Higher Corporate Tax Rate for the Danish Financial Sector and Cap on Deductibility of Salary Expenses
In a new bill, which has gone out for consultation, the Danish Ministry of Taxation proposes to increase the Danish corporate tax rate for companies within the financial sector to 26%. It is also proposed to introduce a cap on deductibility of salary expenses exceeding approx. DKK 7.5 million.
In connection with the presentation of the so-called “Arne pension” on 10 October 2020, the government announced that this new early retirement initiative would be financed partly by a new special tax on companies within the financial sector, partly by a cap on tax deductibility of salary expenses. On 1 February 2022, the Ministry of Taxation published a bill for consultation, which clarifies how these two financing elements will be implemented in practice. It remains to be seen how the third financing element, mark-to-market taxation of real property, will be put into practice, but we expect a bill to be tabled in the autumn at the earliest.
The draft bill is of particular interest to companies within the financial sector, but companies with highly paid employees (including those offering incentive schemes) should also pay attention to the proposed rules.
Greater contribution to society from the financial sector
Danish companies generally pay corporate income tax at a rate of 22%.
In the draft bill, it is proposed to introduce a higher corporate tax for companies in the financial sector. This higher tax will be implemented by first assessing the companies’ taxable income under the general rules of the Danish Corporation Tax Act and then multiplying that income by a factor of 26/22 (i.e. approx. 1.18) from 1 January 2024 (approx. 1.15 in the period from 1 January 2023 to 31 December 2023).
The “factor increase” principle is expected to have the same effect as an increase of the corporation tax rate to 26% (25.2% in 2023). The reason for using the "factor model" rather than a direct increase of the corporate tax rate is the challenges posed by jointly taxed groups and utilisation of tax losses in the group.
It is the total income of the financial company that must be "factored" and thus taxed at the higher rate. Companies are not required to split their income into a financial and a non-financial part. Any losses incurred must also be "factored" to allow the company to carry forward the increased loss for deduction in later tax periods. In groups of companies, only companies within the financial sector will be subject to the proposed rules.
1) Financial institutions that have or must have a license under section 7(1) of the Danish Financial Business Act.
2) Mortgage-credit institutions that have or must have a license under section 8(1) of the Danish Financial Business Act.
3) Investment management companies that have or must have a license under section 10(1) of the Danish Financial Business Act.
4) Insurance companies and captive reinsurance companies which are taxable under section 1(1)(i) or (v) of the Danish Corporation Tax Act and which have or must have a license under section 11(1) of the Danish Financial Business Act.
5) Stock brokering companies that have or must have a license under section 13(1) and (2) of the Danish Act on Investment Companies and Investment Services and Activities.
6) E-money institutions that have or must have a license under section 8 of the Danish Payment Act.
7) Payment institutions that have or must have a license under section 9 of the Danish Payment Act.
8) Undertakings that have or must have a limited license to issue electronic money or to provide payment services under section 50 or section 51 of the Danish Payments Act.
9) Alternative investment fund managers which have or must have a license under section 6 or section 10(2) of the Danish Act on Alternative Investment Fund Managers and which are self-managed alternative investment funds.
10) Mortgage credit companies that have or must have a license under section 2 of the Danish Act on Mortgage Credit Companies.
11) Undertakings covered by the Danish Act on a Ship Finance Institution.
12) Consumer credit businesses that have or must have a license under section 3 of the Danish Act on Consumer Credit Businesses.
13) Companies carrying on business from permanent establishment similar to the business carried on by companies falling within 1-12 above.
Cap on deductibility of salaries
Today, there is no cap on the tax deductibility of companies’ payroll costs. Thus, all expenses incurred for the company’s own employees and directors such as salaries, remuneration, bonus, etc. may be deducted for tax purposes. Companies may also generally deduct expenses for options and warrants offered to the employees as part of their salary under certain employee share schemes, including expenses for rights to purchase or subscribe for shares under section 28 of the Danish Tax Assessment Act. The deductible amount is the difference between the exercise price and the market price of the shares at the time of exercise.
It is proposed in the bill to put a cap on deductible payroll costs of approx. DKK 7.5 million (2022 level) per employee. The cap will apply to any remuneration, whether in money or in kind, paid under the employment contract, including also to certain rights to purchase and subscribe for shares under section 28 and section 16 of the Danish Tax Assessment Act.
To prevent employers from circumventing the cap on deductibility by employing high earners in multiple group companies, it is proposed to impose the cap at group level.
Going forward, companies offering employee share schemes must consider if the total remuneration paid to an employee or a director exceeds the cap. If so, the company will not be entitled to deduct the expenses that exceed the cap. In that case, the company may consider offering an employee share scheme under section 7P of the Danish Tax Assessment Act, which is not deductible anyway. If an employee share scheme is subject to section 7P, the employee will be liable to pay capital gains tax when the shares are sold. It should be noted that a number of conditions must be fulfilled for a scheme to be covered by section 7P of the Danish Tax Assessment Act.
Effective date
The new act is proposed to enter into force on 1 January 2023 and will apply to tax periods starting on or after 1 January 2023.
Kromann Reumert’s tax team will follow the legislative work closely. We are available if you have any questions in relation to the proposed bill or need any assistance or advice.
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