Contents

This section describes the rules governing PAL tax relief if tax has been paid abroad on yields covered by PAL.

 

The section covers

  • Rule
  • Double taxation
  • Relief
  • Specifically for pooling plans with banks
  • Income from different countries
  • More than one source of income from the same country
  • Net income principle

 

Rule

Tax paid to a country other than Denmark and tax paid to the Faroe Islands or Greenland can be deducted from the PAL tax. The relief is calculated according to Section 33(1) and (2) of LL. See Section 20(1) of PAL.

 

If Denmark has signed a double taxation treaty with another country, the Faroe Islands or Greenland, the person liable to taxation can opt for relief under the double taxation treaty instead of Section 20 of PAL.

 

Relief is granted under the double taxation treaty signed between the country of residence and the country of source.

 

It is a condition for tax liability under Section 1(1) of PAL that the person is fully liable to taxation under Section 1 of the Danish Withholding Tax Act (Kildeskatteloven (KSL)) and not resident in another country. This means that the double taxation treaty between Denmark and the country of source must be used.

 

It is thus not the double taxation treaty between the country in which the bank and pension provider are resident and the country of source which should be used.

 

Example

A pension client has taken out a pension pooling plan with a separate custody account with a German bank. Through the pooling plan, investments are made in assets in Belgium. The relief calculation should be based on the method for preventing double taxation under the double taxation treaty between Denmark and Belgium.

 

See section C.3.4.2, Relief methods.

 

Double taxation

According to the global income principle, which applies in Denmark, all income is included in the basis of taxation irrespective of whether the income originates from a source of income in Denmark or from a source of income from abroad. This only applies, however, if the income is otherwise liable to taxation.  See Section 4 of SL.

 

If pension funds are invested in foreign assets, the yields from the pension plan assets may be liable to double taxation if the yields are also taxed abroad.

 

Double taxation occurs when the same person liable to taxation is taxed twice on the same income in the same period.

 

Example

A person whose pension is placed in a separate custody account investing in foreign shares. The share dividends will be subject to 15 per cent taxation in Denmark under PAL. To the extent that the person has also paid foreign dividend tax, the person will either be granted relief under Section 20 of PAL or under any double taxation treaty signed between Denmark and the country of source.

 

Relief

Section 20 of PAL grants relief for legal double taxation, i.e. in those instances where the same person liable to taxation is taxed twice on the same income, as opposed to financial double taxation where two different persons liable to taxation are taxed twice on the same income.

 

For pension providers liable to taxation, the provision means that the pension provider is granted full relief, in the tax on yields from pension plan assets levied on the yields from the equity, for the foreign tax deducted at source on the assets of the pension provider. ►This applies irrespective of whether the tax has been levied in a third country or the country where the custody account has been opened. ◄

 

Persons liable to taxation under Section 1(2), Items 3-6 and 9 of PAL

Persons liable to taxation under Section 1(2), Items 3-6 and 9 of PAL can be granted relief for foreign tax in the PAL tax, which is calculated based on the basis of taxation under Section 6 of PAL.

 

Persons liable to taxation under Section 1(2), Items 1, 2, 7 and 8 of PAL

Persons liable to taxation under Section 1(2), Items 1, 2, 7 and 8 of PAL can be granted relief for foreign tax in the PAL tax, which is calculated based on the basis of taxation under Section 7 of PAL.

 

Persons liable to taxation under Section 1(2), Item 10 of PAL

Insurance companies liable to corporation tax which are also liable to taxation under Section 1(2), Item 10 can be granted relief for foreign tax in the PAL tax, which is calculated based on the basis of taxation under Section 8 of PAL, cf. Section 20(2) of PAL.

 

Persons liable to taxation under Section 1(1) of PAL

Persons liable to taxation under Section 1(1) of PAL are, however, not eligible for relief for foreign tax, cf., however, the below section on persons liable to taxation holding separate custody accounts with banks and pooling plans with foreign banks.

 

The individual pension plan holder in, e.g., a pension fund is not the legal owner of the assets which are double-taxed, and the individual pension plan holder can thus not be granted relief for these foreign taxes deducted at source in the tax levied on yields from the pension plan assets under Section 4 of PAL. It is the life insurance companies and the pension funds etc. which are the legal owners of the assets which are double-taxed, and it is thus the life insurance companies and pension funds which are eligible for relief for foreign tax in the PAL tax under Sections 6, 7 and 8 of PAL, cf. above.

 

The fact that persons liable to taxation under Section 1(1) of PAL are not eligible for relief for foreign tax means that the foreign tax will not have to be distributed between the pension provider and the pension plan holder. The pension provider can thus attribute the full foreign tax to its own basis of taxation.

 

In cases where the pension provider etc. is resident in another EU/EEA state, the yields from the pension plan assets transferred from the pension provider to the pension holder's custody account will be regarded as ‘other income' according to the double taxation treaties. Denmark will then have the taxation right as the double taxation treaties which Denmark has signed with the other EU/EEA countries entitles Denmark to residential taxation of ‘other income'.

 

In the event that another EU/EEA country taxes accrued yields from pension plan assets to a person liable to taxation on yields from pension plan assets, it will typically not be relevant to grant relief for double taxation of the yields from pension plan assets as the foreign country, the Faroe Islands or Greenland is not entitled to collect tax on the income when Denmark is entitled to residential taxation. ►The reason for this is that the foreign country, the Faroe Islands or Greenland is not entitled to collect tax on the income if Denmark is entitled to residential taxation.◄

 

Specifically for pooling plans with banks

The provision means that persons liable to taxation under Section 1(1) of PAL, holding a separate custody account with a bank in Denmark or in another country, the Faroe Islands or Greenland, can be granted relief for tax levied on foreign assets which are related to the custody account, irrespective of whether the tax has been levied by a third country or the country in which the custody account has been opened.

 

Pension savers participating in Danish and foreign pooling plans with banks cannot be granted relief in respect of the PAL tax for foreign taxes deducted at source on assets in the pool owned by the bank.

 

The special relief provision for pooling plan participants in banks under Section 19(5) of the Danish Pension Investment Return Tax Act is discontinued as it pertains to financial double taxation. Under Section 3(3) of PAL, deductions are granted from the basis of taxation. See section B.2, Basis of taxation of plans with banks and credit institutions, pension accounts covered by Section 42 of PBL and contributory pension accounts covered by Section 51 of PBL.

 

Pension savers liable to pay tax on yields from pension plan assets participating in pooling plans with a foreign bank can, however, be granted relief for any tax deducted at source levied by the bank's country of domicile in respect of interest accrued to the account of the person liable to taxation as this is an example of relief for legal double taxation.

 

Note

It is the bank which makes the calculation and submits the application to Tax Centre Maribo.

 

Income from different countries

In the event of income from different countries, a relief calculation must be made for each individual country. See Assessment Guide, section D.C.3, Relief calculation.

 

Only the foreign taxes levied on the types of income included in the basis of calculation should be included in the relief calculation.

 

More than one source of income from the same country

In the event of more sources of income from the same country, an overall relief calculation must be made. A separate relief calculation must, however, be made for each type of income if

  • relief should be granted based on different methods, or
  • credit relief has been applied, and the income in the country in question has been taxed separately.

See Assessment Guide, section D.C.3, Relief calculation.

Net income principle

Irrespective of whether the relief is granted under a double taxation treaty or under Section 20 of PAL, cf. the principle in Section 33 of LL, the net income principle as described in Section 33 F of LL must, in the opinion of SKAT, be applied.

 

In the calculation of the maximum PAL tax relief, when determining the foreign income, the expenses considered to pertain to this income must be deducted. See the comments on Section 20 in L 10 of 28 November 2007.

 

Expenses which cannot be attributed to either the Danish or the foreign income must be distributed proportionately between the Danish and the foreign gross income. See Section 33 F(2) of LL.