This section deals with the application of double tax conventions on income (and capital) when a double taxation issue cannot be resolved by reopening the tax assessment in accordance with the rules laid down in the Tax Administration Act.

The section contains the following aspects:

  • The rule;
  • Presenting the case;
  • Obligation to negotiate;
  • Result of the negotiations.

The rule

Denmark has concluded many agreements regarding the avoidance of double taxation of income, and in some of the agreements of capital as well.

The vast majority of the double taxation conventions contain a provision for the elimination of economic double taxation - usually Article 9 regarding associated enterprises. In conjunction with the provision regarding associated enterprises, the article regarding mutual agreement procedure negotiation is applied - usually Article 25.

(References – not translated)

Presenting the case

Where an enterprise considers that the actions taken by the tax authorities of one or both states will result in economic double taxation, the enterprise may present its case to the competent authority of either of the contracting states (according to the 2017 OECD Model Tax Convention) or for older conventions to the state of which it is resident. It is a precondition that Denmark has a double taxation convention (in force) with the state in question.

The word “action” should be construed as meaning that a case usually cannot be presented before a notification has been issued that the tax authority intends to make a tax adjustment. However, the time limit for presenting a case begins to run on the date that a final decision has been made. See the individual double taxation convention for time limits for submitting a case.

Each double taxation convention may include a time limit for a case to be presented. Article 25(1) of the OECD Model Tax Convention provides that the case must be presented “... within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the Convention”.

In Denmark, the notice of a final decision on a tax adjustment is regarded as being the first notification.

The fact that a taxpayer submits a case under a double taxation convention does not deprive him the possibility of simultaneously making use of the ordinary legal remedies available (Tax Appeals Agency - courts).

The Danish Customs and Tax Administration is authorised to make decisions as the competent authority under the double tax conventions. The administrative jurisdiction is conferred to the Danish Tax Agency and more specifically to Large Companies, Competent Authority concerning transfer pricing and attribution of income to PE’s. See Danish Executive Order no. 1029 of 24 October 2005 regarding the competent authority.

If a foreign tax authority has made a transfer pricing income adjustment of a foreign party, the Danish Tax Agency will determine upon receipt of a request whether it agrees to the foreign tax authority’s decision, including whether the foreign tax authority has applied arm’s length prices and conditions when making the tax assessment. If this is the case, the Danish Tax Agency will make a corresponding downwards adjustment of the Danish associated party’s taxable income, and the economic double taxation is thus eliminated.

However, if the Danish Tax Agency considers that the foreign tax authority did not apply arm’s length prices and principles, the agency is obligated as the competent authority to contact the competent tax authority of the other state. The two states’ competent authorities will then attempt, through exchange of information, negotiations etc., to reach an agreement, which results in the elimination of the economic double taxation. This process is referred to as the Mutual Agreement Procedure (MAP).

The Danish competent authority is also able to eliminate double taxation, which is caused by a tax adjustment made by the Danish tax authority without contacting the foreign competent authority.

Obligation to negotiate

If the competent authorities consider that the conditions for initiating a mutual agreement procedure have been met, they are only obligated to use their best endeavours to reach an agreement that will eliminate the economic double taxation. They are not obligated to reach such an agreement.

An arbitration provision equivalent to Article 25(5) of the OECD Model Tax Convention has been inserted in some Danish DTC. However, Denmark currently has no domestic legal basis for initiating such an arbitration procedure, and the provision is therefore dormant.

The definition of associated parties in Article 9 of the OECD Model Tax Convention is in some respects broader than the definition in section 2 of the Danish Tax Assessment Act (Ligningsloven). The Danish Tax Agency must in its application of a double tax convention refer to the definition in the specific double taxation convention.

Result of the negotiations

The enterprise will always be asked to approve the result of the negotiations with the foreign competent authority.

If the enterprise refuses to accept the result of the MAP negotiations, the original assessment will be upheld, including the resulting double taxation.

If the enterprise accepts the result of the negotiations, the agreement will be made conditional upon the enterprise’s withdrawal of any ongoing domestic appeals.