Danish rules on thin capitalisation are non-compliant with EU law

24 February 2017

According to a recent preliminary ruling by the Court of Justice of the European Union, the Danish rules on thin capitalisation where found to be non-compliant with EU law.

A request for a preliminary ruling was made in proceedings between a Danish based group and the Danish Ministry of taxation.

The case concerned the decision of the Danish tax authorities to tax a Danish parent company on interest income received from a German subsidiary.

Due to the rules on thin capitalisation in Germany, the German subsidiary was unable to deduct the interest expenses.

The Danish group argued that it was against the right of freedom of establishment within the European Union to tax a Danish parent company on interest income from a foreign subsidiary where the corresponding interest expenses were non-deductible, as the interest income would have been tax exempt had the interest-paying subsidiary been a Danish resident company.

The Court of Justice of the European Union ruled in favour of the Danish based group.

Consequently, the Danish parent company is not liable to Danish corporate tax on the interest income received from the German subsidiary.

The ruling will likely have implications for several Danish parent companies, which have paid tax on interest income derived from their subsidiaries located in other European Union countries when these subsidiaries have been unable to deduct the interest expenses due to rules on thin capitalisation.

As a consequence of the ruling, Danish companies affected will be able to have their tax assessments reopened retroactively and receive tax refunds where warranted. More information on this will follow.

It can be expected that the ruling will result in amendments to the law in order to bring the Danish rules in compliance with European Union law.


The above article is taken from tax:watch, our electronic English newsletter on Danish Tax and VAT matters. tax:watch is issued on the last Friday of each month and is free of charge. Please sign up here.