Danish CFC Taxation: Seen in the context of the Anti Tax Avoidance Directive

Abstract

This thesis examines the Danish tax regulation on Controlled Financial Companies (“CFC”) and how these rules have changed since the implementation of Anti-Tax Avoidance Directive (“ATAD”) in the year 2021. This thesis aims to determine whether the current rules are in alignment with EU law. The directive was based on recommendations made by OECD in 2015 regarding tax legislation combating profit shifting and long-time deferral of taxation. Following the implementation of ATAD, it has become significantly easier to obtain control of a CFC and it is thus expected that more companies will be impacted by the rules. The CFC-income threshold was lowered from ½ to 1/3 of the subsidiary’s income. Only select groups of income are considered CFC-income that may qualify a subsidiary as a CFC. The number of groups were expanded because of ATAD, with “other income from immaterial assets” being the most significant of these. This category includes a partial substance carveout that may exempt income from certain immaterial assets from taxation if the CFC maintains significant economic presence regarding these assets. It is concluded that the Danish government has implemented more rigorous rules than required in the Directive. As ATAD is a minimum harmonization directive the implementation nonetheless satisfies demands made by EU law. The Danish CFC-rules are not believed to be compliant with the fundamental rights of freedom as the rules discriminate between companies from different member states. Case law from the European Court of Justice allows for discrimination if it is intended to combat abuse of rights. With this comes a string of requirements of which Danish law fails to uphold several, including the ability to document the economic reality and principal purpose of a company’s investment and in that way keep the subsidiary from affected by CFC taxation. Finally, the thesis proposes two new rules that may bring Danish CFC law in alignment with EU law. These rules are a general substance carve-out that can fully exempt a subsidiary from being taxed according to the CFC-rules and a low-tax requirement, which exempts subsidiaries from being considered by the rules if they have an effective tax rate of more than half the Danish rate.