• Professional News
  • 28 April 2014

Denmark struggles with exit taxes

Denmark has passed new legislation allowing companies to opt for deferred payment arrangements with regard to exit tax on unrealised capital gains on assets transferred from one EU/EEA member state to another. The European Commission expresses concerns.

Following the European Court of Justice's ruling on 18 July 2013 (case-C-261/11), Denmark has passed new legislation allowing companies to opt for deferred payment arrangements with regard to exit tax on unrealised capital gains on assets transferred from one EU/EEA member state to another.

The court 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.

Maximum deferral period of seven years
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 seven years.

National and transnational asset transfers on equal footing
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.

Transitional rule until 30 June 2014
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% p.a., 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.

The European Commission’s concerns
The new rules have not received an unreserved welcome. In a letter to the Danish legislator, the European Commission has expressed concerns about three specific elements of the new legislation:

First, it is the Commission’s view that the legislation should distinguish between assets which are meant to be realised and therefore should be 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.

Second, the new legislation provides that capital gain taxes on transferred assets be paid as income accrues whereas it is the Commission's view that the payment should be deferred.

Last, the new rules set forth an automatic interest charge on the deferred payments balance, which means 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.

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