© 2012 CORIT Hot topics in Finance Nordic Tax Conference 2012

© 2012 CORIT Agenda Overview of international tendencies on interest limitation rules (from thin cap to EBIT tests etc.), ACE-regimes and anti arbitrage rules. Introduction to Danish interest limitation and anti arbitrage rules on financing. Swedish rules on interest limitation and the Swedish view on arbitrage etc. Proposed Finnish interest limitation regime (apparently postponed). Reflections on international issues and wider impact.

© 2012 CORIT Overview of International Tendencies in Corporate finance

© 2012 CORIT Global overview Increasing use of interest limitation legislation – EBIT type legislation - Italy, Spain, Germany, Denmark – UK Arm’s length test and World Wide Debt Cap – Finland, Sweden, France France (proposal 2012) – Global cap on finance charges – Interest on loans generally is deductible for French corporate income tax purposes. Thin capitalization rules. – Deduction for interest on a loan obtained to acquire a participation in another company also may be disallowed in certain circumstances. – Proposal: Interest deductibility capped to 85% of their net amount as from fiscal year De minimis of EUR 3 million.

© 2012 CORIT Global overview Development in Allowance for Corporate Equity (ACE) regimes – Brazil (1996) - ”Juros sobre o Capital Próprio” (JCP). – Belgium (2005) – Notional Interest Deduction – Latvia (2009) – Italy (2011) (see next slide) – Presently considered in other jurisdictions

© 2012 CORIT Overview Italian NID regime (2011) Italy also (re-)introduced a Notional Interest Deduction regime on 22 December – “Aiuto alla Crescita Economica”. The deduction aims to encourage equity financing and create neutrality between Italian companies funded with equity and those funded with debt. ACE rules entitle Italian entities to a tax deduction computed by applying a notional yield to the increase in their net equity (the “ACE base”). The notional yield is fixed at 3% for fiscal years 2011, 2012 and – After 2013, the notional yield will be determined annually by a Ministerial decree based on the yields on Italian treasury bonds and could be increased by an additional 3% to compensate for higher business risk. Ministerial decree provides specific anti-avoidance rules.

© 2012 CORIT Global overview Increasing focus on mismatch arrangements – OECD and EU reports in 2012 EU: Public consultation on the double non-taxation of cross-border companies Public consultation – The public consultation covers cross-border double non-taxation of companies, i.e. cases where divergent national rules and/or inadequate national tax measures in two countries lead to non- taxation – Aim of the Consultation is to understand the full scale of the problem in order to develop the most appropriate policy response by end of 2012

© 2012 CORIT Global overview Staff working paper: The internal market: factual examples of double non-taxation cases – The working group have identified a number of issues where double on-taxation could occur. List is not to be considered exhaustive. Hybrid Entities Hybrid Instruments Use of Double Tax Treaties leading to double non-taxation TP and Unilateral APAs Transactions with associated enterprises in countries with no or extremely low taxation Debt financing of tax exempt income Disclosure

© 2012 CORIT Global overview OECD: Hybrid Mismatch Arrangements - Tax Policy and Compliance Issues – Published March 5, 2012 – No comprehensive data exists on the collective tax revenue loss caused by hybrid mismatch arrangements, anecdotal ”evidence” shows that amount at stakes are high – The report describes the most common types of hybrid mismatch arrangements, the effects they aim to achieve, the tax policy issues raised and the policy options to address them (focus on domestic law) The report does not address the tax treaty implications of hybrid mismatch arrangements (addressed by working party no. 1)

© 2012 CORIT Global overview Conclusions – Hybrid mismatch arrangements that might comply with the letter of the law but achieve double non-taxation generate significant policy issues in terms of revenue, competition, efficiency, fairness and transparency. – The same concern which exists in relation to double taxation exists in cases of unintended double non-taxation. – Specific and targeted rules hold significant potential to address certain hybrid mismatch arrangements and have recently been introduced by a limited number of countries. – Country experience with respect to the design, application and effects of such rules is positive. However, the application of the rules needs constant monitoring to ensure the rules are not circumvented. Recommendations – OECD recommends countries to: 1.Consider introducing/revising specific and targeted rules denying benefits in case of hybrid mismatch arrangements. 2.Continue sharing relevant intelligence on such arrangements. 3.Consider introducing/revising disclosure initiatives targeted at hybrid mismatch arrangements.

© 2012 CORIT Brief introduction to Danish interest limitation and Anti Arbitrage Rules on Financing

© 2012 CORIT Interest limitation rules Comprehensive Legislation Thin capitalization (sec. 11 of the CIT) – 1998 – Classic regulation Asset rule (sec. 11 B of the CIT) – 2007 – One of a kind EBIT rule (sec. 11 C of the CIT) – 2007 – Similar to the approach in Germany and Italy

© 2012 CORIT The Thin Capitalisation Test A corporation is thinly capitalized if the debt-to-equity ratio exceeds 4:1 at the end of an income year, provided that the controlled debt exceeds 10 MDKK. Interest expenses and capital losses regarding the controlled debt that should be converted to equity so the dept-to equity ratio is not exceeded, are not deductible. The thin capitalisation only applies to controlled debt to companies. The rules also include third party debt which is secured by a group company. If the company is able to substantiate that the financing is at arm’s length terms, the company will be allowed to deduct interest expenses even though the 4:1 ratio is exceeded. The thin capitalisation test shall be applied on a consolidated basis for Danish companies belonging to the same group.

© 2012 CORIT The Asset Test Under the asset test net financing expenses may be deducted only if the expenses do not exceed a standard rate of presently 3.5 per cent (2012) of the value of the tax base of certain qualifying assets. The value of the tax base consists of the depreciated value of the company’s assets. Assets, which are not depreciable, are included at the acquisition costs plus improvements. As a main rule, shares and claims are not part of the tax base according to the asset test. – Special rules applies to foreign shareholdings. The deductibility of net financing expenses up to DKK 21.3 million (2012) is not restricted by the asset test. The assets and the net financing expenses are considered on a consolidated basis for group companies.

© 2012 CORIT The EBIT Test Remaining interest payments which are deductible after the application of the thin capitalisation rules and the asset test may be restricted under an EBIT test. According to the EBIT-test, the deductible net financing expenses cannot exceed 80 % of the earnings before interest and tax. – I.e. interest above 80% of EBIT are restricted. As with the asset test, the EBIT test only applies if net financing expenses exceed DKK 21.3 million (2011). The net financing expenses and the EBIT should be considered on a consolidated basis for group companies.

© 2012 CORIT EBIT rule Comparative overview GermanyItalySpainDenmark CostNet financing costs Limit30 % of EBITDA (tax)30 % of EBITDA (accounting) 30 % of EBITDA (tax)80 % of EBIT (tax) NotesEUR 3 mio. de minimis Does not apply to non- group companies Does not apply if the debt/equity ratio does not exceed the groups debt/equity ratio Excessive EBIT base can be carried forward EUR 1 mio. de minimisDKK 21,3 mio. de minimis

© 2012 CORIT Danish Anti Arbitrage Provisions Interest payments between group companies – Limitation on interest deductibility in Denmark if the debt instrument is treated as equity in another jurisdiction (§ 2 B CIT). Inbound dividends – Participation exemption does not apply if dividends are deductible for the payor (§ 13 CIT). – Unless EU Parent Sub Directive applies.

© 2012 CORIT Reflections on International issues and wider impact of Interest Deduction limitation Rules

© 2012 CORIT Reflections….. EU law implications Wider implications – Uncertainty – Investment climate – Group financing vs. Third party financing – Harmonization

© 2012 CORIT JAKOB BUNDGAARD MANAGING DIRECTOR HONORARY PROFESSOR, M.SC., PH.D. CORIT ADVISORY P/S LYNGBY HOVEDGADE 17, 2. SAL 2800 KONGENS LYNGBY DENMARK P: E: