Permission and refusal of application for exemption from CFC taxation

Date 21 okt. 2010

 

On August 24 2010, the Danish National Tax Tribunal gave permission for a parent company to be exempt from CFC taxation of its subsidiary from the income year 2008. The parent company had also applied for an exemption from CFC taxation regarding nine of its other Danish and foreign subsidiaries’ CFC income, however, this was refused by the Danish National Tax Tribunal.

 

The facts of the case

The Danish Tax Authorities had increased a company’s taxable income by including the income of its subsidiaries in accordance with the provisions of the Danish Companies Taxation Act on CFC-taxation. Subsequently, the parent company applied for an exemption from CFC taxation regarding its Danish and foreign subsidiaries.

 

CFC taxation

Under certain conditions, a financial subsidiary must always be jointly taxed with a Danish parent company. This is also known as Controlled Foreign Company or Controlled Financial Company (CFC taxation). The purpose of CFC taxation is particularly to ensure that financial activities are not randomly transferred abroad to avoid taxation in Denmark and it is realised by including the part of the subsidiary’s income on the parent company’s statement of its taxable income, which corresponds to the parent company’s direct or indirect ownership of the subsidiary.

 

Five conditions must be fulfilled in order for CFC taxation to take place:

  1. the parent company must directly or indirectly be a shareholder in the company;
  2. the subsidiary must have a so-called CFC income (financial income) which in the income year must represent more than half of the company’s total income;
  3. the subsidiary’s financial assets must be more than 10% of the company’s total assets;
  4. the parent company’s shares in the subsidiary must not be shares or investment certificates in investment companies; and
  5. the parent company’s shares in the subsidiary must not be owned through a legal entity being subject to taxation under the Danish Companies Taxation Act’s provisions on life insurance companies.

The Danish Companies Taxation Act sets forth the following conditions for when a parent company may be exempt from CFC taxation regarding its subsidiary’s CFC income:

  • the subsidiary must have a concession to operate in areas of insurance, mortgage, securities brokerage, investment management or banking and must be subject to public supervision;
  • the main part of the income must come from business with customers in the country where the subsidiary is situated and with customers with which the subsidiary is not affiliated;
  • the subsidiary’s capital base must not exceed what the operation of such business dictates; and
  • as regards foreign subsidiaries, the taxation of dividends may be waived or reduced in accordance with the parent-subsidiary directive.

The judgment of the Tax Tribunal

The parent company was granted access to be exempt from CFC taxation as regards one of its subsidiaries’ CFC income. The Danish Tax Tribunal attached importance to the fact that this particular subsidiary had a concession to operate in the stock broking business and the subsidiary was subject to public supervision. Furthermore, the major part of the subsidiary's income originated from businesses with customers in Denmark, and the subsidiary had no income from affiliated companies or branches. Finally, the Danish tax tribunal emphasised that the subsidiary’s capital base did not exceed what the operation of that kind of business dictated.

 

The tax tribunal was of the opinion that the rest of the subsidiaries meet the conditions.

 

The tax tribunal emphasised that some of these other subsidiaries’ capital base exceeded what the operation of the kind of business dictated and some were deemed to acquire substantial intercompany income, while others were deemed not to carry on insurance, mortgage, securities brokerage, investment management or banking business. Furthermore, two subsidiaries did not have concession to operate their businesses and were, thus, not subject to public supervision.

 

The importance of the judgment

The judgment indicates that the practice on this area is restrictive regarding to exemption from taxation of subsidiaries’ CFC income. The judgment’s conditions should therefore be carefully reviewed and all conditions must be met before the tax tribunal will authorise an exemption from CFC taxation.

 

 

If you have any questions or require additional information on the judgment contact Jakob Bundgaard, Partner, Adjunct Professor, jbu@mwblaw.dk or Kim David Lexner, Junior Associate, kdl@mwblaw.dk.



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