Payroll tax - Danish High Court finds in favour of banks in a case of general public importance

The Danish Western High Court found in favour of Spar Nord Bank A/S' (formerly Sparbank A/S) claim that it was entitled to calculate payroll tax based on a breakdown of turnover under section 38 of the Danish Act on VAT (pro rata rate). The High Court found that the Danish Customs and Tax Administration has the authority to set aside a company's discretionary allocation of payroll costs on taxable and non-taxable activities based on an allocation of payroll costs based on turnover, if it is obvious that such allocation is not true and fair compared with the actual time spent. The High Court held that the bank's assessment based on the breakdown of turnover was misleading compared with an assessment of the actual use of resources. But the High Court did not find any basis for setting aside the bank's assessment as the Danish Customs and Tax Administration's assessment was not found to be more true and fair than that of the bank. Plesner conducted the cases on behalf of the bank.

The case in detail

Banks are liable to pay tax on the payroll costs relating to their VAT exempt activities. Payroll tax is not paid on activities that are liable to VAT. If a bank has both activities that are liable to payroll tax and activities that are liable to VAT, the payroll costs are to be allocated. As a starting point, the allocation of the payroll costs between taxable and non-taxable activities not liable to VAT is to be based on the actual time spent. If such allocation is not possible, the company is to make a discretionary allocation. The bank had calculated the discretionary allocation of the payroll costs based on the breakdown of turnover under section 38(1) of the Danish Act on VAT.

The issue of the case was whether the bank was entitled to calculate the allocation of the payroll costs between taxable and non-taxable activities based on this breakdown of turnover. The Danish Customs and Tax Administration had set aside this assessment because it did not find that it reflected the actual time spent on the taxable and non-taxable activities in the bank. For that reason, the Danish Customs and Tax Administration had determined the payroll tax basis based on its own assessment.

The question was first of all whether the bank had been entitled, under the rules applicable at the time, to calculate the discretionary allocation of the payroll costs between the taxable and non-taxable activities based on the breakdown of turnover, no matter if the discretionary allocation might be misleading in terms of the actual use of resources.

Secondly, the question was whether, if the High Court found that the party liable to pay tax did not have a legal claim to exercise such discretion based on the breakdown of turnover, the Danish Ministry of Taxation had proved that the bank's assessment could be set aside.

As for the first question, the Danish Ministry of Taxation had acknowledged that according to the wording of the statutory order on payroll tax in force until 1 January 2007 the party liable to pay tax had a legal claim to allocate the payroll costs based on the breakdown of turnover as stipulated in the Danish Act on VAT. The Danish Ministry of Taxation therefore acknowledged and admitted the part of the bank's claim that related to the period until 1 January 2007.

The statutory order was amended with effect from 1 January 2007. The Danish Ministry of Taxation argued that it had been clarified by the amended wording of the statutory order that the party liable to pay tax did not have a legal claim to base an assessment on the breakdown of turnover, it is merely a starting point that could not be upheld if the assessment on such basis was clearly misleading. However, when the statutory order went out for consultation the Danish Ministry of Taxation stated that no substantive amendments had been made to the statutory order.

The High Court found that the amendment to the statutory order did not imply any substantive amendments. But, in spite of the Ministry of Taxation's acknowledgement, the High Court found that the statutory order did not imply an actual legal claim for the party liable to pay tax to use the breakdown of the turnover, not prior to the amendment as of 1 January 2007 either.

Accordingly, the High Court found that the bank's assessment based on the breakdown of turnover did not provide a true and fair view of the actual allocation of resources between the taxable and non-taxable activities. The High Court did, however, concur in the bank's view that, when exercised in accordance with the directions of the legislator, the assessment is to be taken into account if the Danish Customs and Tax Administration cannot prove that its assessment is more true and fair. The High Court found that the Danish Ministry of Taxation's assessment was not more true and fair. Consequently, the bank's assessment based on turnover was upheld.

The implications of the judgment for other banks

By this judgment, the High Court has established that, as advised by the Danish Ministry of Taxation in connection with the consultation procedures relating to the new statutory order as of 1 January 2007, no substantive amendments had been made before or after 1 January 2007.

The High Court also established that when the payroll costs are allocated using the percentage for deduction of VAT, the assessment made by the party liable to pay tax can only be set aside if the Danish Customs and Tax Administration proves both that this party's assessment is misleading and that the Danish Customs and Tax Administration's assessment is more true and fair than that of the party liable to pay tax.

It is thus not sufficient for the setting aside of the assessment made by the party liable to pay tax when the percentage for deduction of VAT is used that the Danish Customs and Tax Administration is able to prove that the allocation (the assessment) is misleading when compared with the actual use of resources, if the Danish Customs and Tax Administration cannot prove at the same time a more true and fair assessment.

The current rules for the allocation of payroll costs

Under the current rules (applicable from March 2013) the assessment relating to banks that are not able to calculate the actual time spent is standardised (meaning subject to automatic application of guidance or policy). The current statutory order requires that the discretionary allocation be made to the effect that 60% of the payroll costs are considered spent on activities liable to payroll tax. The remaining 40% is then reduced by the percentage prescribed in section 38(1) of the Danish Act on VAT.

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