Amcham yearbook 2007-Tom5 - American Chamber of Commerce ...

If a property is tax-depreciable, the difference
between the written down value and the
sales price is tax-deductible. However, this
loss reduces the purchase price when calculating
the capital gain. Please see above.
Machinery and equipment
The proceeds from sale of machinery and
equipment are deducted from the depreciation
pool. Therefore, a taxable capital income
gain or loss does not typically arise when
such assets are sold. If the balance of the
depreciation pool becomes negative, the
negative amount may be recognized in the
same year or deferred to the next year,
except if subsequent purchases in that year
exceed the negative amount.
Goodwill
Gains from sale of goodwill are treated as
taxable income and losses are deductible.
Know-how, patents
and trade-marks etc.
Capital gains and losses from other intangible
assets such as know-how, trade-marks,
patents and copyrights are also generally
included in the taxable income in the year of
disposal. The capital gains or losses are calculated
as the difference between the cash
equivalent of the written down value for the
tax purposes and sales prices.
Gains and losses from
exchange adjustments
Realized foreign exchange gains and losses
must be included in the taxable income
when realized. Unrealized gains and losses
may, upon application, be included in the
taxable income.
However, if permission has been granted, the
company will not be able to revert to the
ordinary method of only including realized
exchange gains and losses.
Deductions
Business expenses
Generally, expenses incurred during the year
in order to “earn, secure and maintain the
income” are fully deductible on an accrual
basis.
Capital expenditure
Generally, capital expenditure is not
deductible. However, acquisitions of small
assets representing a value of up to DKK
11,300 (2006) / DKK 11,600 (2007) or with
a useful life up to three years may be written
off immediately in the year of purchase.
Research and development
Research and development costs are upon
the choice of the taxpayer either fully taxdeductible
in the year the costs are incurred
or may be amortized in equal installments
over a period of five years. For tax purposes
costs relating to the acquisition of know-how
and patents can be fully deducted in the year
of purchase.
Computer software
The costs of computer software are fully
deductible in the year of purchase.
Entertainment expenses
Only 25% of business entertainment expenses
are deductible for tax purposes. The definition
of entertainment expenses is broad
and includes e.g. gifts to customers. The
rules do not apply to expenses related to
employees of a company. Such expenses are
fully tax-deductible. Advertising costs are
also fully tax-deductible.
Provisions for bad debts
Recognized losses on accounts receivable are
deductible. Provisions for bad debts are
deductible to the extent that the final losses
on specified debtors can be substantiated.
Depreciation
Tax depreciation is calculated according to
the following rules, irrespective of the
method applied for accounting purposes.
Machinery and equipment
Machinery and equipment are depreciated
collectively on a declining-balance basis. This
balance may be written off at an annual rate
of up to 25%.
Machinery and equipment
used for leasing purposes
Assets like machinery, motor vehicles, office
machines, and office equipment that are
leased out are generally not depreciable in
the year of acquisition, but may be depreciated
at 50% in the following year. However,
exemption may be granted by the Danish tax
authorities, allowing leased assets to be
depreciated according to the general rules
applicable to operating equipment.
Buildings
Buildings used for commercial and industrial
purposes may be depreciated at an annual
rate of up to 5% over a period of 20 years,
using the straight-line method based on the
purchase price.
Buildings used for the following purposes
are generally not depreciable:
• Offices, unless the building is closely
connected to a depreciable building
• Activities such as banking,
mortgage banking, insurance, etc.
• Postal services
• Residence, except hotels,
camping huts, nursing homes etc.
• Hospitals
Goodwill
Goodwill and other intangible assets
acquired in 1998 or later can be amortized
over a 7-year period. Special rules apply to
goodwill acquired prior to 1998 and goodwill
acquired from affiliated parties.
Leasehold improvements
Leasehold improvements are amortised in
equal amounts over the term of the lease if
the term exceeds five years. Otherwise, the
leasehold improvements are generally amortized
over five years at an annual rate of 20%.
Inter-company loans
(Thin capitalisation)
A Danish company cannot deduct interest
expenses or capital losses on debt raised with
affiliated parties, including both Danish and
foreign parties, to the extent that the total
debt of the company in question exceeds a
debt-to-equity ratio of 4:1 at the end of the
year.
Limited deductibility applies only to interest
expenses (capital losses) relating to the part
of the controlled debt that needs to be converted
to equity to satisfy the debt-to-equity
rate of 4:1 (i.e. a minimum of 20% equity).
The right to deduct interest (capital losses)
on controlled debt is not restricted if the
company can demonstrate that similar
financing can be obtained between unrelated
parties.
Transfer Pricing
Danish entities are for transfer pricing purposes
required to apply prices and terms in
intra-group transactions that correspond to
such prices and terms as unrelated parties
would apply in comparable transactions.
Such enterprises are required to prepare and
maintain written documentation concerning
the prices and terms applied in the intragroup
transactions. It should be possible, on
the basis of such documentation, for the tax
authorities to assess whether the prices and
terms have been fixed in accordance with the
arm’s-length principle. The requirements are
applicable for both domestic and cross border
inter-group transactions.
Joint taxation
Compulsory national taxation
All Danish group companies as well as all permanent
establishments and real properties in
Denmark must be mandatory jointly taxed.
The fiscal unity implies that tax losses
incurred in one entity can be utilized against
taxable profits realized in another participating
entity. Tax losses incurred prior to the
establishment of the fiscal unity cannot be
utilized in other group companies’ taxable
income.
The delimitation of which companies are to
be jointly taxed follows the group definition
for financial reporting purposes. An enterprise
is a group enterprise if the parent holds
the majority of the voting rights. Thus, the
size of the percentage interest is irrelevant. If
all the shares carry identical voting rights, the
enterprises are, basically, subject to joint taxation,
provided that the parent and companies
controlled by the parent own more than
50% of the share capital in the subsidiary.
Statement of taxable income
The taxable income is made up for each individual
enterprise in accordance with the general
provisions of Danish tax law. The entire
income of both wholly and partly owned
enterprises is included in the statement.
Special rules apply with respect to tax loss
carry forwards.
Administration Company
The ultimate Danish company in a group is
the administration company.
Liability
The individual jointly taxed companies,
including the administration company, are
liable only for the tax on their own income.
Once the companies have paid their share of
the tax to the administration company, the
administration company will be liable for the
taxes received from the other jointly taxed
companies.
Foreign permanent
establishments/real properties
Income in a foreign permanent establishment
or real property is not included in the
Danish income, unless international joint taxation
has been elected.
International joint taxation
A Danish company can elect international
joint taxation, in which case all non-Danish
and Danish group enterprises and permanent
establishments/real property must be
part of the joint taxation arrangement. This
also applies to foreign parents and sister
companies, if any. The income in the foreign
enterprises and permanent establishments/
real property is made up in accordance with
Danish tax rules, and a credit relief is granted
for tax paid outside Denmark.
The application of international
joint taxation is limited.
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Hans Henrik Tholstrup