DENMARK Law and Practice Contributed by: Morten Krogsgaard and Lennart Meyer Østenfjeld, Moalem Weitemeyer
“Qualifying Lender” In certain circumstances, withholding taxes on interest payments may be required in relation to a lender if: • the lender, directly or indirectly, and acting alone or together with others, has control- ling power over the financial and operational affairs of the debtor of the interest; • the lender is not entitled to claim reduction or elimination of Danish withholding tax on inter- est pursuant to a tax treaty with Denmark or the EU Interest and Royalty Directive (Council Directive 2003/49/EC); and • the income is effectively subject to a tax rate of less than 75% of the Danish corpo- rate income tax rate, which is currently 22% (including final, effective taxation in back-to- back type on-lending scenarios). The definition of “qualifying lender” will often carve out these related lenders. 8.3 Thin-Capitalisation Rules Restriction Rules on Deductibility of Interest Expenses There are three main restriction rules on the deductibility of interest expenses (earnings strip- ping rules). These are as follows. • The thin cap rule which is only applicable to internal group debt as defined in the rules. • The interest ceiling rule (a Danish specialty, applicable to all financing expenses whether internal group or external). • The earnings before interest, taxes, deprecia- tion and amortisation (EBITDA) rule (the Anti- Tax Avoidance Directive (ATAD) rule known in all EU jurisdictions, applicable to all financing expenses whether internal group or external).
Thin Cap Rule The main features of the thin cap rule are as fol- lows: • safe harbour ratio: 4:1 debt/equity ratio; • asset valuation: assets are measured at market value (not book or tax value). Non- recognised internally generated goodwill is included at market value in the “safe harbour” calculation; • threshold: lower threshold of DKK10 million (Danish tax consolidated level); • interest restriction: only restricts interest rela- tive to the portion of debt needed to be re- characterised as equity to meet the 4: “safe harbour” threshold; • scope: restricts both interest expenses and capital losses relative to controlled debt. However, restricted capital losses may be carried forward for set-off in future capital gains on the same loan; and • independent financing proof: does not apply if the taxpayer can prove that similar financ- ing may be obtained between independent parties. Interest Ceiling Rule The main features of the interest ceiling rule are as follows: • net financing expenses: deductibility of net financing expenses (subject to a highly technical definition) is restricted to the extent those expenses exceed the tax value of cer- tain qualifying assets multiplied by a standard interest rate determined annually based on certain benchmarks in line with market devel- opment of interest rates; • concept: the interest ceiling rule allows the deduction of expenses it would cost to debt finance the taxpayer’s (consolidated) relevant
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