The Danish rules regarding payment of additional value-added tax (VAT) in connection with subsequent corrections of VAT returns will be changed significantly as of 1 July 2023. The new rules were adopted more than a year ago, but the date of entry into force has not been announced until now. As the new rules enter into force from 1 July 2023, it is important that taxpayers act swiftly if they need to make corrections to past VAT returns, particularly if additional VAT will be payable to the Danish tax authorities.

Companies now have only a few weeks to identify any errors and make relevant subsequent declarations if they want to avoid interest on the corrections. Also, going forward, the new rules mean that corrections leading to additional payments should be made as soon as possible after being identified.

The interest rate is determined once a year and consists of the base rate (0% in 2023) plus 0.7%. Interest is calculated on a monthly basis as compound interest, meaning that interest on interest is paid. Therefore, there is a risk that interest of up to 28.55% will accrue if a correction is made three years back. Failure to pursue mitigating steps to correct errors from three years ago, before the interest rules take effect, can be costly. On this basis, businesses doing business in Denmark should therefore quickly assess whether they have a potential historic risk of interest.

However, it is possible to correct errors via subsequent declarations without paying interest if the correction is made before the rules come into effect on 1 July 2023. The authorities have been reluctant to provide any guidance on when an amendment must be submitted in order to fall under the old regime. However, it is clear that any amendments made after 1 July will be subject to interest — it might be possible to amend as late as 30 June without incurring interest, but amended returns should be submitted as soon as possible rather than left until the deadline.

When and in what cases is interest added?

Interest is automatically added to the Tax Account (which shows the current balance between the tax authorities and the business) when corrections are made to previous declarations, i.e., when VAT is declared retrospectively (missing output VAT or too high input VAT deduction). Interest is only paid if the adjustment cannot be included in the balance of the tax account in the period to which the adjustment relates. Subsequent VAT and tax returns that result in a negative tax account in the corrected return period, automatically result in the subsequent collection of interest. There has been uncertainty as to whether this will also apply even if there is only a period shift — and regardless of whether, for example, the VAT deduction was made in a later period than it should have been. Based on the latest information, we would not expect this to be an issue, but this may be a concern going forward. Moreover, interest is not added on a positive balance, meaning that the rules only apply if the amount is in favor of the Danish tax authorities.

The new rules mean that if a business has applied the VAT deduction rules incorrectly and deducted too much input VAT, any corrections would lead to interest liability, which was not previously the case. There may also be transactions in which the VAT treatment is unclear or uncertain and later need to be amended — e.g., if the entity has sold a part of its business and treated the sale as an exempt transfer of going concern and this would turn out to be a taxable sale of assets.

The rules allow the Danish Tax Agency to exempt companies from interest in specific cases (upon application), but it is not yet clear in which cases an exemption will be granted, and we expect that the starting point will be that no exemption from interest will be granted.

Companies with a partial-deduction right should also be aware that in addition to the recently published executive order, a number of changes will come into force for companies with partially exempt activities that lead to a partial deduction of VAT. They may only use one provisional deduction rate per financial year, which is the most recently calculated deduction rate for a full financial year. The rules are very specific regarding which rate may be used, so taxpayers should ensure that they apply the rules correctly. Moreover, the annual adjustment of the provisional deduction rate (on-account rate) must be corrected in the VAT period that includes the sixth month after the end of the financial year. This is meant to ensure that the correction will not be affected by the new interest rules.

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

EY Denmark, Copenhagen

• Anne-Mette Høiriis | anne-mette.hoeiriis@dk.ey.com
• Anja G. Dahlgaard | anja.gartner-dahlgaard@dk.ey.com

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor