Danish Supreme Court: Danish tax authorities may refuse deduction for part of salary with retroactive effect

The Danish Supreme Court has passed judgment in favour of the Danish tax authorities to the effect that the authorities may refuse a right to deduct part of payroll costs retroactively. The Danish Minister for Taxation has announced that new legislation will be introduced to mitigate the effects of the Danish tax authorities' change of practice. The Danish banks Arbejdernes Landsbank and Lån & Spar Bank against whom the proceedings were commenced were not successful in the Danish Supreme Court as opposed to in the Danish Eastern High Court. Plesner conducted the case on behalf of the banks.

In a judgment of 1 June 2016, the Danish Eastern High Court found in favour of Arbejdernes Landsbank and Lån & Spar Bank in that it was a change of practice when in 2012 and 2013 the Danish tax authorities refused the two banks to deduct payroll costs paid in connection with the acquisition of other banking activities. Accordingly, the Danish Eastern High Court found for the two banks.

The Danish tax authorities could not accept this result.

The Minister for Taxation stated in his response of 17 August 2016 that in his opinion the Danish Eastern High Court's judgment would give rise to such significant problems in relation to the organisation of the tax authorities' control that the Danish Ministry of Taxation had decided to appeal the judgment to the Danish Supreme Court. The Ministry had asked the Legal Advisor to the Danish Government to request that the Danish Supreme Court subject the case to fast-track processing.

The general public importance of the case was further emphasised by the fact that the trade organisations Dansk Finans (English: Finance Denmark), Dansk Erhverv (English: The Confederation of Danish Enterprise) and Dansk Industri (English: The Confederation of Danish Industry) intervened in the proceedings as non-parties in support of the two banks. Plesner conducted the case for both the two banks and the three trade organisations in the Danish Supreme Court.

Danish businesses have expressed, in different ways, much concern about not only the very considerable difficulties but also the legal uncertainty to which businesses will be subject due to the tax authorities' change of practice. Consequently, the Minister for Taxation stated in a press release of 11 April 2017 that if the Ministry of Taxation were to be successful in the case before the Danish Supreme Court, a solution must be found in order that businesses may deduct their payroll costs without any hassle.

The Danish Supreme Court's judgment of 30 June 2017 found for the Danish Ministry of Taxation in that the tax authorities may refuse businesses to deduct part of their payroll costs with retroactive effect.

The following is ia stated in the Danish Supreme Court's reasoning:

"The Supreme Court finds that the fact that the tax authorities have not previously intervened against businesses' deduction of general payroll costs relating to employees that have been involved in company acquisitions etc cannot be equated with a positive decision of the issue.

As there is no established administrative precedent, the tax authorities have not been precluded from reducing without a prior, publicly available notice Arbejdernes Landsbank's deduction for the part of the payroll costs that does not constitute operating costs."

Accordingly, it must be expected that the Minister for Taxation will introduce an amendment that may mitigate the effects of the Ministry's success and ensure the businesses deductions for their payroll costs.

Read the Danish Supreme Court's judgment (in Danish)

Read the Danish Eastern High Court's previous judgment in the matter:
"Judgment in favour of banks in tax case of general public importance"

Latest news on Tax Law

Tax Law