Denmark implements interest on indirect tax late payment

A new bill allows the Danish Tax Agency to impose interest on unreported VAT, special payroll tax (in Danish, “lønsumsafgift”) and excise duties, due to late registration. In 2022 the applicable interest rate is 8.4 % per year. Denmark has up until now not had a legal basis to charge interest on unreported or incorrectly reported indirect tax due to late registration. However, a new bill in force as of 15 June 2022 allows for interest on unsubmitted indirect tax filings. This bill will especially affect foreign companies which are unaware of their indirect tax obligations in Denmark.

Background

Danish legislation did not use to allow for late payment interest on correcting filings or late filings, even though resulting in a payment to the Danish Tax Agency. This did not use to be the case for late filings due to late registrations either. Interest in such cases would only be imposed 14 days after the Danish Tax Agency’s assessment of payable tax. Consequently, the period between the retrospective registration date (i.e. start of activity) and the assessment date did not use to be subject to interest.

This has provided companies the opportunity to take advantage of the lack of interest, by not reporting and paying their tax in a correctly or timely manner. The Danish Tax Ministry finds this to be unfair and has therefore issued this bill.

So what does this mean?

•  As of 15 June 2022, the bill will cover only the following scenarios:

1. The company registers on time, but files the first VAT return with delay, before the Danish Tax Agency make a preliminary tax assessment;
2. The company registers and files the first VAT return with delay.

Also, companies subject to limited VAT recovery, due to performing both VAT liable and VAT exempt activities, will be required to calculate their final pro rata and report additional payable VAT, if any, no later than 6 months after the end of the previous accounting year. Later corrections will lead to interest.

This bill will especially affect foreign companies which are unaware of their VAT obligations in Denmark. However, companies who deliberately have chosen not to register and pay VAT in Denmark based on the assumption that the economic risk is insignificant could also be affected by the implementation of interest. Consequently, the new bill should give foreign companies a higher incentive to be compliant in Denmark from day one, in order to avoid interest.

• At a later date (due to current IT challenges), the bill is expected to cover additional payable VAT as a result of audits and/or self-disclosures, as well. Interest might be imposed even for periods subject to ongoing audits. Consequently, such audits might lead to interest being applicable to longer periods, calculated as of the date when VAT was due.

The implementation of the new law will result in an increased need for companies, especially foreign companies, to ensure the correct VAT handling of transactions from the beginning of their economic activity, in order to avoid paying interest. Consequently, there is higher incentive to ask for binding rulings or at least advice with respect to uncertain topics.

Such topics may cover (not exhaustively):

• place of supply;
• party liable to pay VAT;
• transfer of going concern (TOGC);
• fixed establishment;
• VAT exemption or zero rate;
• transactions subject to high amounts;
• implementation of ERP systems.

Note that Danish legislation does allow for interest exonerations. However, historically, the Danish Tax Agency has rarely exploited this option, namely exempting taxpayers from interest. Consequently, we find it quite unlikely that this exemption will be highly used.

Overall, the new bill creates a higher incentive for companies to ensure compliance with indirect tax. In 2022, the interest rate is 8.4 % per year, calculated per each day of delay.

The current law has no transitional rules, meaning that the general 3-year statute of limitation seems to apply. In other words, interest will be calculated not only as of 15 June 2022, but also retroactively.

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