Contents
This section describes how the person liable to taxation can choose between the relief method under a double taxation treaty or under Section 20 of PAL, and how the relief is calculated.
The section covers
- Choice of relief method
- Double taxation treaties
- Exemption relief under a double taxation treaty
- Credit relief under a double taxation treaty
- Relief under Section 20 of PAL, cf. Section 33 of LL
Choice of relief method
The person liable to taxation can choose to obtain PAL tax relief for tax paid to a country other than Denmark and tax paid to the Faroe Islands or Greenland under either
- Section 20 of PAL, or
- a double taxation treatment between Denmark and the country in question.
Relief under Section 20 of PAL, cf. Section 33 of LL, is granted in accordance with the credit method.
Relief under a double taxation treaty is granted in accordance with the exemption or credit method.
Relief under Section 33 of LL
Section 33 of LL is an internal relief rule. This rule applies if there is no double taxation treaty between Denmark and the country in question, or if the person liable to taxation requests relief under the internal rule instead of relief under a double taxation treaty. See TfS2000.691 where a person liable to taxation was able to choose the relief rule set out in Section 33 of LL instead of relief under the relevant double taxation treaty.
See Assessment Guide, Double taxation, section D.C.3.6, Relief methods.
Double taxation treaties
Denmark has signed a number of treaties with other countries to avoid double taxation. With the exception of the Nordic treaty, the treaties are bilateral.
Most treaties signed between Denmark and other countries are based on relief according to the credit method.
Many of the treaties signed are designed in accordance with the principles in the OECD model treaty. The treaties are based on the principle that a person can be resident in one country only (the country of domicile). The other country is called the country of source. The treaties distribute the right of taxation between the country of domicile and the country of source.
The double taxation treaties are implemented in Danish legislation and can thus by used directly by the taxpayers.
The double taxation treaties state which persons and taxes are covered by the treaty. The PAL tax is an income tax and is covered by the treaties which Denmark has signed.
Relief under a double taxation treaty may be granted in accordance with the credit or exemption method. The individual double taxation treaty states which method should be applied.
For a list of the treaties signed, see Assessment Guide, Double taxation, section D.E.
Exemption relief under a double taxation treaty
When, under a double taxation treaty, relief is granted in accordance with the exemption method, it means that the Danish tax levied on the foreign income is reduced.
|
PAL tax * foreign income
Total PAL income
|
A simplified example
PAL income abroad 100,000
►Tax paid abroad 10.000◄
Total PAL income 500,000
PAL tax 15% of 500,000 75,000
75,000 (PAL tax) * 100,000 (foreign income)
500,000 (total PAL income)
►The relief granted for tax paid abroad is thus DKK 15,000 irrespective of whether only DKK 10,000 has been paid abroad.◄
Credit relief under a double taxation treaty
When relief is granted under a double taxation treaty in accordance with the credit method, Denmark, as the country of domicile, must accept that the taxpayer's PAL tax is reduced by an amount corresponding to the tax paid abroad. The amount deducted can never exceed the amount of the PAL tax that corresponds to the income that can be taxed abroad.
This means that the relief granted in respect of the Danish PAL tax corresponds to the lower of
- The tax paid abroad and
- The proportional amount of the Danish PAL tax levied on the foreign income (exemption relief)
A simplified example
PAL income abroad 100,000
►Tax paid abroad 10,000◄
Total PAL income 500,000
PAL tax 15% of 500,000 75,000
75,000 (PAL tax) * 100,000 (foreign income)
500,000 (total PAL income)
The actual PAL tax on the foreign income (the exemption method) is 15,000. The tax paid abroad is 20,000. The smallest amount should be granted as relief, i.e. 10,000.
Relief under Section 20 of PAL, cf. Section 33 of LL
Section 33 of LL only applies to the taxable income and can thus not be applied directly to PAL tax relief. Under Section 20(1) of PAL, tax paid to a country other than Denmark and tax paid to the Faroe Islands or Greenland can be deducted from PAL tax according to the calculation principles set out in Section 33 of LL.
Section 33 of LL is a credit relief provision. This means that if the person liable to taxation has paid tax to a country other than Denmark or to the Faroe Islands or Greenland on income included in the basis of taxation under PAL, the person in question is entitled to a reduction under the credit relief provision.
PAL tax credit relief under Section 33 of LL corresponds to the lower of
- The tax paid abroad and
- The proportional amount of the Danish PAL tax levied on the foreign income
If Denmark has signed a double taxation treaty with a country to which tax has been paid, the Danish PAL tax relief cannot exceed the tax which the foreign country can levy under the treaty. See Section 33(2) of LL.
A simplified example
Denmark has signed a treaty with another country under which the country of source is only entitled to impose a 10 per cent tax on interest. In accordance with internal rules, the foreign country has imposed a 20 per cent tax on the interest income.
PAL income abroad 100,000
Tax paid abroad 20,000
Total PAL income 500,000
PAL tax 15% of 500,000 75,000
75,000 (PAL tax) * 100,000 (foreign income)
500,000 (total PAL income)
The actual PAL tax on the foreign income (the exemption method) is 15,000. The tax paid abroad is 20,000. The smallest amount should generally be granted as relief. As the country of source, under the treaty, is not entitled to withhold more than a maximum of 10,000, the Danish PAL tax relief amounts to 10,000.
The person liable to taxation can submit an application to the foreign country to have a refund of 10,000, the excess tax paid abroad under the double taxation treaty signed between Denmark and the foreign country.