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June 4, 2021
2021-1107

Denmark passes bill on CFC taxation

On 3 June 2021, the Danish Parliament passed Bill No L 89 on controlled foreign company (CFC) taxation. The law implements the CFC rules of the European Union’s (EU) Anti-tax Avoidance directive (Council directives (EU) 2016/1164 and (EU) 2017/952) (the ATAD) into Danish law.

The ATAD provides Member States with two options for CFC taxation:

  • Model A: CFC taxation of non-distributed financial income
  • Model B: CFC taxation of non-distributed income resulting from non-genuine arrangements put in place for the essential purpose of obtaining a tax advantage

Existing Danish CFC taxation is based on model A and CFC taxation requires that more than 50% of the income is of a financial nature and that more than 10% of the assets are of a financial nature. The existing rule is applicable irrespective of the level of taxation for the CFC.

The new law retains model A with the following key changes:

  • The asset test is abolished.
  • The income test is lowered from 50% to 33.3%.
  • The concept of financial income is expanded to cover “other income generated from intellectual property (IP).” This rule may capture profits from the sale of goods and services that are based on IP. However, other income from IP is exempt from CFC taxation provided an economic substance test and certain formal conditions are satisfied. A grandfathering rule provides that a parent company may obtain a step up on tax basis for intangibles owned by an existing CFC, equal to fair market value at the beginning of the income year beginning 1 July 2021 or thereafter.
  • A Danish parent company may elect only to include the CFC income of a subsidiary rather than the entire income of the subsidiary. Such an election will be binding for five years.

The new rules are applicable for income years starting 1 July 2021 and thereafter.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young P/S, Copenhagen

Ernst & Young P/S, Aarhus

Ernst & Young LLP (United States), Nordic Tax Desk, New York

 

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