Denmark: Tax incentives, investments for North Sea hydrocarbons

Tax incentives, investments for North Sea hydrocarbons

The Ministry of Finance in Denmark on 27 March 2017 announced a political agreement has been reached concerning the framework agreement regarding investment incentives for the North Sea hydrocarbon activities. The draft law proposal has not been published.

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Tax incentives and provisions

A tax incentive “window” from 2017 to 2025 would apply to motivate investments in hydrocarbon infrastructure assets in the North Sea. The investment window includes the following:

  • The annual depreciation rate on the large assets would increase from a maximum of 15% to 20% (e.g., drilling rigs, production platforms, etc.).
  • The hydrocarbon Chapter 3A “uplift” would increase from 5% per year over a six-year period to 6.5% per year over a six-year period.
  • Currently, depreciation/uplift deductions can be initiated when the asset has been acquired, completed, and assembled to a state that it may be used in the operation according to its purpose. According to the agreement, the timing would be changed so that the depreciation/uplift would be available when payment has been made (likely, only available for new investments in the investment window period).
  • To provide for a balance between the hydrocarbon producers and the Danish government in instances of future increases in oil prices, a repayment obligation would apply. Companies choosing to take advantage of the investment window would be subject to a “windfall tax.” Starting in 2022, if the price per barrel increases to an average of U.S. $75 (2017 prices) or more over a year, an additional tax of 5% would be levied. If the average price increases to U.S. $85 (2017 prices) or more, the additional tax would be increased to 10%. The trigger prices would be adjusted at 2% per year from 2022. The windfall tax would be payable out of the profits from hydrocarbon activities before interest and tax (EBIT).
  • To keep track of the repayment obligation, a separate repayment balance would be required to be kept. When the investment window ceases in 2025, no further amounts would be added to the repayment balance. The repayment balance woud be inflated at a rate of 4.5% from 2022. If the repayment balance has not been repaid in 2037, the balance would cease (without being repaid). The windfall tax would be maximized to an amount equal to 20.1% of the investment expenses incurred in the years 2017-2025.
  • Anti-avoidance rules would be introduced so that for a buyer of a hydrocarbon activities take-over (succession), the seller's liability to pay the repayment balance and that restructurings could not eliminate the repayment balance. A joint liability for seller would also be introduced to satisfy payment of the repayment balance.

Third-party access

As part of the framework agreement, it is the intention to improve the third-party access to the central hydrocarbon infrastructure. Third-party access means that other companies (i.e., than the owners of the infrastructure) could have access to use the infrastructure (platforms, pipelines, etc.). Accordingly:

  • The pipeline law would be amended to make it more flexible to reserve capacity in the oil pipes. The tariff system would be amended so that operating expenses are calculated according to actual use; the capital costs would be calculated according to reserved capacity, etc.
  • The “underground law” would be amended so that the Danish Energy Agency is granted clear authority to insert conditions in approvals for expansions of facilities/developments of facilities to reserve capacity for third-party option to use the facility.
  • A number of other conditions would be made so that third-party access is made easier at reasonable terms.

© 2017 KPMG Acor Tax, a Danish limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

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