New rules on taxation of activities in Denmark's Exclusive Economic Zone widen the Danish territorial taxing powers, and foreign companies and persons covered by the rules may thus incur limited tax liability in Denmark on income from these activities.
On 1 July 2023, new Danish tax legislation came into force concerning the tax levied on activities conducted by foreign companies and persons in Denmark's Exclusive Economic Zone (the Danish continental shelf).
Although the Danish government has just postponed the tender process for the energy island in the North Sea, the level of offshore activity along Denmark's coastline is still high, and following the broadening of the marine spatial plan agreed in the beginning of June 2023, the volume of activity is only expected to increase. A territorial widening of Denmark's taxing powers is therefore a natural consequence of the increasing level of activity on Danish territory.
The purpose of the new rules is to introduce a legal basis for taxing activities conducted by foreign non-resident companies and persons in Denmark's Exclusive Economic zone, i.e. outside the 12 nautical mile limit (corresponding to approx. 22 km). Earlier, Denmark had no powers to tax income deriving from activities carried out outside of the 12 nautical mile limit unless powers to tax the relevant resources in the relevant geographical area had been conferred under an international treaty or agreement, and unless Denmark had established a specific legal basis for doing so.
Under the new rules, foreign non-resident companies and persons carrying out activities in Denmark's Exclusive Economic Zone will have limited tax liability to Denmark. As a result, companies or persons must declare and pay tax on income derived from the activities conducted. Individuals carrying out personal work for an employer covered by the new rules will have limited tax liability to Denmark on their salary.
Activities fall within the scope of the new rules if the activities carried out by a company or a person involve the establishment, operation and utilisation of artificial islands, installations and facilities. "Activities" should be construed broadly but will include for instance the erection or dismantling of offshore wind turbines in a wind farm. It will also include the on-going operation, servicing or major replacement works of offshore wind turbines in a wind farm. Transporting CO2 to a storage facility may also be included.
Certain activities are exempt from taxation under the rules. For instance, the rules do not apply to activities concerning cables and pipelines that do not continue into Danish land or sea territory or are related to exploration or exploitation of the resources on the Danish continental shelf or the operation of artificial islands, installations and facilities on the Danish continental shelf.
The rules will impose on foreign non-resident companies and persons conducting offshore activities certain obligations when it comes to allocating income to a permanent establishment, intercompany trades and transfer pricing, employment taxation, VAT, etc.
Our highly specialised team of tax advisors have extensive experience in advising clients in the energy and offshore sectors. Feel free to contact us if you have any questions about the new rules.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
