Deadline for filing company tax returns

In connection with SKAT's introduction of the new digital solution for filing company tax returns last year, SKAT extended the deadline date for filing company tax returns for the income year 2014 to 1 September 2015 (this date was later extended to 6 September 2015, however).

For the income year 2015, where the usual filing deadline is six months after the end of the income year, which means 30 June 2016 for most companies, SKAT has again – in line with last year – extended the deadline date to 1 September 2016.

In connection with the preparation of company tax returns for the income year 2015, we recommend that companies check whether their distribution of losses is correct.

The implications of the new Auditors Act for your company

Independence and impartiality. That is the purpose of the forthcoming amendments to the Danish Auditors Act, which will come into force on 17 June 2016 at the latest.

We see growing demands from politicians and the general public for transparency in the financial statements of companies. At the EU level, various rules have therefore been adopted to protect companies against conflicts of interest among consultants.

If you are a business manager, it means that you now need to consider how to organise and compose the external advisory services and decide who should provide them.

In addition to increased transparency, the new rules have been adopted to make sure companies obtain the best possible advice. In this context, corporate managements should take a close look at their panels of consultants in relation to the assignments that are solved externally by consultancies and business partners in the fields of bookkeeping, accounting, HR and payroll, coupled with legal assistance and audit services.

385 PIEs will be affected – initially

The draft Bill proposes that the so-called PIEs (Public-Interest Entities) should ensure independent audits by drawing a sharp line between the preparation of financial statements and the subsequent auditing process. The affected undertakings include, among others, listed companies, banks, insurance companies and mortgage credit institutions.

PIEs:

1. MUST rotate auditors every seven years;
2. ARE NOT ALLOWED to buy consultancy and audit services from the same audit firm;
3. MAY ONLY buy consultancy services from the appointed auditor for 70% of the total fees paid;
4. MAY ONLY buy tax advisory services of a minor nature from their auditor.

Why these changes, and how should a PIE deal with them?

Besides public transparency, impartiality and independence are, as mentioned, the primary reasons for the new rules. The purpose is to avoid the situations where the auditor both provides consultancy and subsequently acts as a reviewing body in relation to the very same financial statements. By pursuing such a practice, companies risk that any poor advisory services that may be provided will never be disclosed to the public.

The limit imposed on the percentage of consultancy services purchased from the auditor may, offhand, seem to be contradictory since the Bill has already established rules prohibiting companies from obtaining advice from the auditor. In practice, however, an audit will always involve some degree of advice – and, accordingly, consultancy services –, and in respect of the public-interest entities, this has therefore been solved by imposing a limit of 70% of the total fees paid.

The obligation to rotate audit firms is another way of ensuring that a company's financial statements are once in a while audited by fresh, unbiased eyes, rather than being assessed by the same audit firm for the 25^th consecutive year.

For a public-interest entity, it is therefore extremely important to consider whether the audit firm, according to the entity’s current practice, can be said to be independent – and maybe start identifying new possibilities of consultancy right away.

So far, only around 385 public-interest entities will be affected directly by the coming tightening in Danish legislation (source: Børsen).

What about the rest of us? What should we do?

It is true that legislation will primarily affect PIEs, but several experts predict that many other companies are going to follow although there is no statutory requirement at this point in time (source: Børsen). This means that the new Act could also have an impact on other forms of business entity, such as the public limited company (A/S) and the private limited company (ApS).

The new legislative amendments are in many ways a continuation and extension of the amendments to the Danish Auditors Act which came into force on 1 January 2013 and offered a wide range of relaxations of the rules governing public and private limited companies.

What is particularly interesting is the fact that, since 2013, reporting class B enterprises subject to an audit obligation have been able to opt for an ’extended review’ instead of an audit. As such an option has to be made at an annual general meeting and only applies as from the next following financial year, it is not until now that we are seeing the effects of this solution.

In an extended review, the auditor examines fewer items, and the solution may therefore be economically beneficial. The possibility of opting for an extended review is interesting for the businesses that do not require the additional security and “seal of approval” offered by an audit.

In common with outsourcing of functions in the administrative area, it is not only a professional, but also an attitudinal and strategic choice whether a business decides to opt for the review or the audit if the business belongs to the form of entity that has the option.

If you are subject to an audit obligation

If your business is subject to an audit obligation, but is not a PIE, you need not take any action at this point.

Nevertheless, if you would like to obtain independent consultancy services, you are free to make a distinction between audit services and consultancy services.

If your business is a reporting class B enterprise and meets certain criteria, you are entitled to opt for an extended review instead of an audit. The criteria that must be met are that the business is not allowed to exceed two of the following limits for two consecutive financial years:

• Revenue: DKK 89 million
• Balance sheet total: DKK 44 million
• Number of employees: 50

If you are not subject to an audit obligation

Small businesses still have the possibility of claiming exemption from the audit and extended review. To be eligible, these businesses are not allowed to exceed two of the following limits for two consecutive financial years:

• Revenue: DKK 8 million
• Balance sheet total: DKK 4 million
• Number of employees: 12

For many businesses, it is unnecessary to carry out the in-depth controls and inspections involved in an audit or extended review. For others, it is a good idea, especially if the business is planning a merger, acquisition or investment – or simply is going to take out a loan from the bank.

Whether the business should claim exemption from the audit and extended review is a decision to be taken by the board of directors and management, and here it is an advantage to seek advice from two or more sources.

If the business wants to exercise the possibility of audit exemption, it means that the business can choose to concentrate its purchases of financial reporting and consultancy services in one place and, thereby, avoid the cost of the extra work processes.

Facts

The draft Bill is based on various EU rules adopted by the European Parliament in April 2014. These are the rules that have to be implemented into Danish law by the coming summer.

Advice from Azets

At Azets, we provide advice in the fields of legal, HR and accounting services. We assist with legal challenges related to employment law, tax law and company law. We also provide advisory services and assistance with assignments related to VAT, company formation and other business changes.

Holiday pay obligation for executives

For companies, it is currently the peak season for preparation of annual reports. In this context, the following questions will pop up:
- Which method should be used to provide for holiday pay?
- Must holiday pay be provided for the company's chief executive officer?

As a general rule, we would recommend that provision for holiday pay be made in relation to the company's chief executive officer if he or she is entitled to paid holiday in accordance with the provisions of the Danish Holiday Act or is entitled to paid holiday under the executive contract. It will also be necessary to provide for holiday pay, however, if the chief executive usually takes his or her holiday in common with the other employees of the company. The same would apply if the chief executive is the principal shareholder in the company.

For tax purposes, the company is allowed to deduct the provision in the year during which its employees and chief executive accrue holiday entitlement. This is the most common method as the company would otherwise have to deduct the cost in the year when holiday is taken / holiday pay is paid.

Entrepreneur companies (IVS)

Set up in business by forming an entrepreneur company for 1 krone

If you are considering setting up your own business, you can choose to operate either as a sole proprietorship or in corporate form.

As a sole proprietor, you are personally liable for any losses that may be suffered by your business, but also for damages and other claims made against the business.

If you choose to form a company instead, it will in most cases be the company that becomes liable for losses. You will lose the value of the company's assets, but your personal property will often not be affected.

IVS is a miniature ApS

An IVS may be formed with a share capital of between DKK 1 and DKK 49,999. The entrepreneur company must subsequently build up its share capital by setting aside at least 25% of its annual profit until the share capital and a special reserve for the accumulated profits total DKK 50,000 combined. When this has been accomplished, the entrepreneur company may convert into a private limited company (ApS).

It is important to emphasise that an IVS is subject to exactly the same requirements for bookkeeping, financial reporting and tax accounts as most other companies. An IVS also falls within the scope of the Danish Companies Act.

Accordingly, the IVS must prepare annual financial statements in compliance with the financial reporting requirements of the Danish Financial Statements Act, which must be filed with the Danish Business Authority, and is also required to prepare a statement of its taxable income, which must be reported to SKAT. Filing  and reporting deadlines etc. are the same as those applying to other companies.

It is our experience that quite a few people are surprised to learn of the additional requirements imposed on the IVS compared to the rules applying to sole proprietorships. The arguments that are often advanced by company owners are that the company has little or no activity or that the work involved to meet the financial reporting requirement is disproportionate to the company's size or activity. It has to be made clear than none of the arguments qualify for exemption from the above-mentioned requirements.

We therefore recommend that all people planning to form an IVS should acquaint themselves with these requirements beforehand. Besides, it is often a good idea to seek professional assistance for solving the task relating to financial reporting etc. and pay the appropriate fee for such work.

Benefits of the entrepreneur company

Setting up a business in the form of an entrepreneur company rather than establishing a sole proprietorship offers the following benefits:

• Cheap and easy way to set up a business
• Your are liable only to the extent of your investment, protecting your personal property, if you are so unfortunate as to accumulate unsustainable debts in the company
• If you are two or more people wanting to set up in business together, the entrepreneur company provides a better framework than a partnership. In a partnership, all partners are jointly and severally liable for the business debt
• It is easier to invite new partners/shareholders to join a company

Drawbacks of the entrepreneur company

Setting up a business in the form of an entrepreneur company rather than establishing a sole proprietorship involves the following drawbacks:

• The IVS is burdened with more accounting requirements, and its financial statements have to be published
• Payment of dividends is not allowed until the built-up share capital has reached DKK 50,000
• As an individual person, you are not entitled to borrow money from the company
• Any loss incurred in the entrepreneur company is not deductible against your personal, or your spouse’s, taxable income
• Customers may demand that more security be provided in connection with purchases of goods

Assessment of private consumption

This section deals with various situations where private consumption is so low that it may form a basis for an increase.

Private consumption is defined as the amount available for spending after the rent/mortgage etc. has been paid. In other words, it is the income spent on food, beverages, holidays, household services, etc.

Low private consumption to support discretionary change in assessed income

Practice over the past decades has shown that SKAT is required to meet certain main requirements to give notice of and implement a discretionary change in the taxable entity's assessed income:

No matter whether a taxable entity in the form of a natural person is a self-employed earner, a principal shareholder, an employee or a claimant of social security benefits, SKAT is required to establish or prove on a balance of probabilities that the taxable entity's private consumption exceeds the private consumption that can be financed by the entity's taxable income on the tax return, taking into account any documented information about tax-exempt income and information about net assets.

Moreover, if a taxable entity in the form of a natural person is a self-employed earner or a principal shareholder, SKAT is also required to demonstrate and substantiate that the bookkeeping records and financial statements in the sole proprietorship or in the company are inadequate to such an extent that the bookkeeping records and financial statements may be disregarded as a basis for assessing the taxable income of the relevant taxable entity.

In the context of the duty to establish or prove on a balance of probabilities the taxable entity's private consumption for the income year(s) in which the assessed income has been changed, SKAT is also required to demonstrate the connection between the taxable entity's private consumption and the size of the taxable entity's private consumption for the preceding income year(s). However, only on condition that SKAT is able to provide the necessary information to assess the taxable entity's private consumption.

As a yardstick for a minimum acceptable private consumption, SKAT may then, alternatively, take into account the rates of net disposable income that are applicable to debt rescheduling arrangements in accordance with the civil law rules of the Danish Bankruptcy Act and the Danish Executive Order on Debt Rescheduling.

A discretionary change in the assessed income of a taxable entity in the form of a legal person (companies etc.) will in most cases be made in connection with a derived discretionary change of the taxable entity in the form of a natural person who is the principal shareholder of the company, and who is usually also the chief executive employed with the company, as the company's increased income is considered to have been paid, either as taxable concealed dividends to the principal shareholder or as additional taxable earned income, to the chief executive.

To be able to assess a private consumption in support of or as a basis for a discretionary change in the assessed income, SKAT may impose on any taxable natural person an obligation to present a net asset statement, the purpose of which is to provide information about net assets at the beginning and end of the income year as well as changes in net assets, including the main items of the person's private consumption. The net asset statement must include the person who, at the end of the income year, was the cohabiting spouse of the taxable entity. In regard to principal shareholders, the net asset statement must also provide information about significant economic agreements concluded in the income year between the company and the principal shareholder or his or her spouse.

Documentation requirement for trade in personal effects, family loan and gambling winnings

In cases where SKAT gives notice of a discretionary change in the assessed income and where such a measure is explained by a decision to disregard the financial records as a basis for assessment and by an insufficient private consumption, the taxable entity or the entity's adviser will often argue that the private consumption is sufficient on account of tax-exempt income from the purchase, sale and barter of personal effects, the tax-exempt portion of inheritance, gifts or gambling winnings, or on account of a tax-exempt increase in net assets in the form of a family loan.

The same documentation requirements apply to information about any aspects that may be of importance to private consumption as those applying to other information disclosed on the tax return. To provide documentary proof of any purchase, sale or barter of personal effects, the taxable entity will typically be required to present (external) receipts for the purchase, sale or barter deal, and to provide documentary proof of a family loan, the taxable entity will typically be required to prove that a loan document exists and that the loan was disbursed by the end of the relevant income year(s) in respect of which SKAT has assessed a low private consumption and before SKAT requested the submission of the financial records for investigation purposes.

If a taxable entity argues that an unacceptably low or negative private consumption in one or more income years is wholly or partially offset by gambling winnings, the taxable entity is required to prove not only that the entity obtained gambling winnings in the relevant year(s), but also that the entity obtained a net gain from gambling in the relevant year(s).

More detailed documentation requirements for information about tax-exempt income etc. depend on the importance of the information to the income assessment and SKAT's possibility of checking the information with an independent third party and, accordingly, depend on SKAT's estimate in the case at hand.

Exceptionally low private consumption as an independent basis for change after estimate

Practice has recognised that even if SKAT is not capable of establishing formal or actual errors, omissions or inadequacies in the taxable entity's bookkeeping and accounting records, SKAT will nevertheless be authorised to make a discretionary change in the assessed income if the taxable entity's private consumption is exceptionally low, including negative, in relation to the taxable entity's income on the tax return and changes in the entity's net assets during the income year.

Conclusion

Overall, it is important for us to emphasise that it is essential for any business to keep proper books of account and to have a proper cash function.

Besides, it is important that adequate documentation is available to prove any large-scale economic transactions in the family in the form of loans, inheritance, damages, gambling winnings, sale of furniture, etc.

Deadlines for filing tax returns

Deadlines for filing tax returns for employees

Personal tax information in the tax folder is collected as from 1 January. The information is stored in the folder continuously.

The tax assessment notice for 2015 will be ready as from 14 March 2016 if you are an employee, and it will be possible to enter changes to the tax assessment notice until 1 May 2016.

After 11 May, you may request a reopening of your tax assessment notice, for instance if you have forgot an entry on the form.

Deadlines for filing tax returns for self-employed earners

If you are a self-employed earner, you will receive a service letter instead of a tax assessment notice, in which you can enter any changes you may have. If you enter the changes before 31 March, the tax assessment notice will be generated shortly after that date. Self-employed earners can enter changes right up to 1 July, and the tax assessment notice will – usually – be generated immediately afterwards.

The 1 July deadline also applies to entities subject to limited tax liability, foreign income and persons involved in limited partnership projects.

If you are married to a self-employed earner, the deadline for filing your tax return will automatically also be 1 July.

Deductions and income you must usually check and correct:

• Deduction for wage costs in connection with household services (service deduction)
• Deduction for transport between home and work (commuting allowance)
• Shares and other securities
• You let a room or dwelling unit for part of the year
• Child support payments
• Meals and accommodation and separation allowance
• Work clothing, business literature, courses, etc.
• Maintenance payments to former spouse

Refund of electricity tax - new requirements for companies

As from 1 April 2016, to claim a refund of the electricity tax, the invoice from the electricity company is also required to contain information about the purchaser's current central business register (CVR) or tax registration (SE) number.

The purchaser is responsible for notifying its electricity supplier of its CVR number.

The same applies where a tenant purchases electricity from a landlord in connection with the annual reading of electricity consumption and calculation of electricity tax.

For more details, see the legal guidelines E.A.4.6.16.2 Dokumentation