The Danish Interest Limitation Rules in Light of Council Directive (EU) 2016/1164 and its Interest Limitation Rule

Abstract

This paper examines interest limitation rules as a way to combat tax avoidance. Throughout the years, a lot of countries have implemented interest limitation rules. On 12 July 2016, The European Union (EU) introduced an Anti-Tax Avoidance Directive, Council Directive (EU) 2016/1164, which contains an interest limitation rule. The Directive sets out minimum standards meaning that Member States are allowed to have stricter rules in their national laws. Denmark now has two possible sets of interest limitation rules. It is interesting to examine what the content of the Danish interest limitation rules should be. The thesis investigates what the content is in the Danish interest limitation rules and in the interest limitation rule in Council Directive (EU) 2016/1164 and to what extent the content of the Danish interest limitation rules should adjust to the content of the interest limitation rule in EU’s Directive. It is not part of the thesis to investigate to what extent Denmark is allowed to maintain its current interest limitation rules. It only examines to what extent it is desirable from a Danish perspective. The study is based on two legal dogmatic analyses (de lege lata) of the Danish interest limitation rules and the interest limitation rule in Council Directive (EU) 2016/1164 and one legal policy analysis (de lege ferenda) of to what extent it is desirable to adjust the content of the Danish interest limitation rules to the content of the interest limitation rule in EU’s Directive. The research indicated that there is a difference in the tax treatment between debt and equity and a difference in the tax rates between countries which encourages taxpayers to place debt in high tax jurisdictions and exploit interest deduction to avoid tax. Denmark has three interest limitation rules. SEL § 11 relates to the amount of debt. SEL § 11 B relates to assets. SEL § 11 C relates to the taxable income. The interest limitation rule in EU’s Directive 2016/1164 resembles the interest limitation rule in SEL § 11 C. On the bottom line both sets of interest limitation rules succeed in mitigating the bias towards debt. However, they all have some problems. The paper concludes that the interest limitation rule in EU’s Directive 2016/1164 offers a solution to the problems with the Danish interest limitation rules to an extent that it is desirable to adjust. Seen in a wider perspective, EU has also proposed a relaunch of a common consolidated corporate tax base which confirms the conclusion. Furthermore, there are other means to mitigate the bias towards debt.