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Tax update from Denmark on DTTs, new bill to reduce tax on capital income and much more...
1. Tax Treaty between Denmark and France/Denmark and Spain - 2010 Perspective
On 30 October 2009 the Danish Minister of Taxation made a statement to Parliaments Fiscal Affairs Committee about the status of negotiating new tax treaties with Spain and France and whether new treaties will have retroactive effect.
According to the statement by the Danish Minister of Taxation there has been an ongoing dialogue with both France and Spain in order to solve concrete tax issues triggered by the cancellation of the treaties. Further, the Danish tax authorities have made inquiries to the French and Spanish authorities on their perspective on taxation of payments from pension schemes with Danish tax residents if new negotiations were commenced.
Based on the answers to the inquiries from the Committee, the Danish tax authorities have decided that there is currently no basis to initiate actual negotiations for new tax treaties with neither Spain nor France.
No additional statements have been issued following the October statement and beginning of 2010 there are no negotiations with either country and at this moment it is uncertain whether Denmark will be able to enter into new tax treaties with France and Spain in the near future or whether a new tax treaty will have retroactive effect.
2. Amended Tax Treaty between Denmark and Switzerland
On 21 August 2009, Denmark and Switzerland signed a protocol to amend the current tax treaty.
The new protocol significantly changes the taxation of dividends. Under the current tax treaty, only the country of residence has the right to tax dividends. The source state does not have the right to levy taxes on dividends (zero rate). In the renegotiated tax treaty, the zero rate is only applicable to dividends deriving from a holding of more than 10% of the capital (subsidiary investments) and for dividends paid to certain pension fund.
This entails that both Denmark and Switzerland will have the opportunity to levy a 15% withholding tax on dividends paid from Danish companies deriving from portfolio investments (holding of less than 10%). The possibility to levy withholding taxes on dividends from portfolio investments will render securities lending and derivatives involving Swiss or Danish shares held by Danish or Swiss investors less tax efficient.
The protocol also contains a provision regarding exchange of information between the Swiss and the Danish authorities in tax matters in accordance with the OECD standard. Further, private pensions will be taxed in the country of source as opposed to the pensioner's country of residence.
The protocol has to be adopted by the Swiss and the Danish Parliaments. While the Danish parliament adopted the protocol in 2009 allowing it to enter into force, the Swiss parliament is yet to do the same. This entails that the new rules will not enter into force before 1 January 2011 at the earliest, and potentially even 2012, depending on the ratification process in Switzerland. Accordingly, in 2010 dividends paid between Switzerland and Denmark are also in eligible for elimination of withholding tax to the extend the tax treaty applies.
3. Denmark Expands TIEA Network
Since 2008, Denmark has expanded heavily its network of tax information exchange agreements. Currently, it network comprises Aruba, The Netherlands Antilles, Turks and Caicos Island, Antigua and Barbuda, Gibraltar, Anquilla, St. Vincent and the Grenadine, St. Kitts and Nevis, The British Virgin Islands, Bermuda, Cayman Islands, Guernsey, Jersey, Isle of Man, St. Lucia, The Cook Islands, The Samoan Islands and San Marino (signed on 12 January 2010).
However, beginning of 2010 only the TIEAs with Guernsey, Bermuda, Isle of Man and Jersey are in force, whereas the other agreements still need to be ratified. Cayman Islands and Gibraltar are, however, expected to ratify the agreements shortly.
4. New Bill Reducing the Tax Rate on Capital Income (unearned income)
On 27 January 2010, the Danish Minister of Taxation tabled Bill no. 112, which includes a proposal to harmonize the taxation of individuals holding claims and bonds issued in Danish kroner and claims in foreign currencies and to reduce the capital gains tax rate, etc.
When fully effective, the Bill is expected to impact the investment dynamics of private individuals as it equalizes the marginal tax rate applicable to private individuals on investments in debt securities with the marginal tax rate applicable to equity securities. Accordingly, only the underlying economic features (and not the tax treatment) should weigh in when private individuals make decisions on placement of their investment portfolios.
The Bill is the result of an agreement reached between the Danish Government and the majority of the Danish Parliament to change the taxation of gains and losses on claims of private individuals.
Key elements of the Bill:
- Lifting of the tax exemption for gains on so-called "blue-stamped" claims and bonds (qualification as a blue-stamped claim/bond has required that certain minimum interest requirements were fulfilled when issued and that the bond is issued in (or tied to) Danish currency). Such gains will in the future be included in the capital income of the holder.
- The introduction of a deduction in the capital income of the holder for losses claims/bonds issued in Danish currency.
- Change of the general de minimis threshold for taking into account gains and losses on claims and bonds held by private individuals to DKK 2,000 (currently DKK 1,000).
Reduction of the maximum tax rate applying to positive net capital income over the next five years from 51.5% to 42%.
Moreover, the Bill proposes a number of amendments as a result of the derived effects on other areas, including certain changes in relation to investment funds.
The Bill follows an opening statement sent to Denmark from the EU Commission suggesting that the Danish tax distinction between certain claims and bonds issued in Danish currency and bonds issued in other currencies is in conflict with EU law. By eliminating the differences in the taxation of claims in Danish kroner and in foreign currencies, respectively, the proposed change will ensure compliance with existing EU legislation.
It is proposed, quite extraordinarily, that the Bill is to take effect as from the date of its tabling in order to give effect to the lifting of the minimum interest rule for claims acquired on the date of tabling of the Bill or later. An effective date for the Bill lying after the date of publication of the amendments would spur extraordinary acquisitions of currently blue-stamped bond claims and entail a significant loss of proceeds for the public sector.
Lifting of the tax exemption only applies to bonds issued or acquired as from today. Existing portfolios of blue-stamped bonds held by private individuals will continue to be exempt from tax according to existing rules for their current owners.
The proposed amendments will prima facie only affect the claims side. Hence, the taxation of gains and losses on the debts of private individuals in Danish kroner will remain unchanged.
The taxation of gains and losses on the debts of private individuals in foreign currencies will only be affected by the expansion and increase of the existing de minimis threshold: Today, any gain (and loss) on debts in foreign currencies is subject to tax if the net gain for the year plus the net gain on claims in foreign currencies exceed DKK 1,000. The applicable de minimis threshold will be expanded to also include gains (and losses) on claims in Danish kroner, and the amount will be increased to DKK 2,000.
Your Taxand contact for further queries is:
Anders Oreby Hansen
T. +45 72 27 36 02