New compulsory co-taxation for group companies - reduction of corporation tax

Corporate Tax Reduction Bill

On 31 May 2005, the Danish Parliament adopted Bill No. L 121, which, in addition to reducing corporation tax, also concerns the extension of the joint taxation rules so that all Danish group companies are subject to joint taxation. We review below the main content of the law.

1. Reduction of the corporate tax rate

The corporate tax rate will be reduced from 30% to 28% with effect from the 2005 income year. For companies with a staggered income year, the new law applies from the income year commencing on or after 2 April 2004. At the same time as reducing corporation tax, the corporate tax rate for taxpayers using the corporate tax regime is also reduced.

Withholding tax on dividends distributed to Danish companies is reduced to 18.48%. This is because these companies are only liable to tax on 66% of the dividends. This applies to dividends adopted on or after 1 July 2005.

The taxation of dividends paid to natural persons has not changed. It has therefore become more advantageous to take dividends out of the company instead of wages.

2. Territorial principle for companies

Income from permanent establishments and immovable property abroad shall no longer be included in the taxable income of the company. Thus, if the company has a branch abroad, the income from the branch does not have to be taxed in Denmark.

The following exceptions to this general rule apply:

• If the company chooses to be taxed under the new rules on optional international co-taxation, see below.
• In the case of international shipping and aviation activities, the exception is that they must continue to include taxable dividends, interest and royalties from abroad.
• Branches abroad with a predominance of financial income. (CFC companies)

3. Amendment and extension of the rules on co-taxation

3.1. National co-taxation

All Danish group companies are subject to compulsory co-taxation.

Affiliated companies are considered to be companies that have a controlling influence in another company. The decisive influence can be, among other things, if the company has more than 50% of the votes in another company. It doesn't matter how big the ownership is. Under the rules in force so far, there was a requirement for 100% ownership. In order to avoid that the companies could circumvent the new rules on joint taxation by selling a small number of shares, the definition of group has been substantially changed. It is now essentially the same companies that are required by the Annual Accounts Act to file consolidated accounts, which are also covered by the new group definition in the rules on co-taxation.

The Danish parent company must be the management company for joint taxation. If there is no Danish parent company, a management company must be chosen from among the Danish affiliates. Among other things, the management company is liable for the taxes of the entire group.

It is the entire income of the subsidiary that is included in the co-taxation and not just the part of the income that corresponds to the distribution of votes. If the company has 51% of the votes in the subsidiary, the entire income of the subsidiary must be included in the co-taxation income.

If the company has had a voting majority in the subsidiary for only part of the year, only that part of the income is included in the co-taxation income. Tax depreciation can be calculated as a maximum in terms of how much the income period makes up of a calendar year.

All companies in joint taxation must have the same income year as the management company. This may result in a number of companies now subject to co-taxation having to reschedule their income years.

Deficits must be carried forward with the company's own transferable deficits first, then co-taxation deficits for the year of income in question and, finally, carried forward deficits in co-taxation.

Payments must be made from the companies which take advantage of a loss from a jointly taxed company to the company making the loss. Once payment has been made, only the management company is responsible for the full tax payment.

3.2. International co-taxation

Companies can choose for themselves whether they want to be subject to the new rules on international co-taxation.

If the group will be subject to the rules on joint taxation, all foreign and Danish group affiliates and permanent establishments/properties must be included in the joint taxation. This also applies to any foreign parent and sister companies. When choosing international co-taxation, the companies bind themselves for 10 years.

If co-taxation is discontinued before the end of the period, full re-taxation of the retaxation balance will occur. If co-taxation ceases at the end of the binding period, only a fictitious liquidation reserve will be retaxed, with a maximum of the tax value of deducted losses.

This law has been intended to minimize the number of companies that will opt for international co-taxation.

Re-taxation of existing balances

If co-taxation is discontinued as a result of the new rules, it does not entail full re-taxation in the year of cessation. Instead, the retaxation occurs as the foreign company earns a profit in subsequent income years. The retaxation balance must therefore be accounted for in accordance with the old rules.

Entry into force

The amendments to the rules of co-taxation will in principle have effect for companies whose income year begins on or after 15 December 2004. Companies falling within the group concept as defined in the new rules, but which would not have been covered under the original draft legislation, may be excluded from co-taxation in the first year of income commencing after 15 December 2004 but before 2 March 2005.

Our comments

The new rules have effectively abolished the possibility of international co-taxation for larger groups with foreign parent companies and subsidiaries. For smaller groups, a binding period of 10 years combined with a tightening of the re-taxation rules will in the vast majority of cases make it unattractive - let alone “expensive” to continue in co-taxation. The flexibility that the previous rules provided for choosing which companies should be included under co-taxation and for how long is no longer available, and this alone will deter most groups from opting for international co-taxation. But it is also precisely this option that the government has wanted to abolish.

Good advice

Before filing the tax return for the 2005 income year, companies should carefully consider the desirability of opting for international co-taxation. If not, the company does not have to take any action, since international co-taxation in the future presupposes a positive alternative to the tax return. Companies whose income year begins before 15 December 2004 may provisionally postpone the decision until the next income year.

Contact SkatteInform

Get qualified answers to your tax questions.

Whether you have a minor tax issue or want an assessment of a major tax case, our lawyers and chartered accountants are available with qualified advice.

Call us by phone 33 32 10 10

or send an email at info@skatteinform.dk

Tax Inform

Chartered Accountants

Vester Voldgade 9, 2nd

1552 Copenhagen V

Article No 2005-35. 13 October 2005

Source:

Law No. 426 of June 6, 2005

‍

Disclaimer

‍The above information is for guidance purposes only, and we accept no responsibility for decisions made based on this information without prior individual advice. We accept no responsibility for errors or omissions.

‍