Bill on changes to Danish CFC rules introduced

In November 2020, the Danish Minister of Taxation introduced a bill on adjustment of the Danish CFC rules. The purpose of the bill is to adjust the Danish CFC rules for alignment with the EU Anti-Tax Avoidance Directive, also known as the ATAD. The rules are proposed to have a broad application and are expected to increase the administrative burden for Danish companies. 

Under current CFC legislation, a Danish parent company must include in its taxable income a subsidiary’s total taxable income calculated according to modified Danish tax rules if:

• The subsidiary’s CFC income exceeds 50% of its total taxable income (income test); and
• The value of the subsidiary’s financial assets exceeds 10% of the value of the subsidiary's total assets (asset test).

The Danish CFC applies only if a Danish parent company controls another company. In the current CFC rules, a company is considered to control another company if the parent company has a controlling influence over the other company, generally taken to be direct or indirect control over more than 50% of the voting rights in the other company.

In the following we have noted some of the important changes proposed in the bill:

• The CFC income threshold will be reduced from 50% to only 1/3 CFC income. Furthermore, the current 10% asset test will be removed. 
• The CFC rules only apply if a company (the parent company) controls another company (the subsidiary). Under current Danish CFC rules, control is determined on the basis of rights (or similarly). The bill expands the control definition for alignment with the control definition in the ATAD, i.e. control will be deemed to exist if a company (the parent company) by itself, or together with its associated enterprises holds a direct or indirect participation of more than 50% of the voting rights, or directly or indirectly owns more than 50 % of capital or is entitled to receive more than 50% of the profits of the other company (the subsidiary),
• The ATAD gives the EU Member States the possibility to implement a so-called "substance test", when implementing the directive into local law. This means that it is possible to avoid the CFC taxation in situations where the foreign subsidiary (or permanent establishment) carries on a substantive economic activity supported by staff, equipment, assets, etc. According to the bill Denmark has chosen not to implement the substance test. The lack of a substance test has been highly discussed in Denmark and is one of the main challenges with the bill.  

It is expected that the bill will be adjusted when Parliament starts the reading of the bill. Regardless of how the final bill will be adopted, there is no doubt that the Danish CFC rules will be even more complex than before.

We are following the implementation of the Danish CFC rules closely. We will release a follow-up newsletter once the bill has passed and the adjustments to the Danish CFC taxation are known for certain.