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Corporate exit tax rules under pressure
The ECJ ruled that the existing exit tax legislation which required the immediate payment of exit tax on a company’s deemed capital gains upon transfer of its assets to another jurisdiction was a violation of EU law. Taxand Denmark discusses the amended legislation and the implications going forward.
Following the European Court of Justice’s ruling Denmark has passed new legislation allowing companies to opt for deferred payment arrangements with regard to exit tax on assets transferred from one EU/EEA member state to another.
The adopted Danish legislation introduces a deferred payment arrangement allowing companies to partially defer exit tax payments. Exit taxes are to be settled through instalments as the transferred assets realise income in the form of earnings, gains or dividends. The aim of the new Danish legislation is to reduce discrimination between national and cross border transfers of assets in relation to corporate migration.
The European Commission is still not convinced that the new legislation adheres to EU Law because:
- The rules should distinguish between assets meant to be disposed of as taxes and assets not meant to be disposed of
- Income from assets should not lead to the payment of fixed tax instalments as such rules do not apply to Danish non-migrating companies
- The new rules entail interest being charged on the deferred payments balance, meaning that an exit tax charge may be imposed on corporate migration.
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Given the current legislation companies should always be aware that it may be possible to salvage foreign tax losses by deducting them to the Danish head of a group when that group finally closes down a foreign venture. There is presently no legislation granting Danish companies the right to deduct losses incurred upon liquidation or relocation of foreign businesses and a deduction would therefore solely be based on EU law.