Proposed amendments to the Danish Merger Tax Act

26 April 2018

Anders Kiærskou, Manager, Tax |

On 23 March 2018, the Minister of Taxation presented a new bill seeking to remove unintended tax advantages associated with certain cross-border mergers.

According to the Minister of Taxation, it is a fundamental principle of the entire Danish corporate tax system, including the exit tax rules, that income earned in Denmark must also be taxed in Denmark.

The new bill intends to amend the Danish Merger Tax Act, as it has been shown that the current rules for cross-border restructuring in certain cases unintentionally allow for income earned in Denmark not to be taxed in Denmark.

The purpose of the bill is to remove this inadvertent possibility of applying the Merger Tax Act’s provisions on cross-border merger, demerger and contribution of assets to avoid taxation of income earned in Denmark.

The date from which a tax-exempt merger takes fiscal effect (the merger date) may, according to current rules, be prior to the date of the final adoption of the merger by the merging companies.

In a verdict dated 27 October 2017, the Danish Eastern High Court ruled that this was indeed the case in a situation where a Danish company in a multinational group was merged into a foreign affiliated company.

In the specific case, income of approx. DKK 140 million, which the Danish company had earned during the period from the merger date to the date of adoption of the merger by the participating parties, was not subject to taxation in Denmark.

According to the proposed bill, for cross-border mergers, where a foreign company is the recipient company, income earned in a contributing Danish company should be subject to taxation in Denmark before the merger takes place, and this should not be avoided by allowing the participating companies to carry out the merger retroactively for tax purposes.

In order to ensure this, it is proposed that the merger date of a Danish company participating in a tax-exempt cross-border merger, where a foreign company is the recipient company, cannot be prior to the date of adoption of the merger by all the merging companies.

The proposed bill will also affect the demerger of a Danish company and cross-border contribution of assets from a Danish company, when the recipient company is resident abroad.

As the possibility of avoiding Danish taxation through the implementation of cross-border corporate restructuring under the Merger Tax Act is unintended, it is proposed that the new rules shall take effect for cross-border mergers etc. that has not yet been adopted by all participating companies on 23 March 2018 or later.

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.