Contents

The section describes the rules on when a separate account for taxes is required.

 

The section covers

  • Background
  • Rule
  • Determination

 

Background

Gains and losses on bonds, mortgages and other claims, investment certificates, shares in limited companies, share certificates and convertible bonds as well as real property are determined according to the inventory principle. See Section 15(3) of PAL.

 

In a country other than Denmark, any taxation of gains and losses in connection with the disposal of assets will typically be based on the realisation principle.

 

There may thus be a temporal difference between the taxation in Denmark under PAL and the taxation abroad. The increase in the value of the asset will typically be taxed sooner in Denmark than in a country other than Denmark.

 

If the foreign country is authorised to tax gains and losses from the disposal of assets, the taxation will generally take place in the year of disposal. If there is no increase in the value of the asset in the year of disposal, there is no Danish PAL tax from which the foreign tax can be deducted.

 

Under a double taxation treaty, gains and losses on real property can typically be taxed in the country in which the property is situated.

 

Some double taxation treaties signed with foreign countries also provide that the country in question is entitled to tax gains and losses from shares in property companies domiciled in the country in question even though the shareholders are resident in Denmark.

 

See also

See also Assessment Guide, Double taxation, section D.E, Treaties and agreements signed.

 

Rule

Under Section 20(2) of PAL, the person liable to PAL taxation must maintain an account for taxes paid on gains and losses from each assets when the following conditions are met:´

  • The gains and losses are taxed in a country other than Denmark, are taxed in the Faroe Islands or Denmark (under internal legislation and any double taxation treaty), and
  • Gains and losses in the PAL tax calculation are included according to the inventory principle.

 

The balance of the account shows the size of the ‘saved-up' deductions in respect of the Danish PAL tax.

 

An account should only be maintained for taxes in respect of real property and shares in property companies domiciled abroad. This appears from the comments on Section 20(2) in bill L 10 of 28 November 2007.

 

Determination

To the account is added a proportional amount of the PAL tax of the person liable to taxation. The amount corresponds to the share of the tax which relates to gains on the asset for which no relief has been granted under a double taxation treaty under Section 20(1) of PAL.

 

In case of losses on the asset following determination according to the inventory principle, a negative tax is calculated which can be deducted from the balance.

 

If the asset in question is disposed of and this results in tax being levied abroad, an ordinary relief calculation is made for the year in question.

 

If the foreign tax exceeds the proportional amount of the PAL tax which can be attributed to gains on the asset, the remaining sum can be deducted from the other PAL tax payable by the person liable to taxation. This applies only to the extent that it does not exceed the balance. The balance is then reduced by the amount deducted.

 

If the amount exceeds the PAL tax payable by the person liable to taxation, the amount is disbursed in cash.

 

Example of account for taxes

Year 1

Year 2

Year 3

Year 4 

Gains according to the inventory principle

  100

100

-20

100

PAL tax (15%) 

15

15

-3

15

Tax account balance

15

 30

 27

 0

Gains from abroad from disposal under the realisation principle

 0

 0

 0

 280

30% foreign tax on realisation gains

 0

 0

 0

 84

 

In the example, the person liable to taxation owns shares in a property company domiciled in a country other than Denmark which in years 1, 2 and 4 increase by 100 in value, whereas year 3 shows a decrease in value of 20.

 

The profit of 280 from the disposal in year 4 determined according to the realisation principle is taxed in the country other than Denmark at 30 per cent.

 

In years 1 and 2, the PAL tax is determined according to the inventory principle on gains from shares in the property company of 15 per year. In the country other than Denmark, no foreign tax has been paid on gains from the property. The tax account thus has a balance of 30 at the end of year 2.

 

In year 3, there is a loss. The PAL tax determined according to the inventory principle on the loss from shares in the property company is -3. In the country other than Denmark, no foreign tax has been paid on gains from the property. The tax account thus has a balance of 27 at the end of year 3.

 

In year 4, the PAL tax determined according to the inventory principle on gains from shares in the property company is 15. As an amount of 84 has been paid in foreign tax on the asset in year 4, PAL tax relief of 15 is granted. The maximum relief cannot exceed the actual PAL tax paid on the asset.

 

Of the remaining foreign tax paid (69), the tax account balance can be used for offsetting the amount of 27. This means that the person liable to taxation can be granted additional relief or have the amount of 27 disbursed.

 

The difference between 69 and 27 cannot be offset against other PAL tax or be disbursed. This is because the relief cannot exceed the proportional amount of the Danish PAL tax levied on the foreign income from the asset.

 

If the amount of 27 does not exceed the other PAL tax paid in year 4, the amount is offset against the other PAL tax. If, e.g., only 20 can be offset, the remaining 7 is disbursed.

 

On the shares in the property company, a total of 0 has been paid in PAL tax.