The recently proposed Bill L48 contains a proposal for a statutory right to deduct final losses in foreign real estate as well as permanent establishments and subsidiaries in the EU/EEA in the Danish income statement. The Bill is the implementation of the European Court of Justice's ruling in the Bevola case (C-650/16), where the CJEU concluded that the freedom of establishment in the EU precluded parts of the Danish principle of territoriality for companies.
In order to align Danish tax legislation with the freedom of establishment, it has been proposed that Danish companies should be allowed to include the following losses in the Danish income statement:
― Losses in directly owned subsidiaries tax resident in EU/EEA countries or in the Faroe Islands or in Greenland.
― Losses in indirectly owned subsidiaries tax resident in EU/EEA countries or in the Faroe Islands or in Greenland, provided that all intermediate companies are tax resident in the same country as the indirectly owned subsidiary.
― Losses in permanent establishments located in EU/EEA countries or in the Faroe Islands or in Greenland.
― Losses in real estate located abroad.
The Bill has set up the following conditions for deduction:
― Deduction of losses in EU/EEA subsidiaries requires that the losses would also have been deductible if international joint taxation was elected.
This means that the losses must have occurred when the subsidiary has been able to choose international joint taxation with the Danish parent company
This requirement entails the need to calculate a fictitious international joint taxable income in order to determine the extent of deductibility of the loss.
The general loss reduction, where taxable income above a certain threshold can only be reduced by 60%, is applicable in this scenario.
The requirement is only applicable to subsidiaries and not permanent establishments or real estate.
― Only final losses can be deducted.
In order to be considered final, losses must not be possible to deduct in either previous income years, the current income year or in later income years in the source state or any other country.
The assessment must be based on the legislation in the country in which the subsidiary, permanent establishment or the real estate is located.
- It varies greatly between states when the possibility to deduct a loss in a company, permanent establishment or real estate is forfeited. E.g. if a subsidiary or a permanent establishment is sold, it has to be assessed whether the sale renders a loss final or whether it can be utilised by a new owner.
― The determination of the deductible amount must be calculated according to Danish rules.
Prior to the proposal of the Bill, a draft bill was subject to consultation. During this process, a significant number of questions were asked to the Ministry of Taxation regarding the application of the proposed regulation. Some of the most essential comments from the Ministry are:
― Regarding the documentation requirements of the finality of losses, the Ministry of Taxation has stated that an Executive Order will be issued, outlining how companies should appropriately document a final loss.
― The Ministry of Taxation has confirmed that in case a third party has the opportunity to use the losses, these will not be deductible in Denmark. For example, where a subsidiary is sold and there is no loss carryforward limitation according to local rules.
― The Ministry of Taxation confirms that the subsidiary or permanent establishment has to be tax resident in an EU/EEA country (or in the Faroe Islands or in Greenland), both at the time when the loss arises and at the time when the loss is final and thus deductible.
Generally, we consider it positive that the Danish government is now seeking to bring the Danish rules into conformity with EU law. However, we believe that the possibility to deduct foreign losses based on the Bill is narrow because of the extensive set of criteria that has to be met.
Further, we believe that a number of unresolved issues still exist regarding the application of the new rules, especially regarding the possibility to deduct losses from permanent establishments and the assessment of when a loss is considered to be final.