National and International Joint Taxation: An Analysis of the Consequences of the Danish Legislation on Joint Taxation

Andreas Lottrup Windahl

Student thesis: Master thesis

Abstract

The purpose of this master thesis is to expound on the Danish legislation on joint taxation. Both the mandatory domestic joint taxation and the voluntary international joint taxation is in the scope of this master thesis. This thesis also seeks to explore the pros and cons of the Danish legislation on joint taxation. Through a case study I am able to give my opinion on whether international join taxation should be chosen or not. The obligatory national joint taxation is something that more and more companies in Denmark has to take in to account as there has been a steady growth of company groups that meets the group definition in the Danish Companies Act. This definition is, in substance, the same as the group definition in IAS 27. This group definition states that a company is part of the group in the parent company can control the company. This means that voting-rights are the defining factor, and not ownership of capital. Companies that meets the definition pays their taxes to the administration company, which is normally the parent company, and this company is responsible of paying taxes for the whole group to the Danish Tax authourities SKAT. In joint taxation a single “joint taxation-income” is made up of the sum of each of the entities taxable income. The domestic join taxation in Denmark has since law no. 426 of July 6 2005 been operating on the territorial principle, so that only entities that resides in Denmark are subject to the mandatory join taxation. This means that income from a Danish company’s permanent etablishament in a foreign contry should not be included in the join taxation-income, and on the other hand that a foreign contry’s permanent establishment should. The law also introduced the “all-or-nothing” approach to foreign companies in regards to joint taxation. If a group wishes to include foreign companies or other foreign entities in the joint taxation they have to include every subsidiary abroad. This is called the global principle, and was passed as a way to stop groups exploiting the law, to “cherry pick”, which companies they wanted included, thereby miminizing the amount of Danish tax they had to pay. By choosing international joint taxation the group binds themselves for a 10-year period with this. One of the benefits of joint taxation is the ability to use deficits from affiliated companies to offset positive income from other group companies, thus postponing the taxation. In the short team, this will give the group more liquidity than if each company was taxed on its own. The Danish government introduced the bill L 173 in 2012 because they were of the opinion that multinational groups “abused” loopholes in these rules to avoid paying taxes in Denmark. In the bill a limitation of the amount deficit from prior years that can be used to reduce a company’s income was introduced. This means that companies can reduce 100 % of income up to a max of DKK 7.500.000, after which the exceeding income can only be reduced by 60 %. Even though the bill was aimed at multinational companies, a lot of other companies are greatly affected by it aswell. The bill also introduced joint and several liabllity for wholly owned companies, and secondary liability for partly owned subsidiaries, to stop multinational groups “emptying” a company that owes taxes, and not have the other companies in the group be liable for these. Because of the secondary liablility minority investors can end up being liable for taxes in a company they have no ownership or control over. This is in my opinion unreasonable, and there are ways of getting the same results, without hurting the minority investors. Whether to choose the voluntary international joint taxation or not, is a very complicated matter. There are many factors that has to be taken into account before making the decision. Foreign tax rates, and the tax base in the countries that the group has subsidiaries, the group’s complexity and size, and the companies future deficits or surplus all influences whether it’s advantageuous to choose international joint taxation. Because of the 10-year period, it can be extremely hard to predict this accuratly. In the case a fictional group, operating in Denmark, Germany, England and Sweden, is followed through a 10-year period. The group’s taxes are stated first as they would be without international joint taxation, and after with international joint taxation. In the case are also different scenarios where some of the above stated conditions have changed, to show how that would influence the choice. For the group in the case international joint taxation would be a good choice, though this requires them to be very certain of incomes of the different companies for the next 10 years. The conclusion of the thesis is that it’s not possible to make a clear-cut assessment on whether international joint taxation is benefit or not. This has to be analyzed by a case-by-case basis, and will for the most part only be benificial if the group expects large deficits in foregin companies, while still managing a surplus in the Danish companies.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2019
Number of pages93
SupervisorsHenrik Andersen