Azets News Finance - Q1, 2016
This newsletter presents the recent changes, deadlines, information regarding VAT, tax, new regulations and many other financial aspects of interest to small entrepreneurs and up to large international groups.
Voluntary payment of tax on account by 1 February 2016
As we have mentioned earlier, it is now possible for companies to pay a third voluntary instalment of tax on account until 1 February in the year following the income year. In respect of the income year 2015, the third tax instalment may therefore be reported and paid by 1 February 2016.
If the company wants to pay a third instalment of tax on account, we would like to point out that the instalment should be reported on the company’s tax account before payment is made. Otherwise, SKAT (the Danish Customs and Tax Administration) may return the amount to the company.With the introduction of the third instalment of tax on account, a company’s financial statements for the income year will practically always be more or less ready by the deadline for reporting and paying tax on account. This will make it easier for the company to calculate the amount of voluntary tax payment.
New Executive Order concerning filing of annual reports from 1 January 2016
As we mentioned in our Update newsletter for Q4 2015, the Danish Business Authority launched new digital solutions with effect from 15 September 2015. In connection with the new solutions, the Danish Business Authority has issued a new Executive Order on Filing and Publication of Annual Reports, etc.
As from 1 January 2016, all businesses will be required to state their registered office on the front page of the annual report. If the annual report contains an audit opinion, the accountancy firm’s business reg. (CVR) number must be specified together with the auditor’s name in the opinion itself.The initiative to require the specification of the accountancy firm’s CVR number is due to the experience of auditors that financial statements are often filed with their names although they are not registered as the auditors of the companies concerned. Eventually, it should be possible to coordinate the systems, which will prevent this practice.
SKAT on mobile phones and tablets
SKAT has developed an app for mobile phones and tablets. SKAT intends to enhance and update the app on a regular basis. At this point, the app offers the following features:
- Login to business and file your VAT return
- Add VAT payment deadlines to your business calendar
- Buy day certificates for your yellow-plate car
- Vehicle excise duty calculator
Illegal shareholder loans
If you are you one of those who have received a letter from the Danish Business Authority on illegal shareholder loans in 2015, or if you receive such a letter later on, we would like to answer some of the questions that may arise in connection with receiving such a letter.
The reason why you receive such a letter is that the Danish Business Authority has detected by random checking that the latest annual financial statements of a company in which you are a member of the management include an amount receivable from the company’s owners or management. According to the Danish Companies Act, such loans are illegal in the vast majority of cases and therefore have to be recovered. The management of the company is responsible for recovering the loan.
When a company lends money to its owners or management, for instance to its chief executive officer, such arrangements are often collectively referred to as “shareholder loans”. Under the Danish Companies Act, the main rule is that shareholder loans are illegal.
Please note that lending to owners or members of management of the company’s subsidiary is also illegal, which also applies to lending to spouses etc. of owners or members of management.
Financial year has not ended
If the financial year has not yet ended, there is still time for the company to recover the illegal loan before the end of the financial year. The item “receivables from owners and management” will in these cases not appear from the company’s balance sheet.
Accordingly, the Danish Business Authority will be able to see that the company no longer has a shareholder loan.
The Danish Business Authority points out that any measure to write off the loan in the financial statements will not legalise the loan as the requirement is for the recovery of the full loan amount.
Far from all companies will manage to recover their receivables by the end of the financial year. The Danish Business Authority calls on the management to recover the loan immediately if the loan is illegal.
If the loan is recovered after the end of the financial year, the loan will still appear from the balance sheet when the company files its next annual report with the Danish Business Authority. In those cases, the management is encouraged to write in the management’s review that the loan has been recovered after the end of the financial year. You may also provide this information in a note to the financial statements.
However, the Danish Business Authority may subsequently order the company’s management to submit documentation to prove that the loan has been repaid in full, inclusive of statutory interest.
If an illegal loan is recognised in the company’s balance sheet, the full amount has to be repaid immediately. In other words, it is not sufficient to agree on a repayment arrangement with the debtor.
If the loan is illegal under the Danish Companies Act, it has to be repaid. This applies regardless of whether you have been taxed on the loan amount.
It follows from the Danish Companies Act that an illegal loan must be repaid with statutory interest. This means specifically that an amount of interest is payable equivalent to the rate of interest set out in the Danish Interest on Overdue Payments Act plus 2%. If a higher interest rate has been agreed, interest must be calculated in accordance with the agreement.
Under the Danish Interest on Overdue Payments Act, the rate of interest is the lending rate fixed by the Danish central bank (at 1 January and 1 July of each year) plus 8%.
What happens if I fail to recover an illegal loan immediately?
If the Danish Business Authority detects an illegal loan when checking the next annual report of the company, the Danish Business Authority will issue an enforcement order instructing the company to recover the loan immediately, inclusive of statutory interest.
At the same time, the company will be requested to submit documentation to prove that the loan with interest has been repaid to the company. If the company fails to submit such documentation, the Danish Business Authority will levy mandatory fines on the management until the documentation is submitted. The time limit for submission of documentation is typically six weeks.
What are the possible consequences of an illegal loan?
The circumstance that a company has – or has had – an illegal loan is a punishable offence for the members of management who have decided to grant or maintain the loan. It follows from section 367 of the Danish Criminal Code that any non-compliance with the prohibition is punishable by a fine.
The fine typically amounts to about 2.5% of the loan principal if the loan is repaid within six weeks of the Danish Business Authority’s enforcement order and 5% if the loan is repaid later than six weeks after the order.
A concrete analysis will be conducted in each individual case to assess whether sufficient grounds exist to report the management to the police.
If a company has granted a loan that falls within the prohibition of the Danish Companies Act against loans to company owners and/or members of management and the loan amount is of a not insignificant size or the offence is repeated, the Danish Business Authority may decide that a company should not be allowed to exercise the possibility of audit exemption in its two subsequent financial years. The Danish Business Authority may further decide that the company should not be allowed to choose to have an audit performed in accordance with the Authority’s standard of declaration for small enterprises.
Danish Business Authority notifies SKAT
If the loan is not repaid, the members of management who have decided on or maintained the relevant transactions will incur liability for the losses inflicted on the company.
In addition, the management risks being confronted with a claim for damages. This means, specifically, that the individual members of management risk assuming personal liability in damages for any loss the company, the company’s creditors or any other persons have sustained as a result of the loan.
What is a legal loan?
A concrete assessment must be made in each individual case to determine whether a shareholder loan is legal or illegal.
Experience shows that by far the majority of shareholder loans are illegal.
Various exemptions from the prohibition against shareholder loans have been provided, for instance in the following situations:
- Legal equity financing
- Lending to Danish and certain foreign parent companies
- Lending in the context of usual business transactions. In some cases, outstanding balances may be regarded as usual business transactions and are therefore exempted from the prohibition against shareholder loans. Accordingly, credit facilities granted in the ordinary course of business are exempted from the prohibition. The following conditions need to be met:
- the transaction must be in the ordinary course of business;
- the transaction must be for the benefit of the company;
- the loan to the shareholder/member of management must have been granted on the same terms (terms of payment, credit scoring, provision of security, etc.) as those on which similar transactions are usually conducted vis-à-vis third parties;
- the transaction must be usual in the industry concerned; and
- furthermore, it is normally a condition that the company has entered into similar transactions with unrelated parties.
The management is responsible for ensuring that a specific loan meets the conditions of the Danish Companies Act for being legal.
Errors in the annual report
If you think that the latest annual report of the company contains an error or misstatement concerning a loan to shareholders or members of management, you should contact the Danish Business Authority.
Annual report with illegal shareholder loan
If you have already filed a new annual report at the time when you receive the letter from the Danish Business Authority, you are naturally not able to rectify the offence and write in the annual report that steps have been taken to rectify the offence.
The annual report you have filed will be subjected to the Danish Business Authority’s ordinary procedures of financial reporting monitoring. If the Danish Business Authority selects the company’s annual report for a random check and detects that the company has an illegal shareholder loan, then the management of the company risks being served with an enforcement order with instructions to recover the loan immediately. Moreover, the management risks that the Danish Business Authority notifies SKAT of the offence and, finally, the management risks being reported to the police for non-compliance with the prohibition against shareholder loans.You should not take any measures in relation to the Danish Business Authority because of the letter, but the Authority calls on the management of the company to recover any illegal shareholder loans immediately.
A fine of DKK 5,000 will be levied
The Western Division of the Danish High Court has ruled that the fine imposed on businesses that have failed to label their yellow-plate cars with information of name and CVR number cannot be less than DKK 5,000 – even in first-time cases.
Rules were introduced with effect from 1 January 2013, requiring all vans and lorries with a total permissible laden weight of up to 4 tonnes to be provided with information of not just the name or logo of the business, but also its CVR number.
The rules were introduced as an initiative to combat moonlighting, but although the rules were probably mainly targeted at the building industry when drafted, they apply to companies in virtually all sectors and industries. This means that cars belonging to, say, butchers’ shops, furniture shops and bookshops, also have to be labelled with the company’s CVR number.
As always when new rules are introduced, it takes quite a while for everyone to have fully adjusted to the amended practice. A new judgment pronounced by the Western Division of the Danish High Court shows that the judiciary does not look favourably on this slow pace of adaptation and that no discount is offered on the fine, even in first-time cases.
The case in question was about a self-employed person who was working in the building industry and, in September 2013 – i.e. nine months after the rules had come into force – had been stopped in his van, which was not labelled with information of any kind whatsoever. According to himself, this was due to pure laziness. Immediately after the inspection visit, he therefore arranged for the required information to be labelled on the vehicle.
Although the master builder pleaded guilty, he refused at first to pay a fine of DKK 5,000 for violation of the rules. Indeed, the district court ruled in favour of the builder and fixed the fine at DKK 2,000, both because it was a first-time case and because the vehicle was identifiable on the basis of its number plate.
However, SKAT appealed the judgment to the Western Division of the Danish High Court, which ruled that the fine should be fixed at DKK 5,000 as it is clearly evident from the legislative history of the Act that this should be the normal fine even in first-time cases.
SKAT has announced that in second, third and fourth-time cases, they will claim fines of DKK 10,000, DKK 15,000 and DKK 22,500, respectively. The mentioned fines are per vehicle. The fines – and legal costs, if applicable – are not tax-deductible.
New guidelines from SKAT on VAT deduction in holding companies
Against the background of a judgment delivered by the European Court of Justice on 16 July 2015, SKAT has changed its practice and prepared new guidelines relating to ”VAT deduction for adviser expenses involved in the acquisition of companies”.
The change means that holding companies, in certain circumstances, are entitled to full VAT deduction on costs incidental to the acquisition of shares in subsidiaries.
To be eligible for VAT deduction, it is essential that the holding company subsequently supplies services subject to VAT to the subsidiary, for instance management fees.
In relation to the holding company’s other costs and expenses, for instance auditors’ remuneration and office supplies, the guidelines offer an opportunity for a changed VAT deduction.Companies that could have deducted VAT in accordance with the new guidelines, but have not claimed the deduction in their returns, may apply for a resumption of VAT liability dating 10 years back from the date of the judgment, i.e. reopening of VAT periods that have commenced but not expired on 16 July 2005. The deadline for application for recovery of VAT is 16 May 2016.
Audit exemption – unchanged practice on grounds of invalidity
Certain requirements to qualify for an audit exemption are absolute grounds of invalidity: adoption of a resolution on audit exemption at an annual general meeting and disclosure in the management’s statement the year before the exemption takes effect. On the other hand, instances of non-compliance with the requirements of an amendment to the articles of association, notification of the exemption and deregistration of the auditor are not absolute grounds of invalidity.
Below follows a quote from the Danish Business Authority’s website,www.erst.dk, on audit exemption:
”Exemption from audit may be claimed provided that
- a resolution on audit exemption has been adopted at the annual general meeting of the company;
- the company’s articles of association are amended to ensure that they do not provide for a statutory audit, including the election of an auditor;
- the management’s statement in the annual report for the year when it is resolved to claim audit exemption for the years ahead contains information that the company has decided to claim audit exemption; and
- the management declares in the management’s statement in the annual report for the current financial year that the conditions for being eligible for audit exemption have been met.
The company must notify the Danish Business Authority of the audit exemption and forward the amended articles of association to the Authority. Minutes of the proceedings of the general meeting must be enclosed with the amended articles of association”.
The Danish Business Authority writes that the Authority, according to general practice, accepts the decision to claim audit exemption, even if the company has failed to send notification of the decision and amend its articles of association. In very special circumstances, however, it may occur that the Danish Business Authority, in exceptional cases and based on a concrete assessment, will not be able to recognise the audit exemption on account of such instances of non-compliance.
The other formal requirements for being eligible for exemption, however, have to be met unconditionally, see items 1 and 3 above.
As it appears, the Danish Business Authority has not tightened its practice relating to audit exemption, but this practice should naturally not result in auditors/businesses “turning a blind eye” on formalities: they should always be observed.
The Danish Business Authority agrees that it has no invalidating effect in itself that information on the auditor is provided under company facts in a situation where the company voluntarily opts for a review, an extended review or assistance with presentation and a statement to this effect by an approved auditor.
Deduction for wage costs in connection with household services for 2016 and 2017
The deduction for wage costs in connection with household services has been reintroduced. New types of costs are deductible, some have been changed and others have been removed. Some people will call it a “greener” deduction arrangement, and the dividing line between domestic help services and building work services has become less blurred.
The allowable deduction will next year be increased by DKK 3,000 to a maximum of DKK 18,000 per person, but as opposed to the present arrangement, it will be a composite deduction. Deductible expenses for domestic help services may in future not exceed DKK 6,000 per year per person, whereas the maximum deductible expenses for building work services will amount to DKK 12,000 per year per person. It is still only wage costs inclusive of VAT that will be deductible.
When it comes to the types of work that are eligible for tax deduction, 11 new types have been added to the positive list according to the published agreement. On the other hand, other types will disappear, while others will remain unchanged.
- Repairs and improvements to chimneys
- Disassembly of wood-burning stoves
- Establishment of intelligent building installations
- Solar screening of windows and glass doors
- Installation of air-to-air heat pumps
- Expenses for advice on energy improvements
- Protection of outer doors and windows against flooding
- Installation of water-permeable pavements in driveways etc.
- Removal of building parts containing asbestos
- Installation of electric car chargers
- Expenses for broadband connections
In relation to the exterior framework of the home, the rules will in future also allow deductions for expenses incurred in connection with replacement of panes, windows and doors and expenses for exterior paint work, except for painting of roofs. Expenses for installation of solar panels, photovoltaic cells and household wind turbines will also be deductible.
As far as domestic help services are concerned, a tax deduction for expenses incurred in connection with cleaning, window cleaning, childcare and gardening will also be available in 2016 and 2017, but – as stipulated above – within an upper limit of DKK 6,000 per year per person. This means an average monthly deduction of DKK 1,000 for a married couple.
Expenses for repairs or improvements to kitchens and bathrooms will no longer be deductible. The same applies to expenses for flooring work and expenses for interior paint and wallpaper work.
Supreme Court judgment concerning VAT on secondment of employees
The Danish Supreme Court has dismissed the appeal from the judgment of the High Court, which ruled that secondment of employees is an activity subject to VAT and that VAT is therefore payable on such activity.
It is of no relevance whether a profit is made on the secondment, and it is similarly irrelevant how the remuneration for the secondment is paid.As a result, this also applies to ordinary secondments between consolidated undertakings – so remember to issue an invoice with VAT.