Draft bill: Deductions for all business-related payroll costs

A Danish Supreme Court ruling in June 2017 giving the Danish tax authorities the right to a change of practice with retroactive effect and to deny employers the right to deduct payroll costs not directly related to current operations has left businesses in a chaotic situation tax-wise: In principle, all payroll costs and a number of other operating costs were to be divided into a deductible and a non-deductible part. However, the Minister for Taxation had already announced legislative changes if the Supreme Court ruling were to go against tax payers. As a result, the Ministry of Taxation has recently submitted a bill for consultation that, if passed, would give all businesses the right to deduct all business-related payroll costs with retroactive effect.

In 2011, SKAT, the Danish Customs and Tax Administration, commenced proceedings against a number of Danish banks with a view to changing the general tax treatment of payroll costs. SKAT believed there was no authority to approve a deduction of payroll costs incurred for work relating to an expansion of the business, or for work otherwise not with a sufficiently direct relation to day-to-day operations. Plesner represented Arbejdernes Landsbank and Lån & Spar Bank in the two pilot cases conducted before the courts.

In June, the Danish Supreme Court ruled that Arbejdernes Landsbank and Lån & Spar Bank could not deduct the proportion of their business-related payroll costs incurred in connection with, say, company acquisitions. Despite SKAT’s years of practice of recognising full deductibility of all business-related payroll costs, the Supreme Court found that not only could the banks’ deduction of payroll costs be denied, but – and contrary to the judgment passed by the Eastern High Court – SKAT could also deny deductibility with retroactive effect.

As the Supreme Court ruling would have immense administrative consequences for large parts of the Danish business community, the Minister for Taxation issued a press release even before the case was in final hearing before the Supreme Court announcing a change to the law that would allow businesses to deduct all business-related payroll costs if the Supreme Court were to find for the Ministry of Taxation.

The bill proposing such change and extension of the right to deduct business-related payroll costs was submitted for consultation on 31 August 2017.

The bill addresses the substantial difficulties pointed out by the banks during the court case, including the administrative burdens it would impose on businesses if they were to keep track of the time individual employees spend on current operations or performing work in connection with, say, company expansion.

The change is proposed to be implemented by way of a new section 8 N to the Danish Tax Assessment Act which would allow the deduction of business-related payroll costs to individuals in a company’s employ and business expenses relating to the employment relationship.

If the bill is passed as proposed, virtually all of the significant administrative burdens following from the Supreme Court ruling will be eliminated.

The change would render all payroll costs and other business-related expenses associated with an employment relationship, including rent, office supplies, ordinary staff costs and the like deductible regardless of purpose as long as costs are incurred in the employer’s interest and in relation to the employment relationship.

The intention is for the right of deductibility to apply not only to payroll costs and the like incurred in connection with company expansion, but also to payroll costs related to restructuring and sale of a business regardless of which restructuring method the company may choose. The right of deductibility will also apply to costs incurred unsuccessfully, for example if a planned expansion or restructuring does not materialise.

The extended right of deductibility is not intended to apply to costs a company incurs to external consultants and advisers. Such costs will remain deductible according to current rules and practice provided they relate to the company’s current operations or calculation of taxable profit.

The bill is proposed to come into force on 1 July 2018, but with effect from the 2012 income year, i.e. with retroactive effect.

The deadline for consultation responses is 28 September 2017.

Plesner will monitor the upcoming legislative work closely.

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