Yvette Lind is an assistant professor of tax law at Copenhagen Business School.
The author would like to thank Alice Pirlot, Maria Jose Schmidt-Kessen, and Jeroen Lammers for commenting on her text. Any errors are solely those of the author. The views expressed in this article are those of the author and do not necessarily reflect those of Copenhagen Business School.
In this article, the author examines how Denmark and Sweden have responded to the COVID-19 pandemic, focusing on their fiscal state aid packages, which, despite being markedly different overall, both feature
anti-tax-avoidance measures.
After initially focusing on the medical aspects of the coronavirus, many jurisdictions have begun instituting economic measures to mitigate the economic consequences of the pandemic and prepare for the financial crisis that will unavoidably follow in its wake. Because these solutions are still in their infancy, states have generally focused on short-term solutions such as offering various financial support packages to both individuals and companies for 2020 and 2021.1
EU member states must abide by EU law, including competition and state aid rules. This complicates matters at a time when states must be able to implement individual solutions that are tailored to their unique situation and overall COVID-19 response plan. Recognizing this dilemma, the European Commission introduced a temporary framework to enable member states to provide financial support related to COVID-19.2 Through the framework, which is based on article 107(3)(b) of the Treaty on the Functioning of the European Union and has already undergone at least one update,3 the EU hopes to help support the economy during and after the COVID-19 outbreak. The framework includes five types of aid that, for a limited period, the commission will deem compatible with the state aid rules and the internal market:
(1) advance payments, selective tax advantages, and direct grants from member states to taxpayers;
(2) member state guarantees of loans that banks provide to companies;
(3) subsidized public loans for companies;
(4) safeguards to help banks channel state aid to businesses in the real economy; and
(5) short-term credit insurance for member states.
This article examines the economic responses of both Denmark and Sweden to the COVID-19 crisis. Despite being closely connected in both geography and law, with their legal systems sharing many important characteristics, the two member states have taken different approaches to the pandemic. Denmark was among the first states to close both its borders and its society, with the government implementing far-reaching protocols on social distancing. Meanwhile, Sweden left its borders open and relied on its citizens’ common sense to limit transmission of the coronavirus. The two states have also reacted differently in terms of economic support measures, in part because of the conflicting approaches to social distancing. This article focuses on these differing approaches to state aid, particularly measures that the governments provide through the tax system. The highly debated Danish decision to exclude tax-evading companies from COVID-19 aid — a move that Sweden and several other states followed — is given particular attention.
Denmark’s COVID-19 State Aid Package
Denmark introduced its first support package relatively early, in part because the government had ordered most retailers, restaurants, and companies to close and most individuals to remain at home and, if possible, work from home. Denmark was also the first EU member state to ask the European Commission for a preliminary decision regarding COVID-19 state aid and, at least initially, submitted more state aid ruling requests to the commission than any other member state.4
Overview
Denmark’s latest support package, announced April 24 in connection with the plan to begin reopening society as of May 18, largely serves to expand previously announced financial aid to the business sector5:
The package extends a previously implemented compensation regime for fixed costs until July 8. Companies can receive compensation corresponding to 25 percent of their fixed costs if they satisfy a minimum revenue decline criteria (now set at a decline of 35 to 60 percent, previously 40 to 60 percent) and a minimum fixed cost criteria (now DKK 12,500 (about €1,650 or $1,800) over a three-month period; previously, DKK 25,000). Also, the latest package increased the ceiling for the maximum amount of compensation available in the fund by DKK 50 million, resulting in a fund of up to DKK 110 million. Finally, the package includes a safeguard addressing companies that were in a loss position before the pandemic hit.
Freelancers and the self-employed will be reimbursed for 90 percent of their lost income (an increase from the earlier 75 percent compensation rate), regardless of whether the lost income is the individual’s primary or secondary source of income. Self-employed individuals who were unable to keep their businesses open because of state prohibitions will be reimbursed for 100 percent of their lost income. Also, the maximum number of reimbursed employees or independent workers per company was raised from 10 to 25.
Small and medium-size enterprises can have the VAT that they already paid for 2019 and 2020 refunded in the form of an interest-free public loan.
For companies that are not liable to pay VAT but pay a salary fee — a special regime that often applies to dentists, physiotherapists, and cabdrivers — the package offers a postponed deadline for payments and the opportunity to have paid fees refunded as an interest-free public loan.
The ceiling on corporate tax prepayment accounts with the Danish Tax Agency is temporarily suspended. Companies can use these accounts to avoid negative interest rates on some bank accounts.
Payments from the tax credit scheme for the 2019 income year will be advanced in June instead of November. These advances will be particularly beneficial and help ensure liquidity for SMEs involved in research and development activity.
The regime includes an extraordinary funding boost of DKK 350 million for the Innovation Fund Denmark to further support SMEs and entrepreneurial companies involved in innovative activities.
Within the existing growth fund scheme, new state-funded lender match programs will help provide start-up capital.
Through a temporary guarantee program, the state will assume responsibility for some trade credit losses.
The state will contribute DKK 100 million in 2020 and an additional DKK 125 million in 2021 to create an export support regime to strengthen export companies and preserve Danish jobs.
Further, the Danish government is establishing a public crowdfunding platform that will work with existing private crowdfunding efforts to help them raise donations and reward-based contributions. The platform will be in place until the end of 2020, when it will be evaluated to ensure that competition is not distorted. Initially, the government set aside DKK 10 million to develop and operate the platform.
Exclusion of Tax Evaders
When it released its most recent support package, Denmark rather controversially announced that companies registered in tax havens would be excluded from the state aid programs. This inspired international debate and led other states — including France, the Netherlands, Poland, and Sweden, with the possible addition of Belgium and Germany6 — to follow suit. The European Commission has confirmed that this action is in accordance with state aid law since member states have the right to design state aid measures that uphold existing EU rules and advance established policy objectives, including combating tax fraud and preventing tax evasion. It said:
Member States are free to design national measures in line with additional policy objectives, such as further enabling the green and digital transformation of their economies or preventing fraud, tax evasion or aggressive tax avoidance.7
Notably, this simply means the aid complies with state aid rules and not necessarily with free movement law. Thus, these measures may still infringe upon, for instance, the free movement of capital or the freedom of establishment.
Denmark excludes three categories of companies from COVID-19 aid:
companies registered in tax havens;
companies that pay dividends during 2020 or 2021; and
companies that reacquire shares in 2020 or 2021.8
The bans on paying out dividends and the reacquisition of shares during 2020 and 2021 are compliant with the European Commission’s temporary COVID-19 state aid framework. Specifically, they qualify as safeguards aimed at avoiding undue distortions of competition in the single market.
In the text of the act, the government explains that paying appropriate taxes is a foundational requirement for receiving financial aid from the state — a type of social contract — and that both the U.N. guidelines on human rights and EU law support this view. Denmark uses the so-called EU blacklist of noncooperative tax jurisdictions as the basis for exclusion to further ensure compliance with EU law.9 This rule assumes that a company located in a tax haven is registered there in order to avoid taxation — which may not always be true since there may be other (legitimate) reasons for the choice. This is one apparent weakness in Denmark’s regulation. Using arbitrary evidence of tax evasion to exclude an entity from the COVID-19 aid package is legally problematic; even before the pandemic, it was difficult to determine when there was an actual case of tax evasion.
Unlike its Polish counterpart,10 Denmark’s regime has no safeguards that would allow companies to redomicile within a specific time frame to be eligible for COVID-19 aid. Thus, absent a change in law, affected companies are permanently excluded from COVID-19 aid.
Denmark has promised to respect its international agreements, including tax treaties. Therefore, two of the states on the tax haven blacklist — Samoa and Vanuatu — are exempt from the exclusion because they have tax treaties with Denmark.11 However, when applying for COVID-19 aid, companies in those jurisdictions must submit a sworn statement attesting to having paid taxes in accordance with the laws of the residence state and the tax treaty. In practice, only 10 states are excluded from Denmark’s aid package: American Samoa, the Cayman Islands, Fiji, Guam, Oman, Palau, Panama, Seychelles, Trinidad and Tobago, and the U.S. Virgin Islands.
The Danish regulation establishing the exclusion is rather simplistic, and there has been little technical elaboration. It is reasonable to assume that it will eventually be clarified. One item that needs clarification is the registration criteria. Does it include subsidiaries, branches, or permanent establishments in an excluded jurisdiction? Further clarification will not only ensure legal certainty, but reveal whether Denmark is sincere in its stated intent to use the exclusion to combat tax evasion. Some 70 corporations are registered in the 10 states included in the Danish exemption. These corporations have, in turn, approximately 230 subsidiaries and other related entities that are physically located in Denmark.12
After a few weeks, it became clear that the exemption regulation only applied to companies who directly owned a Danish subsidiary, thus reducing the amount of affected companies from 70 to 19.13 This clearly illustrates the inefficiency of the exemption regulation from both a fiscal and a legal perspective.
Sweden’s COVID-19 State Aid Package
Overview
In mid-March Sweden began enacting economic measures targeting individuals and companies that are suffering as a result of
COVID-19.14 Because the government could make adjustments to temporary legislation that it enacted during the 2008 financial crisis, it could respond rapidly to some concerns.15 Other measures will be subject to the ordinary legislative process. Several proposals that were made in the last couple of months will become effective in July at the earliest, given Sweden’s lengthy legislative process and its plan to refer its state aid measures to the European Commission for approval. However, some of the proposed measures will have a retroactive effect.
Sweden’s COVID-19 plan includes16:
Compensation for turnover losses aimed at helping businesses reorient and adapt their activities in light of the crisis — for example, shifting production to focus on necessary healthcare items or adapting a restaurant to focus on takeaway. The plan calls for determining the support based on the individual company’s turnover loss (excluding wage costs in March and April 2020), and the amount will vary between 22.5 and 75 percent. A business must have had a turnover of SEK 250,000 (about €23,300 or $26,000) in the last financial year and a loss of at least 30 percent to be eligible. The loss is calculated by comparing turnover in March and April 2019 to that in March and April of this year.
Employer-deferred tax payments that are reported monthly or quarterly (such as income tax withholdings, social security contributions, and VAT) for the accounting periods from January through September for up to three months. This relief can be retroactively applied, and companies that paid into their tax accounts from January to March can receive a repayment from the Swedish Tax Agency. Companies that mismanage their finances, are otherwise unethical, or have large tax debts are ineligible.
A temporary reduction of employers’ social security contributions from March 1 to June 30, although employers must pay old age pension contributions during this period. The reduction is expected to apply to up to 30 employees per company and to that the portion of the employee’s wage that does not exceed SEK 25,000 per month, for a tax relief of up to SEK 5,300 per employee monthly. The government says this measure will reduce the number of employees who are dismissed during the crisis.
A public loan guarantee program (with the guarantees issued to companies via commercial banks) that primarily targets SMEs, although larger companies can take part since the government has not included any formal size limit for participants. However, a cap of SEK 75 million per company has been proposed. A company must have suffered financially because of COVID-19 to participate. The government has said that the public loans may not be use to fund bonuses, variable remuneration for senior management, or profit distribution beyond what is comparable to regular salary withdrawals. These loans are subject to interest at bank-determined rates, but companies can defer paying interest on them for the first 12 months.17
Exclusion of Tax Evaders
Several of the proposed measures include conditions that refer to tax compliance and making tax payments in Sweden. The Ministry of Finance stated:
respite will not be granted to companies that mismanage their finances or are in some other way considered unethical. Nor will any relief be granted to companies that have large tax debts.18
The government does not elaborate on this point in the legislative proposal or the preparatory materials, possibly because of its attempt to respond quickly to the pandemic. It is difficult to foresee to what extent it will be enforced. Several questions arise, such as:
Will the determination that finances have been mismanaged be based on existing accounting standards, or will other guidelines be adopted?
Will the Swedish Tax Agency be responsible for monitoring the tax compliance of companies applying for state aid? Again, what standards will apply? How will legal certainty be preserved?
In this context, what constitutes large tax debts? Normally, the Swedish Tax Agency enforces corporate tax debts surpassing SEK 10,000 — that is, it forwards these debts to the Swedish Enforcement Authority for collection.19 It is difficult to imagine that this will be the threshold for refusing COVID-19 state aid since these companies are already struggling financially. Either the government or the Swedish Tax Agency should provide further guidance on this point if it is to be a component of the final legislation. The Swedish Tax Agency’s general practice is to review each case on an individual basis. If it appears probable that the applicant will not be able to continue his business or will terminate it without paying all debts, there may be reason to refuse COVID-19 aid.
Sweden has also announced that it will limit access to state aid in a manner similar to Denmark, and exclude companies registered in tax havens.20 The government has provided little information on this point, stating only:
Businesses and organisations that have
F-tax [Swedish preliminary tax paid by the business operator] will be eligible to apply for the support, which will be paid via the Swedish Tax Agency. The support will not be paid to businesses that are resident in a tax haven.
If that is interpreted literally — as is often the case under the tradition of positive law, a doctrine that has a stronghold in Swedish tax scholarship — only companies that are registered for tax purposes in Sweden would be eligible for
COVID-19 state aid measures. Normally this could be problematic for several reasons, including being considered discriminatory tax treatment and selective state aid, but these are extraordinary times and it may be permissible considering the European Commission’s temporary state aid framework. The justification might be in line with the upholding of policy objectives such as combating tax fraud and tax evasion.
In Sweden the term “tax haven” normally refers solely to jurisdictions on the EU blacklist, and the rule could be applied in a manner similar to the Danish model. This would be preferable from an EU law perspective because it would legitimize the exclusion of tax-evading companies. Furthermore, Sweden will exclude companies listed on the OECD’s list of uncooperative tax havens or the EU’s blacklist.21 This action would expand the exemption with additional tax jurisdictions. The exemption regarding the EU and OECD lists was not explicitly mentioned in the legislative proposal that is currently processed. In any case, the exclusion badly needs elaboration — that is, assuming Sweden plans to follow through and apply it in practice once the proposed state aid measures take effect.
As discussed in the previous subsection, the Swedish government has also stated that it:
expects that the guaranteed loans will not be used for bonuses or variable remuneration to senior management, or for profit distribution other than what is comparable with regular salary withdrawals.22
The prohibition on paying dividends is in line with discussions in other states and the Danish regulation. However, there has been a debate in Sweden about the favorable tax treatment of dividends versus salaries, including how businesses take advantage of tax rules for close companies. The debate has intensified with the government’s effort to include this rule in the legislative text. Notably, the Swedish Council on Legislation (Lagrådet) criticized the provision in its review of the proposed COVID-19 aid rules.23 Ultimately, the provision is a potential game-changer with repercussions far beyond COVID-19 tax relief.
The Swedish Agency for Economic and Regional Growth further clarified that, regarding short-term layoffs, companies providing group contributions would also be exempted because such companies cannot be considered to have financial difficulties that would make them eligible for aid.24
Finally, while plans for future COVID-19 state aid make their way through the legislative process, the Swedish government has begun a formal investigation into potential fraud in connection with the receipt of COVID-19 financial aid and solutions to reduce this criminal activity.25 This illustrates the fact that Sweden has focused less on implementing extensive financial support packages like those in other states and instead has seemed to concentrate on excluding parties from aid under the pretense of tax compliance. Not surprisingly, the investigation has been criticized by the general public and the Confederation of Swedish Enterprise, a major employers’ organization.
Conclusion
Sweden and Denmark have taken markedly different approaches to handling the pandemic, with Denmark locking down and implementing strict social distancing measures early while Sweden relied on herd immunity and the common sense of its citizens. This explains why Denmark had to enact various state aid measures relatively early while Sweden is still processing its economic response. Denmark has also instituted state aid measures that are more generous and far-reaching than those that have been proposed by the Swedish government (at least thus far).
However, despite the differences between the two states, both have decided to implement
anti-tax-evasion agendas.
Denmark has relied on existing EU law provisions — namely the EU tax haven blacklist — and global political discourse. Sweden’s approach rests on much vaguer criteria, such as “managing finances,” the existence of “large tax debts,” and the use of funds for “profit distribution,” along with possibly requiring registration for full taxation in Sweden. But neither state can claim the tax is complete, even putting aside the possibility that more aid will be needed. Both states must take steps to more clearly delineate their rules excluding tax-evading companies from COVID-19 aid to ensure that these provisions remain applicable and adhere to the principle of legal certainty.
FOOTNOTES
1 OECD, “Tax and Fiscal Policy in Response to the Coronavirus Crisis: Strengthening Confidence and Resilience” (Apr. 18, 2020).
2 European Commission, “State Aid: Commission Adopts Temporary Framework to Enable Member States to Further Support the Economy in the COVID-19 Outbreak,” IP/20/496 (Mar. 19, 2020); European Commission, “Temporary Framework for State Aid Measures to Support the Economy in the Current COVID-19 Outbreak,” C(2020) 1863 final (Mar. 19, 2020); and European Commission, “Coordinated Economic Response to the COVID-19 Outbreak,” COM(2020) 112 final (Mar. 13, 2020).
3 European Commission, “Amendment to the Temporary Framework for State Aid Measures to Support the Economy in the Current
COVID-19 Outbreak,” C(2020) 2215 final (Apr. 3, 2020).
4 See European Commission, “State Aid SA.56685 (2020/N), DK — Compensation Scheme for Cancellation of Events Related to COVID-19 State Aid,” C(2020) 1698 final (Mar. 12, 2020); and European Commission, ”State Aid: Commission Approves €12 Million Danish Scheme to Compensate Damages Caused by Cancellations of Large Public Events Due to COVID-19 Outbreak,” IP/20/454 (Mar. 12, 2020).
5 See “Aftale om Hjælpepakker til Lønmodtagere og Virksomheder Mv. i Forbindelse med Gradvis Genåbning af Danmark” (“Agreement on COVID-19 State Aid Package for Employees and Companies Etc. in Connection With the Gradual Reopening of Denmark”) (Apr. 18, 2020). For more information, see the official press release from the Danish government: “Enige om at Justere og Udvide Hjælpepakker til Dansk Økonomi” (“Unity in Adjusting and Expanding COVID-19 State Aid Package”) (Apr. 24, 2020).
6 See, e.g., Victor Mallet, “France Rules Out Coronavirus Aid for Tax-Haven Businesses,” Financial Times, Apr. 23, 2020. The Polish government’s statements on the “protective shield” include the exclusion of companies registered in tax havens. Sarah Paez, “U.K. Groups Don’t Want COVID-19 Relief for Companies in Tax Havens,” Tax Notes Today Int’l, May 13, 2020.
7 European Commission, “State Aid: Commission Expands Temporary Framework to Recapitalisation and Subordinated Debt Measures to Further Support the Economy in the Context of the Coronavirus Outbreak,” IP/20/838 (May 8, 2020).
8 See “Aftale om Hjælpepakker,” supra note 5.
9 Council of the European Union, “Taxation: EU List of Non-Cooperative Jurisdictions” (last updated May 11, 2020).
10 See Jan Stojaspal, “Poland Eases Ownership Condition for Virus Aid to Companies,” Bloomberg, Apr. 30, 2020.
11 BKI nr 11 af 17/03/2012 Bekendtgørelse af Aftale af 16. December 2009 Mellem Danmark og Samoa om Oplysninger i Skattesager samt BKI nr 1 af 15/01/2017 Bekendtgørelse af Aftale af 13. Oktober 2010 Mellem Danmark og Vanuatu om Oplysninger i Skattesager (“Danish Implementation of the Double Taxation Treaties Between Denmark and Samoa in Addition to the One Between Denmark and Vanuatu”).
12 Based on the preliminary findings of Rasmus Corlin Christensen and Javier Garcia-Bernardo using the Bureau van Dijk’s ORBIS database.
13 Emil Ellesoe Ditzel and Niels Lykke Moller, “Regeringen vil Bekaempe Skattely, Men Reglerne Omfatter kun 19 Vikrsomheder i Danmark,” Tv2 Danmark, May 21, 2020 (in Danish).
14 Extra ändringsbudget för 2020 — Åtgärder med Anledning av Coronaviruset (“Extra Amending Budget for 2020 Concerning Financial Measures Related to Coronavirus”), Prop. 2019/20:132. For an illustrated timeline of the planned Swedish response, see Swedish Ministry of Finance, “Economic Measures in Response to COVID-19” (last updated May 12, 2020).
15 See 2009:99 om anstånd med inbetalning av skatt i vissa fall (“Swedish Legislation Covering Deferred Payment of Taxes in Some Cases”).
16 Extra ändringsbudget för 2020, at 52ff. and supplement 6, section 5a.
17 Swedish Ministry of Enterprise and Innovation and MOF, “Proposed Central Government Loan Guarantee Programme for Small and Medium-Sized Enterprises” (May 9, 2020).
18 Swedish MOF, “Crisis Package for Swedish Businesses and Jobs” (Mar. 16, 2020).
19 Skatteverket, “Om Företaget har Underskott på Skattekontot” (“Swedish Tax Agency Guidance to Companies That Have a Deficit in the Tax Account”) (May 10, 2020).
20 Swedish MOF, “Businesses to Receive Support Based on Loss of Turnover” (Apr. 30, 2020).
21 Swedish Ministry of Finance, ”Förslaget på Omställningsstöd Skickas på Remiss” (May 15, 2020).
22 Swedish Ministry of Enterprise and Innovation and MOF, supra note 17; and Lotta Engzell-Larsson, “Företagen har Rätt i sin Kritik av Stöd” (“Swedish Companies Are Entitled in Their Critique of COVID-19 State Aid”), Dagens Industri, Mar. 18, 2020 (in Swedish).
23 See Lagrådet, Utdrag ur protokoll vid sammanträde 2020-05-10 (May 10, 2020) (protocol from the group’s assembly).
24 Swedish Agency for Economic and Regional Growth, “Korttidsarbete: Förtydligande om Utdelningar” (May 18, 2020).
25 Swedish Ministry of Justice, “Utredare ska Föreslå Åtgärder mot Coronarelaterad Brottslighet” (“Investigators Shall Suggest Measures Against Corona-Related Fraud”) (May 7, 2020).
END FOOTNOTES