European Tax Bulletin For Real Estate Funds

This bulletin aims to highlight key tax issues which may be of importance to real estate funds and investors.

Denmark: Corporation tax rate reduction proposed in tandem with restriction on interest deductions

A draft bill was published by the Danish Minister of Taxation on 1 February 2007, proposing some significant changes to Danish corporate income tax, interest deductibility, tax depreciation and dividend payments. The main items of the proposed draft bill are:

  1. The bill proposes to reduce the statutory corporate income tax rate from 28% to 22%, with effect from fiscal years commencing 1 January 2007. Further talks after the publication of the draft bill seem to suggest that the corporate income tax rate may be reduced only to 24% or 26%; and

  2. The bill also includes a proposed restriction on interest deductions which will apply to both inter-company debt and third party debt. The rules contained within the bill provide that:

    Only 55% of net interest expenses in excess of DKK 10m (approx.EUR 1.35m) will be permitted as a deduction in computing taxable income. This results in a deduction at an effective rate of 12.1% (22% of 55%) for expenditure which exceeds the DKK 10m threshold;

    Net financing expenses will not be deductible to the extent they exceed a cap, calculated at a standard rate of return (presently 6.5%), on the tax base of the company's assets (less certain financial assets). Interest expenses that are restricted as a result of the cap will not be eligible for carry forward or carry back for set-off in fiscal years where the cap does not apply; and

    To the extent that they do not exceed DKK 10 million, net financing expenses should always be tax deductible. The proposed changes on interest deduction have encountered fierce opposition within government and industry representatives and there are now talks to replace the suggested rules by a stricter thin capitalisation regime (in principle, 2:1 debt/equity ratio) combined with some further restrictions on the amount of taxable income which could be sheltered by deduction of interest expenses.

    It is envisaged that Danish property owning companies or Danish permanent establishments of foreign companies owning Danish properties will be negatively affected by the bill as they tend to be primarily debt financed and are normally structured in order to rely intensively on interest deductions. It is still unclear when the proposed changes will be implemented and become effective from.


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