Fixed-cost compensation during the Covid-19 pandemic

As a business owner you may now apply for temporary fixed-cost compensation. In order to apply for the compensation, your business must have experienced a fall in turnover of more than 35% as a result of the Covid-19 pandemic.

Businesses covered by the scheme

All businesses established no later than 9 March 2020 and having generated a turnover prior to the pandemic are covered by this compensation scheme.

You may apply for this kind of compensation if your fixed costs amount to at least DKK 12,500 for the period in question.

How to assess your loss of turnover

Your business must make an assessment of its expected loss of turnover from 9 March to 8 June 2020. The assessment of the fall in turnover must be compared to the turnover generated during a comparable reference period. The expected turnover and the turnover of the comparable period must be assessed in accordance with your company’s general accounting practice

• Overall, the reference period runs from 1 April to 30 June 2019
• Yet, if your business did not generate any turnover during that period, the period from 1 December 2019 to 29 February 2020 may be used as such reference period

For newly established businesses, there will be another comparable reference period, but for growth businesses as an example, there are no special rules. However, such businesses may file an application based on the past three months accompanied by factual arguments of why this period gives a more accurate picture.

An application usually covers the entire period and so becomes an “average”. Businesses subject to the lock-down order may, however, split their application so that one part covers the actual lock-down period and the other part the remaining period.

The fall in turnover is to be measured for each individual CVR number (each business). This applies irrespective of whether the CVR number (the business) carries out one or several business activities.

The calculation of fixed-cost compensation is as follows:

• 80% - if you have experienced a loss in turnover of 80 to100%
• 50% - if you have experienced a loss in turnover of 60 to 80%
• 25% - if you have experienced a loss in turnover of 35 to 60%
• Businesses having been subject to an ordered complete lock-down will be fully (100%) compensated for their fixed costs.

Example:

Business A expects a turnover of DKK 1 million for the period 9 March to 8 June 2020 as opposed to a realised amount of DKK 2 million for the period 1 April to 30 June 2019. The expected fall in turnover may therefore be assessed at 50% corresponding to a fixed-cost compensation of 25%. The expected fixed costs for the period 9 March to 8 June (based on the period 1 December 2019 to 29 February 2020) amount to DKK 0.4 million, for which reason an application may be filed for compensation corresponding to 25% of DKK 0.4 million = DKK 0.1 million.

How to assess your fixed costs

The business must provide details on the fixed costs actually incurred during the period 1 December 2019 to 29 February 2020 and on the fixed costs it expects to incur during the period 9 March to 8 June 2020.

Please note that the duration of the compensation has been extended by one month and that you will have to file a separate application for compensation covering the period 9 June to 8 July 2020.

The Danish Business Authority will then pay out compensation corresponding to part of the fixed costs expected to be incurred by the business.

Fixed costs are defined as “costs that do not vary according to the sale or production of the business.”. Consequently, fixed costs do not rely on the turnover of the business.

Costs are always subject to a specific assessment and must be calculated in accordance with the general accounting practice of the business. A cost may in some cases be a fixed cost and in others a variable.

The following list is not a comprehensive one.

Examples of costs covered are:

• Rent
• Rental and leasing costs
• Depreciation and amortisation of tangible and intangible assets (yet not depreciation or amortisation of revaluations)
• Current necessary maintenance of property, plant and equipment
• Costs relating to electricity and heating
• Property taxes
• Licences for the use of software, etc.
• Subscriptions (including insurance)
• Audit, etc. of the financial statements
• Interest expenses and charges, including fee rates in connection with mortgage credit

Examples of variable and fixed costs not covered are:

• Cost of goods sold
• Wage/salary (regular pay covered by other arrangements)
• Sales and marketing costs
• Shipping costs
• Write-down, including write-down on
  a. intangible assets such as goodwill
  b. property, plant and equipment
  c. inventory
• Bad debts
• Provisions
• Value adjustments of financial assets and liabilities (realised and unrealised)
• Costs related to the provision of equity
• Income taxes

The application must include a fixed-cost statement covering the three preceding months of the business furnished with an auditor’s report.

The business must also state whether it has realised an operating loss. The details covering a potential operating loss must relate to the most recent result or financial statements with balance sheet date at 28 February 2019 or later. If the result of the business is negative, the fixed-cost compensation to be paid to the business will be reduced. The reduction will be based on the same percentage as that of the fixed-cost compensation but not exceed 50%. This will ensure that businesses having incurred a loss before the Covid-19 pandemic do not become better off merely as a result of the compensation. However, adjustments will have to be made for losses incurred as a result of extraordinary circumstances (e.g. climate investments, energy efficiency, extraordinary growth or use of resources).

As for size, the compensation amount may not exceed the nominal fall in turnover or account for more than DKK 110 million per business during the period in question. If the business is paid compensation amounting to more than DKK 60 million and files an application covering the extra month, the business will not be entitled to pay out dividends or buy back shares for the income years 2020 and 2021.

Readjustment due to a fall in turnover and actual costs

The paid-out compensation will be readjusted if the business experiences a lower or higher turnover than the one listed in its application for compensation.

The readjustment is made in accordance with the intervals indicated above.

Finally, the business is required to report its actual fixed costs after expiry of the compensation period in question. If the costs have been higher or lower than the actual costs reported in connection with the application, the compensation will be subject to a readjustment.

Contact

Valby: +45 3345 1000 | Odense: +45 6613 0730 | Mail: info@bakertilly.dk

Q&A (updated on 20/04/2020)

1.

Q: Is the primary objective of the business decisive for the payment of compensation? Will a franchisor as an example be subject to the ordered close-down?

A: Compensation for the “ordered” close-down (100%) appears from the “positive list” and is therefore not subject to free interpretation. Example: The turnover of a franchisee falls, for which reason costs will not have to be settled with the franchisor.If the franchisor has costs relating to rent, etc., he or she will have to recognise the loss of turnover incurred in his or her financial statements and not take the objective of the franchisee into account.

2.

Q: Which businesses may be fully (100%) compensated for their fixed costs?

A: In order to be paid full compensation, the business will have to provide documentation of having realised no turnover and must be covered by (and listed in) the executive order (https://www.retsinformation.dk/Forms/R0710.aspx?id=213485)

3.

Q: Which businesses may be compensated for their fixed costs?

A: The compensation package covers:

• All businesses (private-law legal persons) listed in the Danish Central Business Register (CVR) before 9 March 2020. The payment of compensation is based on the registration of the individual business/its CVR number irrespective of whether the business carries out one or more business activities. It is not possible for affiliated entities to file a single application covering the group as a whole.
• All businesses which prior to filing their application have realised a turnover.
• Associations, foundations and self-governing institutions are covered by the rescue package if less than half of their ordinary operating expenses are financed by means of public grants.

The compensation package does not cover public administrative bodies, including governmental authorities, self-governing institutions funded by the state, municipalities, regions and institutions where governmental, regional or municipal grants account for more than half of the operating costs and areexpectedto continue accounting for half or more of the ordinary operating costs.

4.

Q: How is the business to calculate its expected loss of turnover for the period and its costs incurred?

A: The expected turnover and costs incurred must be calculated in accordance with the general accounting policies of the business.

5.

Q: Is there a max compensation?

A: The max compensation to be paid is DKK 100 million or what corresponds to the loss of turnover. If the business is paid compensation amounting to more than DKK 60 million and files an application covering the extra month, the business will not be entitled to pay out dividends or buy back shares for the income years 2020 and 2021.

6.

Q: Will interest charged in connection with overdraft facilities/group financing be covered by the compensation package?

A: Yes. Interest on loans does form part of fixed costs, including fee rates in connection with mortgage credit.

7.

Q: Which costs may be included as fixed costs?

A: The below are examples of fixed costs covered. The following list is not a comprehensive one, and costs will not be covered to the extent that they are based on the turnover of the business in question:

1. Rent
2. Rental and leasing costs
3. Depreciation and amortisation of tangible and intangible assets
4. Current necessary maintenance of property, plant and equipment
5. Costs relating to electricity and heating
6. Property taxes
7. Licences for the use of software, etc.
8. Subscriptions (including insurance)
9. Audit, etc. of the financial statements
10. Interest expenses and charges, including fee rates in connection with mortgage credit.

8.

Q: Other fixed costs, what do they comprise?

A: All other costs (not mentioned above) and which do not relate to the sale, production and distribution of the business and which the business is to cover although it does not generate any turnover for the period. Below is a list of examples relating to variable costs not covered by the compensation package.

9.

Q: How are deductions related to leasing contracts assessed?

A: An example of how to incorporate a leasing contract: As amortisation or depreciation is comprised by the definition of fixed costs, the business is not to include the leasing payment in its statement of fixed costs if it has already incorporated the leasing assets in its balance sheet (financial leasing).The leasing obligation is compensated for via amortisation, depreciation and interest expenses. If the business recognises the leasing obligations as expenses (operational leasing), the leasing obligations will form part of fixed costs.

10.

Q: Which costs are not covered?

A: Below are some examples of variable costs not covered by the compensation package. The list is not a comprehensive one and further specifications covering zoos may be determined to ensure the welfare and well-being of the animals.

1. Cost of goods sold
2. Wage/salary (regular pay covered by other arrangements)
3. Sales and marketing costs
4. Shipping costs

Examples of costs which are neither variable nor fixed and which will not be covered by the compensation package. The following list is not a comprehensive one:

1. Write-down, including write-down on
   1. intangible assets such as goodwill
   2. property, plant and equipment
   3. inventory
2. Bad debts
3. Provisions
4. Value adjustments of financial assets and liabilities (realised and unrealised)
5. Costs related to the provision of equity
6. Income taxes

11.

Q: May new agreements on say sale and lease-back form part of the fixed-cost statement?

A: Agreements concluded before March are generally expected to form part of the compensation package whereas speculations in terms of a conversion of costs are not as documentation of the costs incurred in preceding months must be provided.

12.

Q: Rent is subject to full compensation for restaurants closed as a result of the executive order. However, if a restaurant continues as a take-away restaurant, will the compensation then amount to max80%?

A: In order to be fully compensated, the business will be required to provide documentation of having generated no turnover during the period of the ordered close-down. If a restaurant decides to establish a take-away service, this will generate a certain turnover, for which reason it will not be fully closed down and therefore not entitled to full compensation of its fixed costs.

13.

Q: Will the compensation be paid out up front for the entire period?

A: The compensation is expected to be paid out up front for the entire period due to the requirement of repayment and subsequent adjustment.

14.

Q: Can I file an application for the entire period from 8 March to (July 2020) now that the period has been extended?

A: No. You will have to file a separate application for the period 9 June to 8 July 2020.