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Denmark targets hybrid financing structures

Minister of Taxation Kristian Jensen issued a new Bill, which includes several significant changes to Danish Corporate Tax Act, on 13 December 2006. It is likely to be passed in the spring of 2007.

The most significant clause in Bill L110 is a new anti-avoidance provision that will target some hybrid debt structures between US and Danish companies. Section 2B would reclassify debt as equity if the debt:

· belongs to a Danish resident company or a permanent establishment;

· is payable to an affiliated company or individual resident in another country; and

· receives equity treatment in that other country.

Interest payments and capital losses on debt that is reclassified, will be treated as non-deductible dividends for Danish tax purposes. If the Bill passes parliament in its current form, the provision will take effect for interest payments and capital losses incurred on or after 13 December 2006.

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