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Denmark struggles with exit taxes

28 Apr 2014

In Denmark new legislation has been passed allowing companies to opt for deferred exit tax payments on unrealised capital gains on assets transferred from one EU/EEA member state to another. Taxand Denmark provides an overview of this recent ruling.

On 18 July 2013, the European Court of Justice ruled that Danish exit tax legislation, which requires immediate payment of exit tax on a company's unrealised income when it transfers its assets to another EU/EEA member state, was a violation of EU law.

The new Danish legislation introduces a deferred payment arrangement which allows companies to defer exit tax payments provided that they are settled by instalments as the transferred assets realise income in the form of earnings, gains or dividends. The annual instalment must be at least 1/7 of the calculated exit tax, the maximum deferral period thus being 7 years. The purpose of the new Danish legislation is, to the extent possible, to put companies transferring assets to another member state, which is subject to exit taxation, on equal footing with companies transferring assets within the borders of Denmark. In principle only if the deferral period runs until the time of the actual realisation of the assets will companies transferring assets within a member state be equal with companies transferring assets to another member state.

However in its ruling (C-261/11) the European Court of Justice stated that a member state should be given the opportunity to lay down its own criteria for deferral of exit tax payable to ensure that the exit tax payments are not deferred indefinitely. Should a company opt for the deferred payment arrangement the legislation provides for the establishment of a deferred payments balance. The opening balance will be the amount of exit tax payable, subject to a minimum interest rate of 3% pa, adjusted annually. The new legislation also sets forward a transitional rule for companies already subject to exit taxation. Until 30 June 2014 companies charged with exit tax during the past five years may choose to use the new deferred payment arrangement and get a refund for the already paid exit tax no later than 1 November 2014. The refund is granted without interest.

Discover more: Denmark struggles with exit taxes

Your Taxand contact for further queries is:
Anders Oreby Hansen
T. +45 72 27 36 02

Also published in Thomson Reuters' Taxnet Pro, 1 May 2014

Taxand's Take

The new rules have not received an unreserved welcome. The European Commission has expressed concerns about 3 specific elements of the new legislation: Firstly, it is the Commission’s view that the legislation should distinguish between assets which are meant to be realised and so subject to taxation only upon realisation, and assets which are not meant to be realised and therefore may be subject to the fixed instalments regime. Secondly, the new legislation provides that capital gain taxes on transferred assets be paid as income accrues whereas the Commission's view is that the payment should be deferred. Lastly, the new rules set forth an automatic interest charge on the deferred payments balance, meaning that Denmark is in fact imposing an exit tax charge to be collected at the time of transfer. Evidently, the last word has not yet been said on this matter, and only time will tell whether there will be more changes to the Danish exit taxation.

Taxand's Take Author