10 of the Danish Taxation of Seafarer’s Act is to be understood in accordance with the general EU legal concept of maritime transport, which includes carriage of goods and passengers by sea. The activities performed, which consisted in sailing between the port and the individual destinations at sea where the investigations were to take place, were to be regarded as carriage of passengers and goods and as such be regarded as maritime transport as stipulated in s. 10(2) of the Danish Taxation of Seafarers Act. The activities taking place at the destinations at which the investigations were carried out, however, were, on the other hand, not to be regarded as an integral part of the maritime transport and would not make the shipping company eligible for reimbursement. Bech-Bruun Comments The Supreme Court judgment implies a disregard of SKAT’s existing practice in this area, which – in relation to s. 10 of the Danish Taxation of Seafarers Act – does not accept a division of a specific task into maritime transport and other activities. We may expect the judgment to have an impact on a substantial number of cases dealing with similar issues and pending in the administrative appeal system, and, likewise, the judgment may give rise to the reopening of previously submitted applications for reimbursement. Shipping companies whose applications for tax reimbursement have either been rejected in full or resulted in only reduced reimbursement under SKAT’s existing practice should reconsider whether there is a basis for applying for a reopening of such previous decisions. During the course of the proceedings, Peter Madsen Rederi A/S was represented by Kaspar Bastian, partner at Bech-Bruun. Annual Tax Newsletter 2016 31 First Danish judgment on the EC Arbitration Convention The issue as to what it takes for the three-year time limit provided for in Article 6(1) of the EC Arbitration Convention (Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises) to be complied with has become clearer following a new judgment delivered by the High Court of Western Denmark on 11 March 2016. The grounds provided by the High Court give the impression that, in order for a case to have been submitted pursuant to Article 6(1) of the EC Arbitration Convention, it must fulfil the requirements of being submitted pursuant to Article 7(1) and thereby the Code of Conduct. The matter arose out of a transfer pricing increase in respect of the Danish plaintiff company. By way of a decision made on 29 November 2011, SKAT, the Danish Customs and Tax Administration, had changed the company’s taxable income for the accounting period 2005. The main issue The case pertained to which requirements must be fulfilled for the threeyear time limit provided for in Article 6(1) of the EC Arbitration Convention (90/436) to be deemed to have been complied with, including the correlation of the three-year time limit and the starting point of the two-year period provided for in Article 7(1). The case also pertained to which minimum information is required pursuant to Article 5(a) of the Code of Conduct for the effective implementation of the Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises (2009/C 322/01) to be provided by the taxpayer for a case to have been submitted according to Article 6(1) of the EC Convention, see Article 7(1). The facts of the case Based on the changed tax assessment for the accounting period 2005, the company made a request for the commencement of a mutual agreement procedure (MAP) on 27 September 2014. Subsequently, by way of letter of 7 October 2014, SKAT requested that the company fulfil the conditions provided for in Article 5(a) of the Code of Conduct since SKAT considered it a requirement that the conditions provided for therein had been fulfilled for the three-year time limit provided for in the EC Arbitration Convention to have been complied with. Against this background, the company made a new request for the commencement of a MAP on 26 November 2014. SKAT rejected the request of 26 November 2014 for the commencement of a MAP pursuant to the EC Arbitration Convention as not having been made in due time referring to the fact that the request did not include the required minimum information according to Article 5(a) (ii) of the Code of Conduct. SKAT was of the opinion that the request did not include any indication of which 32 Annual Tax Newsletter 2016 amounts were involved in respect of the associated enterprises to the relevant transaction and, consequently, SKAT did not perceive the Code of Conduct to have been complied with. According to SKAT, the non-compliance with Article 5 (a) (ii) of the Code of Conduct implied that the three-year time limit provided for in Article 6(1) of the EC Arbitration Convention had not been complied with. The request contained information on the amount by which SKAT had increased the Danish income, but no distribution of such an amount had been made among the foreign enterprises stated in the request. The request was, however, accompanied by some material which, in the opinion of the High Court, was suitable for forming the basis of such a distribution. The law governing the issue in question In Denmark, the three-year time limit provided for in Article 6(1) of the EC Arbitration Convention is calculated as from the time when the taxpayer receives the final tax assessment notice from SKAT. This is, among other things, supported by the fact that, from the general explanatory notes to the bill on incorporation of the EC Arbitration Convention (Official Report of Danish Parliamentary Proceedings FT 1991- 92, Addendum A, column 593 ff) in respect of Article 6, the following appears: The case must be presented within three years of the first notification of adjustment of profits from the competent authority. In the case at hand, the three-year time limit consequently started to run from the time when SKAT made its decision on 29 November 2011. As appears from Article 5 of the Code of Conduct, the two-year period provided for in Article 7(1) of the EC Arbitration Convention starts on the later date of i) the date of the tax assessment notice or ii) the date on which the competent authority receives the request and the minimum information as stated in Article 5 (a) of the Code of Conduct. This implies that the taxpayer presents any specific information requested by the competent authority within two months upon receipt of the taxpayer’s request. The High Court’s decision The High Court expressed that a justification requirement may be inferred from Article 6(2) of the EC Arbitration Convention. Such justification requirement, however, does not include any express requirement as to the indication of specific transactions or specification in terms of amount. The High Court also stated that Article 5(a)(ii) of the Code of Conduct makes the following a requirement ”details of the relevant facts and circumstances of the case (including details of the relations between the enterprise and the other parties to the relevant transactions)”. The High Court believed that there was consequently no express requirement of any distribution of the amount in question. Based thereon, the High Court found that the company’s request for the commencement of a MAP could not be deemed to be insufficient with reference to the requirement of the Code of Conduct to state relevant transactions. The implications of the judgment Consequently, the High Court determines whether Article 5(a)(ii) of the Code of Conduct has been complied with in connection with deciding the issue as to whether the tree-year time limit of Article 6(1) of the EC Arbitration Convention has been complied with. This indicates that the High Court construes the EC Arbitration Convention to the effect that, as for compliance with the three-year time limit, consideration must be had to whether the case has been presented pursuant to Article 6(1), see Article 7(1), since Article 5 of the Code of Conduct pertains to when the case has been presented pursuant to Article 6(1) of the EC Arbitration Convention, see Article 7(1). According to the grounds provided by the High Court, one may consequently get the impression that the High Court is of the opinion that the principles of complying with the three-year time limit provided for in Article 6(1) and the starting point of the two-year period provided for in Article 7(1) overlap. Annual Tax Newsletter 2016 33 New judgment: Special investment funds are more than just investment in securities On 9 December 2015, the European Court of Justice reached the following decision in the matter of Fiscale Eenheid (C-595-13; Staatssecretaris van Financiën mod Fiscale Eenheid X NV cs) laying down that VAT exemption also applies to special investment funds investing in types of assets other than securities. However, the European Court of Justice did not find that the concept of ”management” included the actual management of the immovable property of a special investment fund. Main issue of the case The main issue of the case was (i) whether a company set up for the sole purpose of investing the assembled assets in immovable property may be regarded as a special investment fund within the meaning of the VAT Directive and (ii) – if so – whether the concept of ”management” covers the actual management of special investment fund’s immovable property, even though such management has been sub-contracted to a third party. The opinion of the advocate general proposes that both questions be answered in the affirmative. However, the European Court of Justice answered only the first question in the affirmative, ruling against the concept of ”management” covering the actual management of special investment fund’s immovable property. When is a company a ”special investment fund”? According to the decision of the European Court of Justice, the decisive factor is not the type of assets in which funds are invested; rather, it is whether the company is subject to State supervision and is competing with the conventional undertakings for collective investment. When may a service constitute ”management”? In response to the question about the scope of ”management”, the European Court of Justice has found that management comprises only services that ”be specific to, and essential for, the management of special investment funds” and that ”that the specific activity of a special investment fund consists in the collective investment of capital raised.” In this particular situation, the European Court of Justice ruled that the specific activities characterising a special investment fund include the selection, purchase and sale of immovable property as well as administration and accounting tasks. However, the Court did not rule that the actual management of immovable property constituted activities exempt from VAT since the objective of the management is to protect and increase the investment made. According to the European Court of Justice, this objective is inherent in any type of investment. Consequence of the judgment The judgment will have an impact not only on companies investing in immoveable property, but also on companies investing in other types of asset provided (i) that the company is subject to state supervision and (ii) that the company has been set up by investors whose return on investment depends the performance of the investments made by the company and who bear the risk connected with their investments. The requirement of the company being subject to state supervision is new and may mean that companies previously exempted from VAT will not be so in future, and vice versa. For this reason, it is important that the companies in question examine whether the services they have received are or should have been exempt from VAT. In view of the Court’s decision, SKAT, the Danish Customs and Tax Administration, has decided to revise its published draft tax directions (styresignal) on investment funds accordingly. For the present, however, SKAT has published other preliminary tax directions, according to which SKAT is currently in dialogue with the Danish Financial Supervisory Authority and plans to publish final tax directions in a couple of months. We expect the new tax directions to be released in September at the earliest. Moreover, the current tax directions include rules on a limitation period ”freeze” for reclaiming tax payments. As a result of the European Court of Justice’s comments on the concept of ”management”, the decisive factor must be whether the activity in question may be considered special for the specific type of investment or whether it merely constitutes a general service, which would have been rendered no matter the asset invested in. At Bech-Bruun, we are well-versed in advising investors and service suppliers on whether certain types of collective investment undertaking may qualify as ”special investment funds” and whether certain types of services may be deemed as ”management”. 34 Annual Tax Newsletter 2016 About Bech-Bruun With more than 500 specialised and experienced employees, Bech-Bruun is among the leading law firms in Denmark. From our offices in Copenhagen, Aarhus and Shanghai we provide advice on all aspects of corporate and commercial law. Bech-Bruun Tax (16 fee-earners and 6 partners) is the largest truly specialised tax advising team of any Danish law firm. Bech-Bruun Tax advises on all issues relating to corporate taxes and duties. The combination of an extensive network of international tax advisers and our considerable expertise in tax litigation makes us an attractive alternative to the tax divisions of the large auditing firms. For many years, Bech-Bruun Tax has been ranked as one of the leading tax advisers in Denmark, which is reflected in our ratings in Chambers, Legal500 and PLC Which Lawyer? Several of our partners and lawyers are recognised as leading Danish experts within their areas of expertise. Bech-Bruun Tax advises on a stand-alone basis as well as in collaboration with advisers from Bech-Bruun M&A on all matters relating to private equity and venture capital structures. Furthermore, Bech-Bruun Tax has advised a number of private equity firms from, primarily, London, Stockholm and Luxembourg, in relation to the supply of investments for Danish clients. Bech-Bruun Tax has also significant experience in tax litigation and procedural tax matters before the ordinary Danish courts, the Danish National Assessment Council and the Danish Administrative Tax Authorities both in relation to ordinary tax assessments, transfer pricing issues, VAT and duty issues and tax enforcement matters. Bech-Bruun Tax has advised on transfer pricing matters for a number of years and possesses significant experience within this field of expertise. We advise on a wide scope of transfer pricing issues, ranging from the preparation of transfer pricing documentation files, preparation of defence files for corporations, to negotiations with the Danish tax authorities on advance pricing agreements as well as transfer pricing litigation, and we cooperate with selected specialist firms outside Denmark whenever it is relevant or useful for the client. Tax advice in all matters relating to securities and financial instruments is one of our key competencies. Due to our international and demanding client base within the financial sector, we are always up to date with the rapid developments within this field. International tax and rendering assistance to international clients investing in or via Denmark are the primary areas of expertise of Bech-Bruun Tax. Our clients benefit from our significant international experience and extensive international network. Several lawyers with Bech-Bruun Tax have in-depth knowledge of foreign tax legislation obtained through short- and longterm secondments abroad, both in Europe and the USA. In particular, we advise Danish businesses established internationally, foreign businesses with subsidiaries or permanent establishments in Denmark as well as private equity firms interested in investment opportunities in the Danish market. Read more about Bech-Bruun Tax at www.bechbruun.com or contact one of our specialists: Annual Tax Newsletter 2016 35 Anders Oreby Hansen Partner T +45 72 27 36 02 E [email protected] Michael Serup Partner T +45 72 27 33 02 E [email protected] Carsten Pals Partner T +45 72 27 34 77 E [email protected] Jørgen Dreyer Hemmsen Partner, chief economist T +45 72 27 36 06 E [email protected] Peter Nordentoft Associate T +45 72 27 36 22 E [email protected] Thomas Frøbert Partner T +45 72 27 34 33 E [email protected] Lisbeth Poulsen Associate T +45 72 27 36 43 E [email protected] Kaspar Bastian Partner T +45 72 27 34 24 E [email protected] William Sejr-Sørensen Associate T +45 72 27 34 72 E [email protected] Tina Buur Johnsen Associate T +45 72 27 33 85 E [email protected] Bech-Bruun is a market-oriented law firm offering specialist services. With our wide range of products, we serve a large section of the Danish corporate sector, the Danish public sector as well as international enterprises. With the help of more than 500 talented employees and some of the most recognised and experienced experts in the business, we customise solutions to our clients, embracing all of our business areas. Our goal is to strengthen our clients’ businesses and help them outperform their competitors. Copenhagen Denmark Aarhus Denmark Shanghai China T +45 72 27 00 00 www.bechbruun.com
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