10 February 2025 Denmark plans new interest rules for late tax payments and corrections
Legislation (L 2024-12-30 nr. 1694) aimed at eliminating compound interest on late tax payments and corrections has been approved for implementation in 2025. Under the new legislation, amounts that are not paid on time to the tax account will transition to simple interest. Additionally, the fixed interest rate will also increase, meaning that the interest burden will, in most cases, be amplified. Although effective date for the change is not yet known, businesses with a presence in Denmark should be aware of the upcoming change to effectively prepare. Businesses should review their processes and procedures to ensure that VAT and taxes are recorded and paid on time and that reporting and settlements have been done correctly over the past three years. In 2025, Denmark intends to abolish compound interest on late tax payments and corrections, whether voluntarily disclosed by taxpayers or assessed by the authorities. Currently, late payments and corrections are subject to compound interest, meaning that interest accrues on both the initial principal (i.e., tax amount due) and the accumulated interest. The applicable interest has two components: a variable rate, updated yearly, and a fixed rate. In 2024, the variable rate was 0.2% per month and the fixed rate was 0.7% per month. This amounted to a total compound interest rate of 11.35% for a 12-month period. Interest accrued daily, but it was assigned monthly. In 2025, Denmark intends to begin subjecting late payments/corrections for debts within tax accounts to only simple interest — i.e., interest on the accumulated interest from previous periods will no longer accrue and interest will accrue solely on the initial principal. However, for debts outside tax accounts, compound interest will continue to apply. Businesses required to have Danish SE/CVR numbers (i.e., business registration numbers) are assigned tax accounts by default. However, not all nonresidents that are not established in Denmark are required to hold tax accounts. The interest variable rate will stay the same in 2025, but the fixed rate will increase to 0.85% per month. This change is applicable for debts either within or outside tax accounts. For debts within tax accounts, the future simple interest rate will be 12.60% per year. Interest will still accrue daily. For debts outside tax accounts, the goal is that interest will be assigned daily; however, for debts within tax accounts, the aim is to continue assigning interest monthly. Either way, it is currently unknown if and when the authorities' information technology (IT) systems will be able to capture this change. Although the change has already been approved for implementation in 2025, the effective date is yet to be determined. In practice, this means that payments and corrections occurring before the effective date will still be subject to the current rules. Only payments and corrections occurring after the effective date will be subject to the new rules. In general, law changes in Denmark do not have retroactive effect. However, in the case at hand, the authorities seem to indicate that practical difficulties with applying the old rules are the reason for the change. Because the new law does not address the retroactivity aspect specifically, it remains to be seen whether or not payments and corrections occurring after the effective date, covering tax periods before the effective date, would also be subject to both the new rates and interest calculation principles. If so, this would mean that, in practice, the new higher interest rate will have a retroactive effect (as a general rule, interest accrues retroactively within the three-year statute of limitations, whereas, for gross negligence, the statute of limitations can be extended to 10 years). The main impact on businesses is that applicable interest will change. Depending on whether retroactivity applies, as mentioned above, applicable interest would increase by 1.25 percentage points calculated on a 12-month debt age (i.e., the period of time the debt has existed). Looking at a higher debt age, the current, compound interest could be a higher percentage than the simple interest, and as such, the applicable interest might also decrease in certain scenarios. Among other things, the main areas of interest exposure will be deferrals of tax payments during litigation and tax corrections. Note that, recently, interest began being applied to corrections of indirect tax filings, including value-added-tax (VAT), excise duties, customs duties and special payroll tax (lønsumsafgift), and that interest has been and will remain nondeductible for corporate income tax purposes. For companies with no/limited VAT recovery right that are performing foreign purchases, errors leading to corrections, and thereby payment of interest, are a fairly frequent phenomenon. This is also reflected in the context of the ongoing targeted tax audit campaign of the tax authorities on intra-European Union trade — read more in this EY article. Businesses should take this opportunity and perform in-depth analyses of their procedures for ensuring timely bookings of tax deductions and payments, as well as timely filings and settlements for the past three years. By voluntarily disclosing potential additional tax payments, generally as soon as possible after errors have occurred and specifically maybe even before the effective date, taxpayers can try to reduce their overall interest costs. Further, nonresident taxpayers might assess or revisit the pros and cons of having tax accounts, where this is optional.
Document ID: 2025-0445 | ||||||
