Renouncing income retroactively(Taxwatch (Tax news in english))
25-08-2010 07:15
Af
Hans-Henrik Nilausen
Fiscally, it is possible to waive income. Neither individuals nor companies can be taxed on income that is renounced. However, it is a condition that the renunciation is unconditional and given in advance. If taxation shall be avoided, it is thus not allowed to demand that the money instead is given to another party.
Fiscally, it is not accepted that the renunciation is given retroactively. This derives clearly from a new High Court ruling.
The ruling concerned a company that had rented its business to a group company. Between the companies a lease agreement had been drawn up in which the rent was fixed.
The operation of the business was loss making. In the beginning of 2002, therefore the companies agreed that the rent for 2001 should be reduced with approximately DKK 1.2m. In the following year, it happened again, as the companies in the beginning of 2003 – still because of the lessee’ bad economy – agreed to reduce the rent for 2002.
SKAT would not recognize these agreements because they were entered into retroactively. Therefore SKAT demanded that the lesser should pay tax on the original agreed rent. This was accepted by the High Court that added the remark that it is a basic principle that renunciation of an income cannot be made retroactively with taxable effect when the renunciation takes place after the right to the income has been earned.
During the case an expert witness recognized that the reduced rents were on arms length’. The original agreed rents therefore exceeded the market rent. On this background the company pleaded that it could not be obliged to pay tax on incomes over this level because it is stated in the tax law that group companies for intra group transactions must apply prices and terms that would have been agreed with third parties.
The High Court did not agree. The High Court stated that in the tax regulations SKAT has been given the opportunity to adjust tax assessments in cases where arms length’ term have not been applied, but that the regulation cannot be used to change all ready incurred agreements.
In practice renunciation of income can be pertinent with respect to for instance rent and interest income. If renunciation is unconditional and is given in advance, there will be no adverse tax consequences for the company/individual renouncing the income.
Questions can be addressed to Hans-Henrik Nilausen at hhn@bdo.dk
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