Change in the Danish tax authorities' practice for deduction of salary expenses paid to foreign companies

According to section 8 N (2) of the Danish Assessment Act (Da: “ligningsloven”), a Danish company can deduct expenses if it pays another group company for this company's salary expenses when the work performed was in the interest of the Danish company and related to the business of the Danish company. According to the wording of the law, the deductibility requires that the companies are part of either a Danish or international joint taxation group.

On 28 November 2023, the Danish Tax Agency announced that the practice for deductions of such salary expenses paid to foreign companies was revised and amended.

The Ministry of Taxation stated that the provision in section 8 N (2) of the Danish Assessment Act is not in accordance with EU law or with any double taxation treaty entered into by Denmark applying article 24 of the OECD Model Tax Convention from 2017, when requiring that the company receiving the payment must be part of a joint taxation group with the Danish paying entity.

On these grounds the law will also be amended accordingly.

Danish entities are part of a mandatory Danish joint taxation group, and therefore section 8 N of the Danish Tax Assessment Act ensures that these companies are always able to deduct payments to other Danish group companies to cover salary expenses. On the other hand, payments to foreign group companies regarding salary costs are only deductible if international joint taxation has been adopted by the group of companies and this is often not the case.

The Danish Ministry of Taxation stated that when acts involve discrimination as it is more favourable to have a Danish subsidiary than having a subsidiary domiciled in another EU member state this constitute a restriction in the freedom of establishment according to case law of the European Court of Justice. The Ministry did not find the discrimination justifiable. Thus, the Danish Ministry of Taxation found it to be in violation with EU law to make it a condition for deduction of salary expenses that the group has chosen international joint taxation.

It was also considered to be a violation of the non-discrimination provisions in any double taxation treaties entered into by Denmark, applying article 24 of the OECD Model Tax Convention of 2017, when a group company was denied a deduction with reference to the fact that international joint taxation had not been chosen.

On these grounds, the Danish Tax Agency chose to change its practice.

According to the new practice of the Danish Tax Agency, right of deduction must be granted for such payments to group companies domiciled within the EU and payments to group companies domiciled in a country with which Denmark has entered into a double taxation treaty applying article 24 of the OECD's 2017 Model Tax Convention. This way deductions are available for such payments to the relevant foreign group companies to the same extend as payments to Danish companies.

There is a possibility for both ordinary and extraordinary resumption as a result of the change in the Danish tax authorities' practice for companies that may have been denied the right to deduct payments to foreign group companies in violation of EU law or a double taxation treaty. Resumption can be claimed pursuant to the resumption rules in Sections 26 and 27 of the Danish Tax Administration Act (Da. “Skatteforvaltningsloven”).

Ordinary resumption

Ordinary resumption will be granted if the request is made no later than 1 May in the 4th year (or 1 May in the 6th year when concerning controlled transactions) after the end of the income year in question, provided that information of a factual or legal nature is presented to justify the change. Therefore, it is possible to reopen tax assessments for the income year 2020 (and 2018 when concerning controlled transactions), provided that request for resumption is filed before 1 May 2024.

Extraordinary resumption

If the deadline for ordinary resumption has expired, an extraordinary resumption may be granted upon request. The right to extraordinary resumption is limited by the absolute prescription period of ten years, cf. section 34 a (4) of the Danish Tax Administration Act. Furthermore, a request for extraordinary resumption must be made no later than 6 months after 28 November 2023. This means a request for extraordinary reopening of previous tax years backdating ten years must be made no later than 28 May 2024.