Judgment in favour of banks in tax case of general public importance
It was a change of practice when in 2012 and 2013 the Danish tax authorities refused the Danish banks Arbejdernes Landsbank and Lån & Spar Bank to deduct payroll costs paid in connection with the acquisition of other banking activities. On 1 June 2016 the Danish Eastern High Court consequently found for the two banks in two of the cases brought by the Danish Ministry of Taxation against the banks where the High Court very clearly and unambiguously rejected the Danish tax authorities' attempt to tighten the practice with retroactive effect. Plesner conducted the cases on behalf of the two banks.
Commencement of the cases
Both cases were appealed to the Danish National Tax Tribunal which ruled in favour of the banks. The Danish Ministry of Taxation brought the cases before the courts where, at the Ministry's request, they were heard by the Danish Eastern High Court as the court of first instance because they were of general public importance.
The Danish tax authorities made similar decisions in respect of other banks and at this point in time nine of those decisions have been brought before the Danish National Tax Tribunal. One case is pending before the courts but it has been stayed pending the outcome of the two cases in which the High Court has now passed judgment.
Right to deduct payroll costs
One of the banks' claims was that if the payroll costs were not considered to be deductible operating costs, it would be such a material change of practice that it could only be made with future effect.
The judgments by the Danish Eastern High Court
The Danish Eastern High Court passed judgment in favour of the Danish Ministry of Taxation in that deduction for the part of the payroll costs covering work performed in connection with an expansion of a business can be refused. It was taken into account in both cases that the banks' acquisitions of other banking activities as defined in the Danish State Tax Act were expansions of the banks' activities and that also the part of the relating expenses that was paid in the form of salaries to their own employees were consequently not deductible operating costs under section 6 of the Danish State Tax Act.
But the Danish Eastern High Court found for the banks in that the Danish tax authorities' decisions were such a material change of practice that it could not be made without a prior, publicly available notice to such effect. The reason was that in the years when the payroll costs were paid the case law in the area had to be considered to be affected by a conception of law corresponding to the banks' claims. It means that the banks had a justified expectation that the part of the banks' ordinary payroll costs relating to the acquisition of banking activities was not to be calculated separately and that deduction for this part of the payroll costs would not be refused.
Judgment in favour of the banks was consequently passed.
The future importance of the judgments
By passing the two judgments the High Court has established that the Danish tax authorities' reinterpretation of section 6 of the Danish State Tax Act including a limitation on the right to deduct the businesses' ordinary payroll costs, even if it could be covered by the wording of the provision, is such a limitation on the right to deduct payroll costs that it could not have retroactive effect.
The breakdown of the businesses' ordinary operating costs into a deductible and a non-deductible part as wanted by the Danish tax authorities entails a large number of practical problems and problems of general public importance to be clarified if such breakdown is to be made on a justifiable basis in terms of the due process of law. It is therefore important that any future guidelines are not determined based on the results of a few cases selected by the Danish tax authorities but based on a thorough analysis of all relevant issues.
In this connection it should also be borne in mind that if the situation should occur, the Danish tax authorities' reinterpretation does not only affect the deduction for payroll costs but also all other traditional operating costs such as expenses relating to rent, electricity, heating and telephone and that the reduction in the businesses' right to deduct will not only affect expansions in the form of acquisitions but also all other activities not included in the individual business's actual operation.
It is therefore extremely important to the future determination of the businesses' operating cost deduction that the High Court clearly and unambiguously has rejected the Danish tax authorities' attempt to tighten the practice with retroactive effect.
The two judgments mean that the businesses have been ensured a procedure where it will be possible to involve all relevant parties to discuss the future concept of operating expenses and where more political issues such as the increased taxation of the businesses which the limitation of the right to deduct payroll tax etc will entail can also be brought into play.