The General Anti-Abuse Rule (GAAR) in Denmark
Danish law does not have any statutory general anti-abuse rule. In Danish law, there is an anti-abuse rule in Section 3 of the Danish Tax Assessment Act (in Danish Ligningsloven) as well as a legal framework that has been developed through case law.
The legal framework that has been developed through case law is called the “Principal of Reality”.
All taxation is based on the underlying reality. The underlying formal appearance is thus subordinated. Reality is decisive for the qualification and subsequently the taxation.
The principle of reality has been developed through Danish case law, including by the Danish Supreme Court, as being a permanent part of tax law.
An example of the application of the rule from the 1990’s is the depreciation access on the lessor side of e.g., train cars in the United States. If there is no actual ownership of the train carriage in question, there is no right of depreciation.
If the principle of reality is applied, it is a correction of disposition. It is the very disposition and the qualification of it that is adjusted.
Based on various directives from the EU, including the Merger Taxation Directive, the parent-subsidiary Directive and not least the BEPS Directive, a legal provision has been inserted in Danish law – the GAAR in Section 3 of the Danish Tax Assessment Act. Subsection 1 and 2 of this provision has the following wording:
"Subsection 1. Taxable companies and associations, etc. must in the income statement and tax calculation exclude arrangements or series of arrangements that are organized with the main purpose, or that have as one of the main purposes, to obtain a tax advantage, which works against the purpose and intent of the tax law, and which is not real, taking into account all relevant facts and circumstances. An arrangement may include several steps or parts.
Subsection 2. When applying subsection 1, arrangements or series of arrangements are considered to be non-real to the extent that they are not organized for well-founded commercial reasons that reflect the financial reality.”
If the Danish tax authorities wishes to apply this rule, it will require that the Danish Tax Council (in Danish Skatterådet) approves this. The conditions for using this rule are partly an ascertainment of an objective tax advantage, and partly that the achievement of the purpose contravenes tax law.
If these conditions are met, it is possible to take corrective action when it comes to company taxation. According to subsection 4 of section 3 of the Danish Tax Assessment Act, the rule also applies between natural persons and companies e.g., in shareholder relations, to the extent that there is an adjustment at company taxation level. The current wording of the provision has been in force since January 1st 2020.
In addition to this legal provision, section 2 of the Danish Tax Assessment Act contains a rule that regulates the Danish transfer pricing correction access. The rule prescribes that one must trade on market compliant terms in controlled transactions. The special feature of the Danish rule is that it applies both between companies and between a natural person and a company. Thus, the possibility to correct applies generally.
If you need any advice on the General Anti-Abuse Rule (GAAR) in Danish law, DAHL Law Firm is ready to assist.