April 01, 2004 | By Keith Martin in Washington, DC

Denmark made several tax law changes to reduce its attractiveness as a base for offshore holding companies.

The changes are in legislation that the Danish parliament approved on March 30.  They are retroactive to tax years beginning on or after last January 1.

There are two main changes.  First, any Danish company that has a foreign parent company and is disregarded for tax purposes in the country where the parent company is located will also be disregarded for tax purposes in Denmark.  The effect is to deny deductions in Denmark for interest and royalties paid to the foreign parent company.  The change is targeted at holding companies owned by tax residents of other European Union countries or countries, like the United States, that have tax treaties with Denmark.  However, it does not apply to any Danish holding company that is treated as a partnership — rather than a disregarded entity — for US tax purposes, at least in cases where the interest or royalty payments it makes to its US parent are taxable in the United States.

Second, interest paid by Danish companies to shareholders in other countries will be subject to a 30% withholding tax.  However, the withholding tax does not apply to interest paid to shareholders in other European Union countries or in countries with tax treaties with Denmark, provided — in the case of a tax treaty — the parent company has owned at least 25% of the shares in the Danish company for at least a year.

Keith Martin