Denmark Moving Toward Implementing Pillar Two Global Minimum Tax

The Council of the European Union issued directive 2022/2523 “on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union” (the EU Pillar Two directive) on Dec.14, 2022. As a member state of the EU, Denmark is part of the process launched by the European Commission to implement the global anti-base erosion, or GloBE, model rules under Pillar Two and is subject to, and required to implement, directives adopted by the EU.

On June 26, the Danish Ministry of Taxation issued a draft law for public consultation, for implementing the Pillar Two directive into Danish law. The directive will be implemented in a new separate law, the “Danish Pillar Two Act,” instead of into existing tax legislation such as the Danish Corporate Income Tax Act. This is because the EU Pillar Two directive is based on accounting principles—International Financial Reporting Standards or local Generally Accepted Accounting Principles—which is not the case for the corporate income tax act.

On that basis, the Pillar Two Act will to a large extent function independently of existing Danish tax law and mirror the content of the EU Pillar Two directive as far as possible, even though this may lead to terms having different interpretations in the act, compared to existing Danish tax law.

The act is intended to enter into force on Jan. 1, 2024, and will take effect for financial years beginning on Dec. 31, 2023, or later.

The Danish Pillar Two Act

As expected, the draft Danish Pillar Two Act contains the income inclusion rule and the undertaxed payments rule. The EU Pillar Two directive also provided the option for member states to implement a qualified domestic top-up tax—the Danish Ministry of Taxation have made use of this option and a Danish QDTT is therefore included in the draft act.

The IIR will be the primary rule and will be applied if the jurisdiction of the ultimate parent company is Denmark. If the income of a subsidiary within the group is taxed at a rate lower than 15%, under the IIR Denmark will be able to levy a top-up tax on the Danish parent company corresponding to the tax that the subsidiary should have paid to reach an effective tax rate of 15%.

The IIR may also be applied if the ultimate parent company is domiciled in a jurisdiction that hasn’t introduced a rule corresponding to the IIR, or if the ultimate parent company is defined as an “excluded entity.” In this case, the IIR under the Pillar Two Act may apply to a Danish intermediary holding company in the structure.

The UTPR is a secondary rule and comprises situations where the ultimate parent company of a multinational group is located in a (foreign) jurisdiction that hasn’t implemented rules similar to the GloBE rules and thereby the IIR. A Danish subsidiary of such a group can be subject to an additional tax to Denmark under the UTPR in the Danish Pillar Two Act if the ultimate parent or other group companies’ qualifying income is effectively taxed at a rate below 15%.

The QDTT rule is designed in accordance with the EU Pillar Two directive and guidelines from the OECD. According to this rule, a Danish company that isn’t effectively taxed with a rate of at least 15% and is part of a foreign multinational group will be subject to an additional domestic top-up tax in Denmark under the act, so that the total effective tax rate of the Danish company becomes 15%. Purely Danish groups won’t be subject to the QDTT rule but will instead be subject to the IIR.

The Danish Pillar Two Act covers members of national or multinational groups with an annual consolidated revenue of at least 750 million euros ($805 million) in at least two of the four preceding fiscal years. The Danish Ministry of Taxation estimates that approximately 75 Danish ultimate parent entities will be required to submit information and prepare an extended tax return (the GloBE information return).

Consequences of the Pillar Two Act

Changes to the act based on comments received must be expected. However, given that the intention from the Ministry of Taxation is to mirror the EU Pillar Two directive text as far as possible, any changes will likely be minor. The deadline for comments to the public hearing was Aug. 18, and comments received hadn’t been published at the time of writing.

With the decision to implement the EU Pillar Two directive in a law that is envisioned to function independently from existing Danish tax law, uncertainty around conceptualization and interpretation must be expected until its practice has been established. It must also be expected that this will place an added administrative burden on companies that are subject to the new legislation, with added work for advisers as a result.

The act in its draft form is estimated to increase annual tax revenue by approximately 0.6 billion Danish kroner ($56 million) in 2024, growing to 1.9 billion Danish kroner in 2029. The draft bill estimates the expected increase in total annual administration and compliance costs for the Danish groups covered by the act to be around 0.5 billion Danish kroner.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Steffen Strande is an attorney and Poul Erik Lytken is a partner with Accura Law Firm.

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