Expansion of the Danish tax territory

On 1 June 2023, the bill on Expansion of the Danish tax territory was enacted. The rules expand the limited tax liability for individuals and companies within the Danish continental shelf/Exclusive Economic Zone (“EEZ”). The new rules will become effective on 1 July 2023. 

According to the explanatory comments to the bill, the purpose is to ensure that renewable energy facilities are covered by the new rules. The bill was proposed as a consequence of discussions in recent years concerning the establishment of Danish energy islands. 

The rules expand the Danish tax jurisdiction to also provide legal basis for taxation of foreign individuals and companies that perform activities between the 12 Nautical Miles Zone and the EEZ, in contrast with today’s legal basis which only provides tax jurisdiction for activities performed by foreign individuals and companies within the 12 Nautical Miles Zone.

As a consequence of the rules, companies will be subject to Danish limited tax liability if the conditions for establishing a permanent establishment are met. This will, among other things, require a Danish tax filing obligation. Similarly, foreign individuals can be subject to limited Danish tax liability if they perform activities for a foreign entity establishing a Danish permanent establishment due to activities conducted in the EEZ.

According to the explanatory comments to the bill, the objective of the rules is as follows:

Activities conducted through a fixed place of business in Denmark’s Exclusive Economic Zone are also included within the perimeter of Danish taxation, provided the activities are directly linked to the establishment, operation and use of artificial islands, installations and facilities.

Individuals will, in line with the above, also (generally) become tax liable for activities carried out which are directly linked to the establishment, operation and use of artificial islands, installations and facilities.  

According to the comments to the bill, the provision “establishment, operation, and use” is drafted in very broad terms. However, in reading the purpose of the bill, it is KPMG’s view that the rules should be interpreted to only cover activities directly linked to artificial islands, installations and facilities located in the EEZ.

Moreover, activities that involve, for instance, the maintenance and demolition of facilities are covered by the new rules. 

Based on the explanatory comments and the questions and answers to the bill, the Minister of Taxation has stated that the new rules should be applied in accordance with the taxation rights applicable to Denmark under international law with reference to the UN Convention on the Law of the Sea (“UNCLOS”). Accordingly, activities related to the establishment and operation of grid connections (e.g. cables and pipelines) used solely for transit in the Danish EEZ should not be covered by Danish tax liability.  

Thus, only activities linked to grid connections onto Danish land or territorial waters, or activities related to the exploration or exploitation of resources on the Danish continental shelf or the operation of artificial islands, installations and structures on the Danish continental shelf are covered by Danish tax liability. 

It should be noted that indirect taxes and excise duties are not considered to be within the perimeter of the new rules.

From our perspective, guidance regarding the new rules is very limited. For example, it is not defined in the enacted rules when an activity is to be considered “directly linked” to an establishment, operation and use of artificial islands, installations and facilities, especially regarding services performed by subcontractors. Further, it is not entirely clear based on the wording of some the tax treaties entered into by Denmark, seen in the context of the new rules, whether the new rules could, in some cases, imply a risk of tax controversy. We would therefore welcome more guidance to the enacted rules on this matter.

With regard to Europe in general, we see an international trend where more European jurisdictions are proposing rules on expansion of tax jurisdiction similar to the new Danish rules. For companies performing activities within the EEZ, we recommend keeping an eye on future developments; for example, Norway is also expected to implement an expansion of Norwegian tax jurisdiction. 

If you have any questions, you are more than welcome to contact us.