Following pressure from Sønderby Legal, a Member State has, with effect from the current financial year, been persuaded to abandon a complex double taxation scheme.
When Member States draw up their national corporation tax rules, they must, as is well known, do so with respect for the EU’s rules on the internal market. The EU Court of Justice already pointed this out in the mid-1980s. From time to time, Member States nevertheless find it tempting to challenge the EU rules.
An example of this occurred in 2019, when a Member State decided to limit the deductibility of royalty payments between subsidiaries located in the Member State and parent companies located in other Member States. The purpose of the scheme was to obtain more money for the Member State’s coffers by limiting the subsidiary’s deduction for the royalty that the company had to pay for the use of the parent company’s brand.
In the specific case, the parent company was located in Denmark. The scheme meant that the parent company was liable to tax in Denmark on the royalty payments that the company received from its subsidiary in the other Member State. As the subsidiary only received a limited deduction for its payment to the parent company, the same money was taxed in both Denmark and the other Member State. That is, double taxation.
The advantage for the Member State was that it could levy full taxation on the subsidiary’s income without the company being able to obtain a full deduction for its expense to the Danish parent company. The group was thus stuck in a tax ‘vice’. According to the double taxation agreement between Denmark and the Member State in question, it is Denmark that has the right to tax royalty payments when the payment is made to a Danish parent company.
The reason for limiting the deductibility was to prevent multinational companies from placing profits from the Member State in countries that have lower taxation than the Member State itself. This justification was without substance in the specific case, because the Danish corporation tax is higher than the Member State’s own corporation tax. Any thought of circumvention and ‘tax haven’ was therefore completely contradictory.
Until the double taxation was brought to an end, the only option for the group was to obtain a so-called Advance Pricing Agreement (APA). An APA is an advance agreement between the taxpayer and the Member State’s tax authorities, which lays down the terms for the pricing of one or more specific future transactions between the group’s companies. It serves to avoid inappropriate tax treatment. However, the process of obtaining an APA can be both lengthy and expensive.
Via the EU Commission and the European Parliament, Sønderby Legal put pressure on the Member State’s double taxation scheme, which the Member State has subsequently chosen to abolish with effect from the current financial year.
By Hans Sønderby Christensen, Attorney at Law (H), Partner and Rikke Bach Nielsen, Associate Attorney, Junior Partner