## cr18178

## Source details

**Canonical URL:** [cr18178](https://www.imf.org/-/media/files/publications/cr/2018/cr18178.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2018/cr18178.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2018/cr18178.pdf.json)

---

### Dynamics of Gross Fixed Capital Formation (GFCF)
- Real GFCF dropped by 20 percent over 2007–10.
- As a share of GDP, investment declined by 5.4 percent during 2007–10 and remains about 3 percent of GDP lower relative to its pre-crisis level.
- Total investment peaked at 24 percent of GDP before the crisis and dropped to 18 percent of GDP in 2010.
- The post-GFC investment recovery was insufficient to compensate for GFC losses, producing a downward level shift in GFCF.
- The decline in the nominal GFCF-to-GDP ratio is more pronounced than the decline in the real GFCF-to-GDP ratio, indicating a role for declining relative investment prices; nevertheless, the real ratio decline in Denmark remains rapid compared with peers.
- Asset-class decomposition: almost all asset classes declined post-GFC except investment in intellectual property products.
- Institutional sectors: decline mainly driven by the private sector; public sector investment expanded and partially offset the private-sector decline.

### Macroeconomic implications of weak investment
- Labor productivity and capital contribution:
  - Labor productivity slowed from close to 2 percent in 2010 to close to 0 percent in 2016.
  - Contributions from the capital-to-labor ratio fell from 0.7 percent in 2010 to -0.3 percent in 2016.
  - Production function relation used: Y/L = A*(K/L)^α.
- Current account surplus dynamics:
  - CAB rose from less than 2 percent of GDP in 2007 to 8 percent of GDP in 2016.
  - Both savings and investment declined after the GFC, but savings recovered and surpassed their pre-crisis peak by 2016 while investment recovery remained sluggish.

### Empirical approach and main accelerator-model findings
- Empirical strategy: baseline accelerator model (12 quarterly lags of output) and augmented accelerator models with additional controls (leverage, price markups, PMR, economic policy uncertainty).
- Baseline accelerator (quarterly, 1998–2016; Newey-West):
  - Observations: 76
  - R-squared: 0.476
  - Sum of βs: 1.475
  - Standard error (sum of βs): 0.625
  - t-stat (sum of βs): 2.360
  - α = -14.76
  - δ = 0.02***
  - Residuals: persistently negative following the GFC (GFCF fell beyond level explained by output); more recently residual converged to zero.
  - Cross-country: unexplained negative component particularly pronounced in Denmark among 9 EU peers.
- Sectoral/category baseline:
  - Residual negative post-GFC through 2016 in most sectors; exception: “financial and insurance activities” with a positive large residual.
  - Category-level: negative residuals for many categories; positive spike in “communications equipment” in 2014–15.
- Augmented accelerator (panel regressions OECD countries, annual 1999–2016, fixed effects, 3 lags of output):
  - Selected estimates (Table 2 verbatim):
    - Coefficient on lagged output sum: 0.57***
    - Coefficient on Leverage (non-financial corporations): 0.21***
    - Coefficient on Change in PMR index: 0.36***
    - Coefficient on Markup indicator: -43.71*
    - Coefficient on Uncertainty index (EU-level): -2.10**
    - α (constant): 27.28
    - Observations: 283
    - R-squared: 0.87
    - Sum of βs: 1.720
    - Standard error (sum of βs): 0.194
    - t-stat (sum of βs): 8.849
  - Interpretation: lagged output significant; non-financial corporate leverage has a negative and significant effect on investment; higher markups (lower competition) and greater policy uncertainty have significant negative effects. PMR impact insignificant in the panel (possible low variability/reverse causality).

### Leverage, tipping point analysis, and long-run investment
- Historical leverage:
  - Denmark historically one of the most leveraged advanced economies.
  - At the outset of the crisis, Denmark’s leverage reached about 210 percent of GDP.
- Tipping point (regression discontinuity):
  - Estimated tipping point γ = 87.8 percent of GDP maximizes R-squared.
  - Long-run (15-year real) investment growth declines rapidly once leverage exceeds 87.8 percent of GDP; growth drops rapidly and becomes negative beyond that point.
  - Given Denmark’s leverage currently above 200 percent of GDP, leverage is identified as an impediment to long-run investment growth.

### Product Market Regulation (PMR) and reforms
- PMR context:
  - PMR index ranges between 0 (least restrictive) and 6 (most restrictive).
  - Denmark is relatively less restrictive compared to OECD countries (1998–2013) but scope for further deregulation identified in electricity, gas, retail, and rail sectors.
- PMR impact on investment:
  - Model 1 (country-level local projections): reforms have a statistically significant impact on investment in the medium-term; on the 5th year following the reform real investment is 4.5 percentage points higher relative to the no-reform baseline.
  - Model 2 (sector-level): product market reforms increase sectoral real investment by about 4 percentage points relative to the no-reform baseline; heterogeneity across sectors is substantial.
  - Model 3 (difference-in-difference with sectoral exposure): at the 5th year following reform cumulative investment gain about 0.8 percent for higher-exposure sectors relative to lower-exposure sectors.
- Policy-relevant sectoral diagnostics: scope for further deregulation particularly in network sectors (electricity, rail, telecom, postal, gas) and retail (licenses/permits, large outlets, opening hours, price controls, protection of existing firms).

### Investment impediments from surveys and micro evidence
- Firm survey (EIB–EIBIS 2017):
  - Most firms identify skilled labor shortages and uncertainty about the future as major impediments.
  - Capacity constraints are among the largest in Denmark, indicating scope for expansion in investment demand if obstacles removed.
  - Footnote: uncertainty likely related to international developments rather than domestic factors.
- Financial constraints and collateral channels:
  - Debt overhang: GFC increased private leverage reducing firms’ funding capacity; highly indebted firms less responsive to demand fluctuations.
  - Declines in collateral values reduced firms’ access to bank financing.
  - IMF (2017a): more highly leveraged firms had lower tangible investment in Denmark.
- Other impediments discussed: uncertainty, weak competition, tax burden features, stringent product and labor market regulations, shift toward intangible assets complicating measurement.

### Policy implications and recommendations to boost investment
- Target areas:
  - Address capacity constraints and skilled labor shortages to unlock investment demand.
  - Reduce policy uncertainty, particularly related to international developments.
  - Tackle elevated leverage to remove a drag on long-run investment growth (reduce debt-bias).
  - Pursue targeted product market reforms notably in electricity, gas, retail, and rail to enhance competitiveness and stimulate investment.
- Tax and leverage-related measures:
  - Reduce debt-bias (tax measures aimed at reducing debt preference).
  - Consider reforms improving investment incentives for small and high-technology firms (dividend taxation, loss-offset rules, refundable R&D measures).
- Macro gains from higher investment:
  - Counterfactual: 2 percentage points higher annual real investment over 2018–22 would result in 0.7 percent higher real output relative to the baseline in 2022.
  - PMR-led investment increases would help reduce the current account surplus through higher investment and firm entry.

### Monetary policy normalization, household and pension balance-sheet exposure
- Baseline interest-rate shock construction:
  - Assume two 25 bps ECB hikes over the coming 2–5 years plus unwinding of a 50 bps fall in the term spread → Danish longer-term interest rates could easily rise by 100 basis points.
- Pension fund asset composition (percent of total assets):
  - Equities: 34.7 percent
  - Other Assets: 35.4 percent
  - Covered Bonds: 14.1 percent
  - Corporate Bonds: 8.8 percent
  - Government Bonds: 7.0 percent
- Pension fund and asset impacts:
  - Danish pension fund assets around $600 billion and 215 percent of GDP.
  - A 100 bps interest rate shock would reduce pension funds’ portfolio asset values by as much as 6–8 percent.
  - A 200 bps shock raises estimated portfolio decline to 9–15 percent.
  - Fixed income: 100 bps shock lowers fixed income asset values by approximately 4–7 percent.
  - Equities: 100 bps shock lowers equities portfolios by around 8–11 percent.
  - Danish government bond benchmark duration: 8.6 years.
- Household transmission and heterogeneity:
  - Pension assets transfer investment risk to households as DC schemes dominate; wealth effects propagate to consumption.
  - Consumption elasticity results (using ALS (2015) French MPC proxies and pension-fund shocks):
    - Lower Half (percentile 1-49): mpc_w_fin 0.122***; w_fin/c 0.364; consumption elasticity 0.044; effect on consumption from 100 bps shock: -2.7% to -3.5%; from 200 bps shock: -4.0% to -6.7%.
    - Mid-to-mid-high (50-69): mpc_w_fin 0.020***; w_fin/c 1.114; consumption elasticity 0.022; effect from 100 bps: -1.3% to -1.8%; from 200 bps: -2.0% to -3.3%.
    - Mid-high to High (70-89): mpc_w_fin 0.013**; w_fin/c 1.872; consumption elasticity 0.024; effect from 100 bps: -1.5% to -1.9%; from 200 bps: -2.2% to -3.7%.
    - Top (90-99): mpc_w_fin 0.002; w_fin/c 4.975; consumption elasticity 0.010; effect from 100 bps: -0.6% to -0.8%; from 200 bps: -0.9% to -1.5%.
  - Main result: consumption of the least wealthy households (below median) is most vulnerable to asset price shocks.
- Quantitative macro consumption impacts (summary):
  - One percentage point increase of the borrowing rate decreases consumption for the median household by less than 0.1 percentage points.
  - For the entire population on average, consumption falls by 0.4 percentage points (some 0.2 percentage points of GDP).
  - Simulated falls in financial assets from interest rate shocks: 6–8 percent (100 bps) and 9–15 percent (200 bps).
- Caveats:
  - Estimates use French micro-based MPC proxies (ALS (2015)) as Danish micro-based MPC estimates unavailable; results tentative and subject to uncertainty.

### Macroprudential policy measures and housing-market tools
- Housing and debt facts:
  - Housing prices declined "23 percent in real terms nationally from their 2006 peak to their eventual trough in 2009".
  - In some regions (Copenhagen metropolitan area and owner-occupied flats) prices fell "as much as 40 percent".
  - Credit creation slowed after the crisis and "has grown only marginally in nominal terms since 2009 (and declined as a share of GDP or disposable income)".
  - Household debt remains "among the highest in the OECD".
- Institutional framework:
  - Designated macroprudential authority: Ministry of Industry, Business and Financial Affairs.
  - Systemic Risk Council (headed by the Danish central bank) issues observations, warnings and recommendations under “comply or explain”.
- Demand-side measures (selected, with effective dates preserved):
  - Supervisory Diamond for Mortgage-Credit Institutions (Proposed: December 2014; effective: January 2018 unless otherwise noted). Five benchmarks covering large exposures, lending growth (< 15 percent per year), short-term funding, interest-only lending share limits (effective Jan 1, 2020), borrower interest rate risk limits.
  - Mandatory Downpayment (Proposed December 2014; effective November 2015): at least 5 percent downpayment (effective 95 percent maximum LTV); tighter single-loan restrictions with 80 percent LTV per loan; vacation property LTV limits raised to 75 percent in 2017.
  - Guidelines on Good Mortgage Lending in Growth Areas (Proposed September 2015; effective February 2016): seven best practices including stress-testing borrowers and amortization requirements.
  - Good Business Practice for Mortgage Lending (Proposed March 2017; amended October 2017; effective January 2018): lending restrictions for households with LTI > 4 and LTV > 60 percent, and minimum interest-rate fixation of 5 years for floating-rate mortgages.
- Supply-side capital and buffers:
  - Capital conservation buffer: will reach 2½ percent of risk-weighted assets by 2019.
  - Systemic risk buffer for six systemically-important institutions: by 2019 will range between 1 and 3 percent of risk-weighted assets.
  - Countercyclical capital buffer: currently set at ½ percent of risk-weighted assets set to take effect on March 31, 2019; Systemic Risk Council recommended rise to 1 percent if risks build, but government signaled non-approval under current conditions.
  - Six systemically-important institutions to carry fully-loaded combined buffer requirements between 4 and 6 percent of risk-weighted assets by 2019.
  - Designated institutions: Danske Bank, Nykredit, Jyske Bank, Sydbank, Nordea Kredit, and DLR Kredit.
- Liquidity and funding:
  - CRD IV introduced liquidity coverage ratio and NSFR (since 2015); institutions not yet required to meet NSFR pending EU legislative process.
- Tax measures affecting housing:
  - Mortgage interest deductibility (MID) being reduced through 2019:
    - Deduction: up to "32.7 percent" of mortgage interest expense for expenses up to "DKK 50,000".
    - For expenses over "DKK 50,000" deduction limited to "26 percent of interest expense in 2018 and 25 percent in 2019 and thereafter".
  - Property and land tax reform agreed May 2017 to take effect in 2021.

### Tax base, investment incentives, and corporate tax options
- Depreciation and loss-offsets:
  - Most plant and machinery: pooled declining-balance method under a 25 percent rate.
  - Business buildings: depreciated individually at 4 percent straight line.
  - Loss carryforward: may be carried forward but cannot offset more than 60 percent of future profits above DKK 8.2 million (2018).
- R&D and business incentives:
  - R&D costs expensed; R&D expensing up to DKK 25 million per year refundable for loss-making taxpayers.
  - Government announced an R&D super-deduction of 110 percent of R&D spending by 2026, phased in from 2018 at initially 101.5 percent; the part exceeding 100 percent is not refundable.
- International anti-avoidance:
  - Denmark early adopter of transfer pricing, CFC, interest limitation, GAAR rules; committed to G20/OECD BEPS Project and will implement ATAD-consistent measures by January 1, 2024 where required.
  - Country-by-country reporting threshold: consolidated turnover of at least DKK 5.6 billion.
- Interest limitation and alignment with ATAD:
  - ATAD prescribes net interest to EBITDA rule (30 percent); Denmark currently uses thin capitalization 4:1, asset-test limiting interest deductions to 2.9 percent of tax basis of assets, and EBIT test limiting interest deductions to 80 percent of EBIT; legislative amendments expected to align EBIT test to EBITDA rule.
- Policy options to improve investment incentives for startups/high-tech firms:
  - Reduce tax rate on dividends.
  - Relax limitations on use of losses carried forward.
  - Relax deductibility rules for establishment/expansion costs.
  - Make R&D super-deduction refundable.
  - Consider rules-based approaches to split labor/capital income for owner-run firms.
- Notional interest / modified equity regimes (selected parameter values preserved):
  - 5.05 percent in 2010; 4.37 percent in 2011.
  - Liechtenstein: currently: 4 percent.
  - Portugal: 3 percent (2010–2013 notional interest for cash contributions); from 2014: 5 percent of company’s share capital for three years (limited to EUR 200,000).
  - Cyprus: rate benchmark = 10-year government bond yield of Republic of Cyprus + 3 p.p.
  - Turkey: rate benchmark = 50 percent of annual weighted average interest rate on Turkish-denominated bank loans.
  - Malta: benchmark = current yield on 20-year Maltese government bonds + 5 p.p.; limited to 90 percent of taxable income; excess can be carried forward.
- Fundamental reform options:
  - Allowance for Corporate Equity (ACE): potentially boosts GDP (Ministry of Finance estimate: 1.7 percent long-run GDP gain) but has long-run fiscal cost considerations; IMF staff preliminary estimate: long-term corporate tax base reduction by 12 percent (ORBIS data, excluding banks, assuming notional interest rate of 2 percent).
  - Common Consolidated Corporate Tax Base (CCCTB): EU-level option with ACE and R&D super-deduction in proposal; implications for Denmark depend on apportionment formula and revenue effects.

_Italic: IMF staff analysis and chapter extracts as presented in cr18178._

### 1. Dynamics of Gross Fixed Capital Formation (GFCF) _____________________________________ 4

### 1. Dynamics of Gross Fixed Capital Formation (GFCF)

### A. Introduction and aggregate facts
- Real gross fixed capital formation (GFCF) has dropped by 20 percent over 2007–10.
- As a share of GDP, investment declined by 5.4 percent during 2007–10 and now remains about 3 percent of GDP lower relative to its pre-crisis level.
- Total investment in Denmark peaked at 24 percent of GDP before the crisis and dropped to 18 percent of GDP in 2010.
- The post-GFC investment recovery was insufficient to compensate for GFC losses, resulting in a downward level shift in GFCF.

### B. Macroeconomic implications of the investment weakness
- Drop in labor productivity growth:
  - Labor productivity slowed from close to 2 percent in 2010 to close to 0 percent in 2016.
  - Contributions from the capital-to-labor ratio fell from 0.7 percent in 2010 to -0.3 percent in 2016.
  - The standard production function relation reported: Y/L = A*(K/L)^α (Y = real output, K = stock of capital, L = labor input, A = total factor productivity, α = capital share).
- Surge in the current account surplus:
  - Current account surplus (CAB = S - I) rose from less than 2 percent of GDP in 2007 to 8 percent of GDP in 2016.
  - Both aggregate savings and investment declined after the GFC, but savings recovered and surpassed their pre-crisis peak by 2016 while investment recovery remained sluggish—driving the increase in the current account surplus.

### C. Purpose and structure of the analysis
- The paper analyzes determinants of the investment slowdown and identifies policies to boost investment.
- Empirical approach includes baseline and augmented accelerator models, and focuses on roles of leverage and product market reforms.

### D. Cross-country and price considerations
- Many advanced economies experienced investment slowdowns after the GFC, but Denmark’s decline is particularly pronounced relative to EU peers.
- The decline in the nominal GFCF-to-GDP ratio is more pronounced than the decline in the real GFCF-to-GDP ratio, suggesting a role for declining relative investment prices; nevertheless, the real ratio decline in Denmark remains rapid compared with peers.

### E. Sectoral and institutional composition
- Decomposition by asset classes: Almost all asset classes saw a decline post-GFC, with the notable exception of investment in intellectual property products.
- Institutional sectors: The decline was mainly driven by the private sector; public sector investment expanded and partially offset the private-sector decline (expansion supported by countercyclical government measures).

### F. Public capital and infrastructure
- Denmark’s infrastructure quality is ranked twelfth best in the world (World Economic Forum survey).
- Compared with EU peers, Denmark’s infrastructure quality is in the middle.
- There is limited scope to raise aggregate investment via public capital spending because Denmark’s government spending on capital is already one of the highest among EU peers.

### G. Within- vs between-sector drivers
- Shift-share analysis of GFCF-to-GVA ratio over 2007–16 indicates within-factors dominated the decline; structural (between-) shifts were negligible.
- Reported figures: the decline in GFCF-to-GVA ratio of 4.7 percent over 2017–16 was mainly driven by within factors (5.1 percent).
- Some sectors (mining, manufacturing, electricity, transport, financial) increased their post-GFC GFCF-to-GVA ratio by 1.4 percent in total, but these gains were more than offset by declines in other sectors.

### H. Output dynamics and the accelerator model
- Aggregate gross value added (GVA) exhibited a downward shift following the GFC, with similar downward shifts across individual sectors.
- The accelerator model—where investment dynamics are explained by changes in output—is a widely used conceptual framework; recent IMF and other analyses find that output dynamics explain part of the investment weakness, but output alone is generally insufficient.

### I. Additional determinants and impediments discussed in the literature
- Debt overhang: GFC increased private leverage, reducing firms’ ability to raise funding for investment projects; highly indebted firms are less responsive to demand fluctuations.
- Uncertainty: Greater uncertainty about future conditions and profits can lead firms to postpone lumpy, irreversible investment projects.
- Financial constraints: Declines in collateral values (equity, real estate) reduced firms’ access to bank financing for investment.
- Weak competition: Greater market concentration and reduced competition (from technological change, regulatory bottlenecks, barriers to entry, or common ownership) can reduce incentives for investment.
- Tax burden: Tax regimes (statutory rates and tax base features such as depreciation allowances, investment tax credits, interest deductibility) affect returns to investment and thus investment behavior.
- Stringent product and labor market regulations: Tighter regulations can impede entry/exit, reduce competition, and constrain firms’ ability to realize profits and obtain qualified labor—negatively affecting investment; effects can be asymmetric (tightening has stronger impact than relaxation).
- Intangible assets: Shift toward intangibles (human capital, R&D, market development, organizational capital) can complicate measurement of private investment and weaken the close association between tangible investment and output.

*Prepared by Tigran Poghosyan; analysis and figures based on Eurostat, EUKLEMS, World Economic Forum, OECD, and IMF Staff calculations as reported in the source document.*

### 11. Uncertainty and capacity constraints are important impediments to investment in

### 11. Uncertainty and capacity constraints are important impediments to investment in

### Investment impediments: survey evidence
- The recent firm survey by EIB shows that most firms have identified skilled labor shortages and uncertainty about the future as major impediments to investment by firms (Figure 9, left panel).
- Capacity constraints are mentioned as one of the largest in Denmark (Figure 9, right panel), indicating scope for expansion in investment demand by firms once the obstacles have been removed.
- Footnote: The uncertainty is most likely related to international developments rather than domestic factors.
- Source of survey: EIB–EIBIS 2017 survey. Note: Reported is the share of firms responding positively.

### Leverage developments and implications for investment
- Leverage in Denmark has been on the rise since 2001 in all sectors, except general government.
- Leverage picked up around 2010 and started declining since then, but remains elevated.
- The largest leverage buildup was observed in the private non-financial sector.
- IMF (2017a) shows that more highly leveraged firms had lower tangible investment in Denmark.

### Product Market Regulation (PMR)
- PMR in Denmark is relatively less restrictive compared to OECD countries, with OECD surveys over 1998–2013 ranking Denmark favorably and showing gradual improvement over this period (Figure 11).
- Nevertheless, Copenhagen Economics (2013a, 2013b, 2013c) and IMF (2016c) identify scope for further deregulation in certain sectors, notably the electricity, gas, retail, and rail sectors.
- Note: Product market regulation (PMR) index ranges between 0 (least restrictive) and 6 (most restrictive).

### Empirical analysis: Baseline accelerator model
- Method: Two-step accelerator approach (baseline accelerator then augmented with additional factors). Baseline uses 12 quarterly lags of output.
- Baseline results:
  - Most coefficients of the lagged output variables, as well as the sum of 12 coefficients, are significant, supporting the baseline accelerator hypothesis of the importance of output for investment dynamics.
  - Estimations are performed using the Newey-West estimator on quarterly data for the 1998-2016 period.
  - Table 1 estimation summary (selected statistics preserved exactly as shown):
    - Observations: 76
    - R-squared: 0.476
    - Sum of βs: 1.475
    - Standard error (sum of βs): 0.625
    - t-stat (sum of βs): 2.360
    - α = -14.76
    - δ = 0.02***
- Residuals from the baseline accelerator model:
  - The residual has been persistently negative following the GFC, suggesting that GFCF has fallen beyond the level explained by weaker output.
  - More recently, the residual converged to zero, suggesting that GFCF has converged to the level explained by the output dynamics.
  - The decline in GFCF beyond the level explained by output movements has been one of the most pronounced among EU peers; Denmark had highest positive residuals in the pre-GFC period.
- Cross-country comparison:
  - Baseline accelerator regressions run for 9 EU peers (Austria, Belgium, Finland, France, Germany, Luxembourg, Netherlands, Sweden, and the United Kingdom) show that the unexplained (negative) component of the GFCF was particularly pronounced in Denmark in the immediate aftermath of the GFC.

### Sectoral and category-level baseline findings
- Baseline accelerator model run for GFCFs in 13 sectors and 10 GFCF categories in Denmark:
  - For sectoral regressions, sector-specific GVAs used; for category-specific regressions, aggregate GVA used.
  - The residual turns negative post-GFC and remains negative through 2016 in most sectors.
  - Notable exception: “financial and insurance activities” sector, for which the residual is positive and large.
  - For GFCF categories, the residual turns negative for many categories in the post-GFC period; a positive spike appears in the “communications equipment” category in 2014–15.

### Augmented accelerator model: additional controls
- Inclusion of additional controls (leverage, price markups, product market reforms, and economic policy uncertainty) removes the persistence of negative residuals following the GFC, implying factors beyond output contributed to the investment decline.
- Panel regressions for OECD countries (annual data, 1999–2016, fixed effects estimator, 3 lags of output) confirm:
  - Lagged output remains significant.
  - Non-financial corporate leverage (measured as credit to non-financial corporations as a share of GDP, source: BIS) has a negative and significant effect on investment.
  - The level of competitiveness, proxied by the price markup indicator (measured as (gross output-intermediate inputs-labor inputs)/gross output, source: EUKLEMS), has a significant negative effect (i.e., low competition adversely affects investment).
  - Policy uncertainty (European-policy related measure of economic uncertainty) has a negative and significant effect.
  - The impact of the product markets reform (PMR) variable is insignificant in the panel regression, possibly due to low variability of the interpolated 5-year interval PMR variable or reverse causality.
- Table 2 selected estimation summary (preserving reported values exactly):
  - Coefficient on lagged output sum: 0.57***
  - Coefficient on Leverage (non-financial corporations): 0.21***
  - Coefficient on Change in PMR index: 0.36***
  - Coefficient on Markup indicator: -43.71*
  - Coefficient on Uncertainty index (EU-level): -2.10**
  - α (constant): 27.28
  - Observations: 283
  - R-squared: 0.87
  - Sum of βs: 1.720
  - Standard error (sum of βs): 0.194
  - t-stat (sum of βs): 8.849
- Note: PMR index values are the OECD’s index for 1998, 2003, 2008, and 2013 with interpolated values in between.

### Diving deeper: leverage and tipping point analysis
- Historical context:
  - Using the macrofinancial history database (Jorda and others 2017) for 17 advanced economies over 1870–2013, Denmark has historically been one of the most leveraged advanced economies.
  - At the outset of the crisis, Denmark’s leverage reached a historical peak of about 210 percent of GDP.
  - Investment-to-GDP ratio in Denmark has not matched the high levels of leverage; since the 1970s, investment-to-GDP ratio has been relatively low—one of the lowest among advanced economies—and dropped rapidly following the GFC.
- Regression discontinuity analysis (following Gaspar and others 2016):
  - A tipping point in leverage is estimated at 87.8 percent of GDP—the level γ that maximizes the R-squared of the regressions.
  - Results indicate long-run (15-year real) investment growth declines rapidly once leverage exceeds 87.8 percent of GDP; investment growth drops rapidly and even becomes negative from the 87.8 percent discontinuity point onward.
  - Given Denmark’s leverage level is currently above 200 percent of GDP, this analysis indicates leverage is an impediment to long-run investment growth.

### Product market reforms and investment
- Rationale: Product market reforms raise long-term output by boosting productivity and employment, which can encourage more investment, especially for firms not constrained by high leverage.
- Methodologies used:
  - Local projections methodology to analyze impact of PMR on investment.
  - Narrative methodology to identify PMR (IMF 2016b).
  - Difference-in-difference approach similar to Rajan and Zingales (1998) to explore mechanisms.
- Model 1 (country-level reforms and aggregate investment) specification:
  - Dependent variable: ri_{c,t+h} − ri_{c,t−1}, where ri is log of real investment; horizons h = 0, 1, ... 5.
  - Regressors include country fixed effects α_c, time fixed effects γ_t, binary reform indicator R_{c,t}, and controls X_{c,t} (including lagged aggregate investment growth and lagged recession dummies defined as growth below -3 percent).
  - Coefficient of interest β_h indicates cumulative response of log of aggregate real investment in period t+h to product market reforms implemented in period t relative to a no reform baseline.
- Preliminary result: Figure 17 (left panel) presents that product market reforms have a statistically significant impact on investment in the medium-term; on the 5th year following the reform, real investment is (figure truncated in source before completing the statement).

### Key implications and policy focus
- Multiple impediments explain weak investment in Denmark beyond output dynamics:
  - Skilled labor shortages, uncertainty about the future, and capacity constraints as per firm surveys.
  - High and rising leverage—particularly in the private non-financial sector—poses a structural impediment to investment.
  - Competitiveness issues (high markups) and policy uncertainty have significant negative effects on investment in cross-country analysis.
  - Product market reforms can boost investment in the medium term, although identification and timing matter.
- Policy focus implied by analysis:
  - Address capacity constraints and skilled labor shortages to unlock investment demand.
  - Reduce policy uncertainty, particularly related to international developments, to improve private-sector investment climate.
  - Tackle elevated leverage in the economy to remove a drag on long-run investment growth.
  - Pursue targeted product market reforms (notably in electricity, gas, retail, and rail) to enhance competitiveness and stimulate investment.

*Source: IMF staff analysis and cited surveys and databases as presented in the chapter.*

### 4.5 percentage points higher relative to where it would have been if the reform did not take place.

### cr18178 - 4.5 percentage points higher relative to where it would have been if the reform did not take place.

### Model 2: Country-level reforms and sectoral investment — specification and main finding
- Empirical specification (annual horizons h = 0, 1, ... 5): the left-hand side is the change in the log of real investment for country c, sector s, period t to t+h: ri_{c,s,t+h} − ri_{c,s,t−1}.
- Fixed effects and controls:
  - α_{c,s}: country-sector fixed effects (sector-specific differences in average investment growth rates within countries).
  - γ_{s,t}: sector-time fixed effects (global shocks affecting sector-specific business cycle and investment).
  - R_{c,t}: binary variable indicating occurrence of a product market reform.
  - X_{c,s,t}: control variables including lagged sectoral investment growth and lagged recession dummies defined as growth below -3 percent.
- Coefficient of interest: β_h — cumulative response of log sectoral real investment in period t+h to product market reforms implemented in period t relative to a no reform baseline.
- Main empirical finding (Figure 17, right panel):
  - Product market reforms have a statistically significant impact on investment at the sectoral level in the medium-term.
  - Real investment in an average sector gains about 4 percentage points relative to the no-reform baseline.
  - The average effect masks substantial heterogeneity across sectors with different exposures to product market regulation.

### Model 3: Difference-in-difference accounting for sectoral exposure
- Specification follows Rajan and Zingales (1998): reform dummies multiplied by Exp_s, the sector-specific “natural” turnover rate (sum of firm entry and exit rates) from the U.S. Bureau of Labor Statistics.
- Interpretation:
  - Sectors with higher “natural” turnover rates are expected to be more bound by product market regulations.
  - β_h represents the cumulative difference-in-difference effect of reforms on investment in higher-“natural” exposure sectors relative to lower-exposure sectors in period t+h.
- Empirical implementation:
  - Investment gain estimated between a sector at the 75th percentile of the U.S. turnover distribution and a sector at the 25th percentile.
- Main empirical finding (Figure 18):
  - Product market reforms tend to increase investment more in sectors with higher propensity of turnover.
  - At the 5th year following the reform, the cumulative investment gain is about 0.8 percent.
  - These results confirm the positive effects obtained in Model 2.

### Policy-relevant sectoral diagnostics
- Denmark’s standing in the OECD’s overall PMR indicator is above OECD average, but scope exists for further deregulation, particularly in:
  - Network sectors: electricity, rail, telecom, postal, and gas.
    - Specific areas for improvement: entry barriers, public ownership, vertical integration, and market structure.
  - Retail sector:
    - Specific areas for improvement: licenses/permits needed, regulation of large outlets, protection of existing firms, regulation of opening hours, and price controls.
  - Example policy suggestion cited: liberalize the Planning Act to allow construction of hypermarkets that combine supermarkets and department stores (reference to Productivity Commission call).

### Conclusions on investment dynamics and policy implications
- Aggregate assessment:
  - Post-GFC weakness in Denmark’s aggregate investment cannot be fully explained by the output slowdown.
  - Baseline accelerator model confirms output slowdown played a role, but post-GFC investment fell beyond the level explained by output movements in most of the post-GFC period.
  - Most recently, investment converged to the level explained by output movements, but stronger investment would have been expected given the record low interest rates.
  - Augmented accelerator model suggests additional factors—high leverage, weak competition, and elevated policy uncertainty—had significant impact.
  - Panel regressions across advanced economies show that reduction in leverage and product market reforms can boost investment in the medium term.
- Policy recommendations (target areas):
  - Reduce debt-bias.
    - Leverage increased at the outset of the crisis and despite recent declines remains elevated.
    - Tax policy measures aimed at reducing “debt-bias” would reduce private sector vulnerabilities and promote additional investment.
  - Enhance competition.
    - Regulations could be eased further in some sectors; gap from OECD EU countries is particularly high in network and retail sectors.
    - Breakdown of OECD index suggests further scope for deregulation in public ownership, vertical integration, market structure, licensing, large outlets regulation, protection of existing firms, shop opening hours, and price controls.
- Macro-critical gains from higher investment:
  - Counterfactual simulation: 2 percentage points higher annual real investment over the 2018–22 period would result in 0.7 percent higher real output relative to the baseline in 2022.
  - Higher investment supported by PMR reforms would help reduce the current account surplus (national accounts identity and supporting theoretical/empirical studies cited).
  - Supporting evidence: PMR reforms increase firm entry and boost investment, which in turn reduce the current account balance (Cacciatore and others (2016)); PMR reforms in advanced economies have a negative short-term effect on the current account balance (Culiuc and Kyobe (2017)).

### Methodological annexes (brief)
- Shift-share analysis (Annex I):
  - Decomposes changes in aggregate investment-to-output ratio into within-effect (changes in investment within sectors) and between-effect (changes in sectoral shares of aggregate output).
  - Presents algebraic decomposition for two-sector, two-period case and generalizes to multi-sector setting using period averages to make decomposition base-invariant.
- Accelerator model (Annex II):
  - Investment I_{it} is modeled as function of desired capital stock K_{it}^*, its lags, and capital depreciation rate δ_i.
  - Desired capital stock changes proportional to changes in output: ΔK_{it}^* = c ΔY_{it}.
  - Baseline empirical specification (lagging output by one year to alleviate endogeneity) and augmented specification include additional factors P_{it} (e.g., policy-affected determinants).
  - Estimation uses fixed effects panel estimator with standard errors corrected for autocorrelation, heteroskedasticity, and intra-group correlation; sectoral panels and country/sector time series regressions also employed.

*Source: IMF staff calculations and analyses presented in the provided chapter.*

### 1.      The ongoing global economic recovery continues to raise the possibility of monetary

### The ongoing global economic recovery continues to raise the possibility of monetary policy normalization in the euro area and in other advanced economies.

### Overview: purpose and scope
- Explores implications to Denmark from a rise in interest rates, including effects on household financial assets held directly and indirectly via pension investments.
- Examines impact of interest rate shocks on financial assets managed by pension funds and outright investments held by households.
- Uses illustrative shocks of 100–200 basis points and a hypothetical 100 bps increase to sketch potential balance-sheet impacts.
- Notes Denmark’s financial system is robust and well capitalized; little evidence of systemic concerns from 100–200 basis points interest rate shocks, but strong linkages between households and asset prices could propagate shocks to the real economy via reduced consumption.

### Interaction of households with the rest of the economy (Section B)
- Households save via banks and pension funds, invest in financial and nonfinancial firms; pensions and insurance firms invest to generate income and pay benefits.
- Financial sector intermediates lending and investment between sectors (Figure 1 stylized presentation).
- Half of domestic private sector credit is provided to households to finance housing purchases and consumption.
- Large mandatory pension contributions lead to a fully-funded occupational pension system that is a natural counterpart to the large household debt stock.
- Pension funds invest heavily in covered bonds issued by credit institutions, creating a funding/lending loop between households, pension funds, and credit institutions (Figure 2).

### Household and pension fund balance sheets (Section C)
- Danish households have very large total financial assets and pension assets in particular; large assets and liabilities increase sensitivity to shocks.
- After the financial crisis, sharp fall of house prices resulted in a large consumption decline in Denmark, with a stronger drop among high-leverage households (Andersen et al., 2016).
- Direct risks to the financial sector from household debt tend to be low:
  - Housing loans in Denmark are full-recourse, making defaults more difficult.
  - Households and creditors use arrangements (e.g., temporary modified repayment agreements) to continue servicing mortgages.
  - Strong social safety net and welfare programs can soften consumption shocks.
  - Danish credit institutions are liquid and well-capitalized, with regulatory capital amounting to nearly 20 percent of risk-weighted assets.
  - Ongoing stress tests by Danmarks Nationalbank show risks to the financial system from household debt deterioration are generally manageable; some systemically important institutions may have small capital shortfalls under a severe recession scenario, arising from falling stock prices, changes in interest rates, and increasing credit spreads rather than household debt specifically.
- Financial accelerator effects (BGG, 1999) can propagate and amplify macrofinancial shocks through links between lending premia and borrowers’ net worth; collateral effects remain valid in Denmark even if extension to widespread bankruptcies/insolvencies is limited by institutional features (variable mortgages, deferred amortization).

### Housing, covered bonds, and transmission channels
- Housing is a major household asset alongside pensions and financial assets; high valuations and favorable tax treatment incentivize large house purchases often funded via large mortgages.
- Households’ debt-to-income ratios are among the highest in advanced economies due to these factors and easy access to low interest rate borrowing.
- Mortgage credit institutions issue covered bonds to fund mortgages; covered bonds are purchased by financial institutions (35 percent) and pension funds and insurance companies (28 percent).
- Implications of mortgage bond structure:
  - MCIs transfer part of mortgage market risk to covered bond investors but remain ultimately responsible for shortfalls if real estate collateral values fall sharply.
  - Large domestic holdings of covered bonds mean risks associated with real estate lending largely remain within the domestic financial system.
  - Real estate developments affect household consumption directly via wealth effects and collateral channels, and indirectly via pension savings invested in financial assets (potentially mutually reinforcing financial wealth effects).

### Vulnerable household groups and heterogeneity of effects
- Two household types appear particularly vulnerable:
  - Low-income households who spend a considerable share of disposable income on housing; higher interest rates will increase mortgage repayments and proportion of households overburdened by housing costs.
  - Households with high loan-to-income (LTI) ratios, often located in highly appreciating urban areas (e.g., Copenhagen), where LTI ratios and credit growth are higher than the rest of the country.
- Vulnerabilities are compounded by a large proportion of variable-rate and interest-only mortgages, rising house prices (especially urban), and easing credit standards.
- Consumption sensitivity to financial wealth shocks appears highly heterogeneous across household groups:
  - Households with low wealth levels and high debt-to-income ratios are impacted considerably harder than low-leverage households.
  - Internalizing these asymmetries can aid calibration of economic policies, including macroprudential measures.

### Quantitative and comparative facts
- Illustrative interest rate scenarios considered: 100–200 basis points; hypothetical 100 bps increase used to sketch pension funds and insurers’ portfolio impacts.
- Danish pension fund assets around $600 billion and 215 percent of GDP—among the largest relative to GDP globally (Table 1).
- Country table highlights (exact entries in source):
  - Denmark: Total pension assets 599 (USD billion); GDP 278 (USD billion); Total pension assets as % of GDP 215; Population 6 (millions); Total pension assets per capita (USD) 99,833; Old-age dependency ratio (%) 2010 = 29.6; Old-age dependency ratio 2100 (% projected) = 52.7.
  - Comparative entries for Australia, Japan, Netherlands, Switzerland, United Kingdom, United States of America included in Table 1 (values preserved in source).
- Banks’ regulatory capital nearly 20 percent of risk-weighted assets.
- Covered bond holdings: financial institutions 35 percent; pension funds and insurance companies 28 percent.

### Mechanisms and expected effects from higher interest rates (Section D forward)
- When interest rates rise:
  - Mortgage servicing becomes more onerous for borrowers (liabilities increase).
  - Asset prices tend to decline (assets fall), deteriorating households’ net asset position.
- Large pension fund and life insurance portfolios imply interest rate-induced valuation changes of pension assets could generate negative wealth effects on household consumption.
- Given the large gross balance sheets, shifts in asset prices and interest rates can significantly alter household net positions despite partial liability flexibilities in Denmark.

_Prepared by Evan Papageorgiou and Vladimir Pillonca (both EUR) with contributions from Andreas Kuchler (Danmarks Nationalbank). This chapter has benefitted from useful discussions with Miguel Segoviano (EUR)._

### 18.      The normalization of monetary policy by the ECB and other major central banks is

### 18.      The normalization of monetary policy by the ECB and other major central banks is

### Overview and baseline scenario
- Interest rates are anticipated increase further across Europe, US and other advanced economies in the coming years as post crisis exceptional monetary policy measures are withdrawn.
- Bond term premia remain near historically low levels across major advanced economies.
- Danmarks Nationalbank estimates that ECB’s “unconventional monetary policy in the beginning of 2015 reduced the term spread in Denmark by at least 50 bps.”
- Baseline shock constructed: assume two 25 bps ECB hikes over the coming 2–5 years plus unwinding of the 50 bps fall in the term spread → Danish longer-term interest rates could easily rise by 100 basis points.

### Pension fund asset composition (percent of total assets)
- Equities: 34.7 percent
- Other Assets (including derivatives, trade credits, real estate and other illiquid assets): 35.4 percent
- Covered Bonds (mortgage bonds): 14.1 percent
- Corporate Bonds: 8.8 percent
- Government Bonds: 7.0 percent

### Impact of interest rate shocks on pension fund asset values
- A 100 bps (one percentage point) interest rate shock would reduce the value of pension funds’ portfolio assets by as much as 6–8 percent.
- Doubling the shock to 200 bps raises the estimated portfolio decline to 9–15 percent.
- Fixed income assets: a one-off 100 basis points interest rate shock lowers the value of pension funds fixed income assets by approximately 4–7 percent.
  - Duration captures most of the negative impact; interest rate sensitivity varies by instrument.
  - Danish government bond benchmark indices have higher duration (8.6 years) and are more price-sensitive than most US and European benchmark indices (in the 4-year and 7–8 year ranges, respectively).
  - Danish mortgage bonds, due to their short duration, are resilient to changes in interest rates.
- Equities: the same 100 bps interest rate shock lowers the value of pension funds’ equities portfolios by around 8–11 percent.
  - Estimated impacts on stock prices across analyzed markets ranged from under 9 percent to over 12 percent.

### Drivers of equity valuation sensitivity
- Two developments increase stock price sensitivity to interest rate shocks:
  - Equity Risk Premia (ERP) in major advanced economies, Denmark included, have declined.
  - Corporate earnings growth has been slowing (it peaked around mid-2017 in Denmark).
- Low ERP and slowing earnings growth reduce compensation for risk and reinforce vulnerability of equity valuations to adverse shocks.

### Exposure channels and amplification risks for Denmark
- Denmark is a small open and financially deep economy with increased share of foreign investors in domestic markets.
  - This raises exposure to external shocks and potential funding stress (e.g., if foreign investors exit covered bond markets).
- Highly leveraged households and domestic macro-financial channels (financial accelerator, collateral effects) could amplify asset price falls into the broader economy.
- Denmark’s safe-haven status offers some protection, but a marked decline in global price of risk could materially lower Danish risk assets.

### Asset prices and household consumption: heterogeneity and magnitudes
- Pension assets increasingly transfer investment risk to households as DC schemes dominate; gains and losses on pension assets feed back to households’ wealth.
- The analysis focuses on marginal propensity to consume (MPC) out of financial wealth and uses ALS (2015) French micro-based MPC estimates as indicative proxies for Denmark.
- Key estimated consumption elasticities and impacts by wealth group (using ALS (2015) parameters and pension-fund portfolio shocks):
  - Lower Half (wealth percentile 1-49)
    - Marginal propensity to consume out of financial wealth (mpc_w_fin): 0.122***
    - Wealth to consumption ratio (w_fin/c): 0.364
    - Consumption elasticity to financial wealth (mpc_w * (w_fin/c)): 0.044
    - Effect on consumption from 100 bps shock (asset price change range 5–8 percent): -2.7% to -3.5%
    - Effect on consumption from 200 bps shock (asset price change range 9–15 percent): -4.0% to -6.7%
  - Mid-to-mid-high (wealth percentile 50-69)
    - mpc_w_fin: 0.020***
    - w_fin/c: 1.114
    - Consumption elasticity: 0.022
    - Effect on consumption from 100 bps shock: -1.3% to -1.8%
    - Effect on consumption from 200 bps shock: -2.0% to -3.3%
  - Mid-high to High (wealth percentile 70-89)
    - mpc_w_fin: 0.013**
    - w_fin/c: 1.872
    - Consumption elasticity: 0.024
    - Effect on consumption from 100 bps shock: -1.5% to -1.9%
    - Effect on consumption from 200 bps shock: -2.2% to -3.7%
  - Top (wealth percentile 90-99)
    - mpc_w_fin: 0.002
    - w_fin/c: 4.975
    - Consumption elasticity: 0.010
    - Effect on consumption from 100 bps shock: -0.6% to -0.8%
    - Effect on consumption from 200 bps shock: -0.9% to -1.5%
- Main result: consumption of the least wealthy households (below median wealth) is the most vulnerable to asset price shocks, showing statistically significant consumption declines of the order reported above.
- Wealth effects from housing could alter total wealth shock impacts; housing shocks may affect middle-income households comparatively more (low-income households often rent).

### Methodology notes and caveats
- Fixed income shock estimates: match bond types to representative benchmark indices (e.g., ICE-BofAML indices) and estimate price impacts based on duration and convexity.
- Equity shock estimates: employ a multi-stage dividend discount model calibrated separately on each major equity market; equity risk premium and dividends are held constant while applying the interest rate shock.
- Estimates are tentative and subject to large uncertainties; ERP are not directly observable and depend on model specification and data choices.
- French ALS (2015) MPC estimates are used as proxies for Danish household behavior due to lack of Danish micro-based MPC estimates; results should be interpreted with caution.

*Source: IMF staff summary of chapter content in cr18178 - 18.      The normalization of monetary policy by the ECB and other major central banks is*

### 32.      Less wealthy households are more consumption sensitive to shifts in asset prices. The

### 32.      Less wealthy households are more consumption sensitive to shifts in asset prices.

### Major findings
- Less wealthy households show higher consumption sensitivity to shifts in asset prices, based on a French-specific dataset; many in this group are not homeowners and often hold some financial assets (e.g. savings and pensions).
- Limited buffers (for example, gross wealth well in excess of net wealth, which may even be negative) may explain increased sensitivity to adverse wealth shocks.
- Variation in consumption sensitivity across household groups dilutes the estimation of MPC when estimated from aggregate data and hides important heterogeneities relevant for policy.
- Transitory shocks can have a very substantial impact on MPC and such shocks can be quite large.

### Quantitative estimates of rate shock effects
- One percentage point increase of the borrowing rate decreases consumption for:
  - the median household by less than 0.1 percentage points;
  - the entire population on average by 0.4 percentage points, or some 0.2 percentage points of GDP.
- Simulated falls in financial assets from interest rate shocks: 6–8 percent and 9–15 percent resulting from 100 basis points and 200 basis points interest rate shocks, respectively.
- The 2018 estimate of the median impact is lower than the 2017 estimate (0.3 percentage points) based on previous household microdata.
- Assumptions and simulations used in asset-impact analysis:
  - Assuming 0.25 passthrough to fixed-rate mortgages.
  - Simulated declines of 8 percent for equity and other investment and 5 percent for pension and insurance assets.
  - Consumption elasticities with respect to asset changes for the ten income deciles: {5, 4.5, 4, 3.5, 3, 2.2, 2.2, 2.4, 2.4, 0.9} percent for the 1st, 2nd,..., 10th deciles (Arrondel et. al. (2015), Table 4, column 4).
  - Consumption elasticities with respect to asset changes for loan-to-value and age cohorts held constant at 3 percent.
  - Consumption elasticities for the 6 loan-to-income cohorts: {2, 2.5, 3, 4, 5, 6} percent (from cohort with LTI < 100 percent to LTI ≥ 500 percent), based on calibration using income information.

### Heterogeneity by household cohorts
- Income deciles: lower-income households have higher exposure via financial asset holdings (including pension and insurance assets) and higher marginal propensity to consume from financial wealth than higher-income households.
- Loan-to-Value (LTV): balance sheet impact rises marginally more for households with LTV greater than 80 percent.
- Loan-to-Income (LTI):
  - Highly-leveraged households (e.g., LTI above 400 percent) are significantly more prone to reduce consumption with rate increases.
  - Consumption sensitivity of both financial assets and liabilities to rates declines faster within lower-LTI households.
  - LTI-based macroprudential measures are less sensitive to property price fluctuations than LTV-based measures.
- Age: sensitivity of household consumption to rising rates does not decline for older households when considering their holdings of financial assets and the increased propensity of retired people to consume out of wealth rather than regular income; considering only liabilities may underestimate older households’ consumption sensitivity.

### Policy recommendations and conclusions
- Macrofinancial linkages among households, asset prices and the financial system are strong; risks from rising interest rates may exacerbate latent vulnerabilities despite Denmark’s large net asset position and substantial buffers.
- Tighten existing macroprudential measures to contain formation of high-risk debt and build resilience. Specific recommendations include:
  - Lower LTV limits from 95 to 90 percent or lower, to reduce household exposure to housing price swings and help buffer consumption. Figure 5 suggests consumption is affected marginally more for households with LTV greater than 80 percent.
    - Earlier staff analysis suggests an additional 5 percent down-payment lowers aggregate consumption by 1.5 percentage points one year after introduction, and increases it by 0.2 percentage points in a new steady-state. Borrowers’ mortgage debt is expected to fall by 7 percent.
  - Impose mandatory amortization for highly-leveraged households with loan-to-income above 400 percent. The loan-to-income limit could be raised to 500 percent if financing is via fixed-rate mortgages.
  - Evaluate stricter loan-to-income restrictions for all loans irrespective of LTV considerations, possibly with tighter limits for interest-only and adjustable-rate mortgages, to help contain household leverage and increase resilience.
- Mortgage interest deductibility (MID) could be reduced further than currently planned because MID distorts investment incentives and incentivizes leverage; transition timing and supply-side measures (planning, zoning, rent control reduction) should accompany changes to reduce adverse impacts. Around 80 percent of private rental housing remains under rent control, constraining supply incentives.

*Source: Denmark — Chapter section on household consumption sensitivity and policy recommendations (cr18178).*

### Annex II. Summary of Macroprudential Policy Measures in

### Annex II. Summary of Macroprudential Policy Measures in Denmark

### Housing market developments and household debt
- Housing prices declined "23 percent in real terms nationally from their 2006 peak to their eventual trough in 2009".
- In some regions and segments (Copenhagen metropolitan area and owner-occupied flats) prices fell "as much as 40 percent" over the same period.
- Recovery was slow initially, gained speed after 2013 and became more widespread as economic growth resumed.
- Credit creation slowed considerably after the crisis and "has grown only marginally in nominal terms since 2009 (and declined as a share of GDP or disposable income)".
- Household debt remains "among the highest in the OECD".
- Rapid housing price increases concentrated in metropolitan areas overlap with strongest credit creation, raising concerns about households borrowing more than they can afford and sensitivity to interest-rate shocks due to a high share of adjustable-rate mortgages.

### Rationale for macroprudential and housing policies
- Main objectives: control formation of new risky household debt and build resilience in households.
- Macroprudential focus since 2012 centered on risks from high household debt and rising housing prices.
- Ongoing housing price increases may seed more macroeconomic vulnerabilities by forcing households to borrow more relative to income and increasing exposure to interest-rate shocks.

### Institutional framework
- Designated macroprudential authority: Ministry of Industry, Business and Financial Affairs (formerly Ministry of Business and Growth).
- Key component: Systemic Risk Council tasked with identifying and monitoring systemic financial risks; issues observations, warnings and recommendations to the Ministry under a “comply or explain” principle.
- Systemic Risk Council composition includes the Danish central bank (head), the Danish Financial Supervisory Authority and other public entities and experts.

### Demand-side macroprudential measures (main measures since 2012)
- Measures are typically announced as combinations of metrics; main bundles include:
  - Supervisory Diamond for Mortgage-Credit Institutions (Proposed: December 2014; effective: January 2018, unless otherwise noted). Regulatory framework of 5 benchmarks for mortgage credit institutions (announced 2014; amended 2016).
    - Large exposures: The sum of 20 largest exposures < CET 1
    - Lending growth: Lending growth to each segment < 15 percent per year 1/
    - Short-term funding: Share of lending refinanced within 3 months < 12.5 percent, and within 12 months < 25 percent of total lending (effective Jan 1, 2020)
    - Interest-only lending: share of interest-only loans for the LTV band of 75 percent or greater of the limit for the type of lending in total loans cannot exceed 10 percent of new loans 3/ (effective Jan 1, 2020)
    - Borrower interest rate risk: Lending where LTV exceeds 75 percent of the lending limit and interest rate is fixed for less than 2 years < 25 percent of new loans 2/
    - Footnotes reproduced as in source:
      - 1/ Lending segments are private homeowners, rental property, agriculture and other corporate.
      - 2/ Applies only to lending to private homeowners and rental property.
      - 3/ Applies only to private homeowners.
  - Mandatory Downpayment (Proposed December 2014; effective November 2015). Consumer protection clause mandating at least 5 percent downpayment for residential real estate purchases, translating into an effective 95 percent maximum loan-to-value (LTV) limit. Tighter single-loan restrictions apply, with 80 percent LTV per loan. The remaining 15 percent of the value of the property is financed with an additional loan having a secondary lien status.
    - Note: Secondary homes and vacation properties have lower LTV limits. LTV limits were raised for vacation properties from 60 percent to 75 percent in 2017 to promote a broader national housing recovery following the housing bust.
  - Guidelines on Good Mortgage Lending in Growth Areas (Seven Best Practices). (Proposed September 2015; effective February 2016). First five practices apply only to borrowers in high housing price growth areas (Copenhagen district area and the municipality of Aarhus).
    - i. Before granting floating-rate mortgages lenders must assess borrowers’ repayment ability under a scenario of interest rate hikes.
    - ii. When granting loans to applicants for buying into cooperative housing associations lenders must assess the cooperative associations’ debt under a scenario of interest rate hikes.
    - iii. Borrowers with negative equity position must amortize sufficiently with a maximum repayment period of 30 years, but exceptions may be granted if LTV is below 80 percent.
    - iv. Borrowers with loan-to-income (LTI) between 4 and 5 must have positive net wealth in the event of a 10 percent decline in house prices, and borrowers with LTI above 5 are similarly stress-tested for a 25 percent decline in house prices. Exemptions may be given to borrowers with high job security if they have fixed-rate and amortizing mortgages.
    - v. In cases where a borrower buys a new home before the old one is sold, the borrower must pay interest and principal payments on both homes until the lender expects the old home to be sold (6 months minimum). Similar provisions apply to borrowers with more than two residences.
    - vi. Lenders must make individual considerations for assessing a borrower’s repayment capacity rather than only meeting institutional minimum requirements for their disposable income.
    - vii. When financing purchases in cooperative housing associations, lenders must review the association’s underlying financial status (annual reports and budget) to ensure that the borrower is buying a healthy association.
  - Good Business Practice for Mortgage Lending (Proposed March 2017; amended October 2017; effective January 2018). Government adopted lending restrictions for households with LTI greater than 4 times and LTV greater than 60 percent:
    - (a) the interest-rate fixation of floating-rate mortgages needs to be at least 5 years, and
    - (b) deferred amortization is only applicable on 30-year fixed-rate loans.
- Mapping of demand measures along LTV, DTI, and amortization taxonomy (as summarized):
  - Supervisory Diamond for Mortgage Credit Institutions: LTV — yes; DTI — yes; Amortization — (checked)
  - Seven Best Practices: LTV — yes; DTI — yes
  - Mandatory Downpayment: LTV — yes
  - Good Business Practice for Mortgage Lending: DTI — yes; Amortization — yes

### Supply-side capital and buffer measures
- Capital conservation buffer applies to all Danish credit institutions since 2015 and "will reach 2½ percent of risk-weighted assets by 2019".
- A systemic risk buffer applies to six systemically-important institutions, and "by 2019 it will range between 1 and 3 percent of risk-weighted assets, depending on the institution."
- A countercyclical capital buffer for all credit institutions currently set at "½ percent of risk-weighted assets set to take effect on March 31, 2019."
  - The Systemic Risk Council recommended this measure may have to rise to "1 percent next year if risks continue to build up", but the government warned that under current credit conditions this will not be approved.
- The six systemically-important financial institutions will carry fully-loaded combined buffer requirements between "4 and 6 percent of risk-weighted assets by 2019", in excess of minimum capital and Pillar II add-ons.
- Footnote identifying designated systemically-important institutions: "Danske Bank, Nykredit, Jyske Bank, Sydbank, Nordea Kredit, and DLR Kredit."

### Liquidity and funding measures
- New liquidity measures introduced with CRD IV:
  - The 2009 Danish Financial Business Act set requirements for banks to hold liquid and unencumbered assets as a liquidity buffer and a funding ratio to prevent maturity mismatches.
  - The 2010 Supervisory Diamond for Banks tightened some regulations with excess liquidity coverage.
  - Since 2015 under CRD IV a liquidity coverage ratio and net stable funding ratio (NSFR) have replaced the liquidity buffer and funding ratio.
  - Most credit institutions observe liquidity requirements in line with NSFR guidelines, but institutions are not required to meet NSFR requirements yet; authorities are awaiting the legislative process in the EU with respect to the NSFR.

### Tax measures affecting housing
- Mortgage interest deductibility is being reduced through 2019:
  - Borrowers can deduct up to "32.7 percent" of their mortgage interest expense from personal income taxes for expenses up to "DKK 50,000".
  - For expenses over "DKK 50,000" the deduction is limited to "26 percent of interest expense in 2018 and 25 percent in 2019 and thereafter".
- A property and land tax reform was agreed in May 2017; when it goes into effect in 2021 it aims to remove a property tax freeze and allow for more representative land tax increases.

_Italic: IMF staff summary based on "Annex II. Summary of Macroprudential Policy Measures in Denmark" (cr18178)._

### 6.      The tax base is marked by relatively

### 6.      The tax base is marked by relatively

### Depreciation rules and loss-offsets
- Most plant and machinery: pooled declining-balance method under a 25 percent rate.  
- Business buildings: depreciated individually at 4 percent straight line.  
- Depreciation rules are maximum amounts; companies can choose lower—even zero—depreciation.  
- Losses: may be carried forward but cannot offset more than 60 percent of future profits above DKK 8.2 million (2018).  
- Note: losses on sale of assets can be deducted immediately rather than remaining in the pool. Companies must not exceed the maximum annual rate even if they took less depreciation in previous years.

### Business tax incentives and R&D treatment
- Limited number of business tax incentives; most important is for Research and Development (R&D).  
- Past use of additional depreciation as a general investment incentive (e.g., between May 30, 2012 and December 31, 2013).  
- Shipping companies: benefit from a tonnage tax regime (with European Commission approval).  
- R&D costs: can be expensed; tax benefit of R&D expensing of up to DKK 25 million per year is refundable for loss-making taxpayers.  
- Implied tax subsidy rate: far below the OECD median (OECD, 2017).  
- Government announced (February 2, 2018) an R&D super-deduction of 110 percent of R&D spending by 2026, phased in from 2018 at initially 101.5 percent. Unlike the standard deduction, the tax value of the part that exceeds 100 percent is not refundable.

### International anti-avoidance initiatives and commitments
- Denmark early adopter of strong anti-avoidance rules covering transfer pricing, controlled-foreign companies (CFC), limitation on interest deductibility, and other anti-abuse provisions.  
- These rules largely in line with the G20/OECD BEPS Project and the July-2016 ATAD; further strengthening of existing anti-avoidance rules is expected.  
- Denmark committed to implementing the four Minimum Standards of the G20/OECD BEPS Project and has largely implemented all 15 BEPS Actions.  
- Country-by-country (CbC) reporting: multinational groups with consolidated turnover of at least DKK 5.6 billion must prepare and submit a CbC report to the Danish tax administration.  
- ATAD implementation: Denmark applies a CFC regime and other ATAD-type measures; Denmark has until January 1, 2024 to conform to the ATAD where its targeted rules are equally effective as the prescribed interest limitation rule.

### Interest limitation, CFC, GAAR, and exit taxation (summary from Table 2)
- Interest limitation: ATAD prescribes an earnings-stripping rule denying interest deductions where net interest to EBITDA exceeds 30 percent; Denmark currently limits interest deductions by: (1) thin capitalization debt to equity ratio of 4:1; (2) asset test limiting interest deductions to 2.9 percent of the tax basis of assets; and (3) an EBIT test limiting interest deductions to 80 percent of earnings before interest and tax. Some legislative amendments may be made to align the EBIT test with ATAD’s EBITDA rule.  
- CFC rule: Denmark’s CFC regime applies where (i) a Danish company controls more than 50 percent of voting power; (ii) more than 50 percent of income of the foreign company is of a financial nature; and (iii) financial assets constitute more than 10 percent of total assets. Denmark resolved in 2017 to further strengthen its CFC regime in connection with the ATAD.  
- Hybrid mismatches rule: Denmark’s current rule targets hybrid structures similar to ATAD provisions.  
- GAAR: Denmark has a broadly consistent GAAR that applies specifically to deny tax treaty and EU Directive benefits where abuse is found.  
- Exit taxation: Denmark applies an exit tax.

### Tax certainty and administrative tools
- Denmark’s early adoption of complex anti-avoidance rules imposed relatively higher compliance costs and, because of frequent changes, contributed to a reputation of lack of tax certainty among taxpayers.  
- International initiatives (BEPS/ATAD) may reduce relative changes required in Denmark and improve stability and predictability, potentially reducing taxpayer compliance costs.  
- Advance tax rulings system: important efforts made to improve legal certainty; advance rulings and an increased Advance Pricing Agreements (“APAs”) program can improve certainty for businesses and tax administrations.  
- The application of GAAR and other discretionary anti-avoidance measures needs to be measured, even handed and predictable to support tax certainty.

### EU obligations and state aid considerations
- Denmark constrained by EU commitments including the Code of Conduct for Business Taxation and State Aid Rules.  
- Code of Conduct: political commitment to refrain from “harmful tax competition,” covering many preferential tax regimes.  
- EU state aid rules prohibit Member States from offering government support through tax that gives a company an advantage over competitors in the EU.  
- Currently, no major Danish rule is known to be in violation; the preferential shipping regime has EU approval.

### Observed FDI patterns and profit shifting risk
- Despite tight anti-avoidance rules, bilateral FDI patterns suggest international profit shifting remains a risk to CIT revenue.  
- Cristea and Nguyen (2016) estimate Danish multinationals reduced their tax liabilities by 3.2 percent during the period 1999–2006.  
- Inbound FDI often comes through indirect routes, consistent with conduit structures and treaty-shopping motives despite Denmark’s GAAR and signature of the Multilateral Convention (MLI) on June 7, 2017 (which will adopt the principal purpose test (PPT) in Denmark’s covered tax treaty network).  
- Top Danish FDI partners (unadjusted inward FDI, 2016): Sweden 17, Luxembourg 13, Netherlands 12, United Kingdom 9, Norway 9. Adjusted for ultimate origin (2015) top partners: United States 17, United Kingdom 10, Germany 9, Netherlands 7, France 7.

### Integration with personal income taxes and combined taxation effects
- Personal income taxed at progressive rates differing by income type.  
  - Labor income: top tax rate of 55.9 percent. This includes the labor market contribution of 8 percent (applies without allowance to all labor income and is deductible for other taxes). The other taxes (national income tax, municipal income tax, and health contributions) add up to at most 52.02 percent (the national tax is reduced below its 15 percent top value in case the total of all three taxes exceeds 52.02 percent). Labor income is additionally subject to a fixed monthly supplement payment of DKK 94.65.  
  - Income from capital other than shares: taxed at a top rate of 42.7 percent; capital gains taxable at the same rate and losses deductible within this income category (recognized on realization).  
  - Income from shares: taxed at rates of up to 42 percent; below DKK 51,700 a rate of 27 applies (collected through withholding). Capital gains taxed on realization at the same rate; losses deductible against other income from shares. The combined rate on dividends, including the CIT paid before distribution, reaches 54.8 percent.  
- Pension taxation: contributions are made out of pre-tax earnings, returns are taxed, and final pensions are also taxed (ETT). Tax on return reduced to 15.3 percent. Contribution levels typically set in labor contracts (typically 12 percent of salary, 2/3 paid by employer); individuals can contribute up to DKK 54,000 per year to individual pension accounts.  
- Share Savings Account (planned): preferential rate of 17 percent (including on accrued capital gains) and would be limited to DKK 50,000 or DKK 200,000 per person (discussions ongoing). Once limit reached no further new funds may be added, but returns on existing shares may be kept in the account without limit.  
- Overall characterization: Danish tax system described as a dual income tax, relatively close to comprehensive income taxation; capital income (except income from shares) faces slightly lower rate and savings vehicles provide preferential treatment within limits. Owner-occupied housing benefits via nontaxation of imputed rents and partial deductibility of mortgage interest.

### Reform options and policy considerations
- Overall assessment: Danish CIT system in good shape with no urgent need for major adjustments.  
- Suggested actions: some relatively small adjustments to fully align the system with international requirements; consideration of reforms to improve investment incentives, especially for small and high-technology firms.  
- Longer-term options: consider fundamental tax reforms to go beyond international standards and make the system neutral with respect to debt and investment.

*Source: IMF staff assessment*

### 16.      In response to recent international initiatives aimed at reducing profit shifting,

### 16.      In response to recent international initiatives aimed at reducing profit shifting,

### Alignment with international anti-avoidance initiatives
- One Danish interest deduction limitation rule will need to be changed from EBIT to EBITDA to be aligned with the requirements.
- Practical implication likely limited because for most firms the more binding limitation is the restriction in terms of assets, which is not affected.
- Existing anti-avoidance rules in Denmark are generally stronger than in most countries, but continued vigilance is warranted as new avoidance strategies are developed.

### Measures to decrease investment disincentives for small and high-technology companies
- Rationale:
  - New companies face cash constraints and obstacles in access to finance due to lack of history.
  - High-technology companies have a greater share of intangible assets, which cannot be used as collateral.
  - Startups and high-tech firms often have many years of loss-making followed by very high profits if successful.
  - Rate of net new business creation in Denmark is relatively low compared to other European countries (Figure. 3).
- Priority reform options:
  - Reduce the tax rate on dividends.
    - High taxation of dividends discourages equity investments in startups by individuals.
    - Listed firms less affected because marginal shareholders may be pension funds or foreign investors.
    - Note: total taxes on shares made up about 1.8 percent of total tax revenues (2016).
  - Relax limitations on the use of losses carried forward.
    - Current limitation poses a challenge for cash-constrained startups; when profitable, they are slowed in using past losses.
    - For some activities (e.g., patent development sold upon success), loss recovery may never happen.
  - Alternatively, relax rules restricting the deductibility of costs for business establishment, expansion or development.
    - Current rules disincentivize existing businesses with free cash flow from undertaking new investments.
  - Make treatment of R&D deductions more generous.
    - The refundable part of the R&D deduction counteracts problems for loss-making, cash-constrained firms.
    - To fully reap benefits of super-deduction, the super-deduction could also be made refundable.

### Dividend taxation, owner-run businesses, and safeguards
- Key considerations if dividend taxes are reduced:
  - If capital income tax is materially lower than labor income tax, owners have incentives to classify income as capital income (dividends and capital gains).
  - Rules-based approaches to split income between labor and capital income are generally preferred to case-by-case taxpayer-specific rules.
  - Denmark already has some similar rules to prevent excessive savings inside such firms.
  - Ensuring effectiveness requires balancing certainty and simplicity; chosen rules must combat income shifting yet remain administrable.
- Examples of rules-based approaches (summary from Table 4):
  - Dividend income allocation using a statutory rate of return on owner-manager’s equity with tiers treating portions as capital income or labor income (used in Sweden and Finland).
  - Minimum salary payment requirements (used in Belgium and the Netherlands).
- Recommendation: conduct a comprehensive study of costs, benefits, revenue effects, and distributional effects before implementing changes.

### Other measures under consideration
- Authorities are considering a special tax deduction worth 15 percent for individuals investing up to DKK 1.05 million equity in unlisted firms.
  - Potential drawbacks: increased complexity; practical difficulties (e.g., condition that investor must not personally know the owner).
- Lower dividend taxes would reduce the debt preference of the tax system (if combined CIT and dividend tax comes closer to tax on interest).
- Continued downward trends in CIT rates may prompt future CIT reductions, which would require profit-splitting rules for owner-run businesses unless dividend tax rates are increased.

### Digital Services Tax (DST) concerns
- Proposed uniform DST across EU Member States could:
  - Create distortions because the tax applies irrespective of the level of profit.
  - Lead to international double taxation.
  - Fail to tax profits effectively if the tax is shifted onto local consumers.
  - Interim/temporary measures risk becoming permanent and counterproductive to global consensus.
- The comprehensive EC proposal raises concerns associated with ring fencing and should be debated at the global level.
- Recommendation: focus on a coordinated and well-integrated international approach to digitalization-related tax challenges to minimize spillovers and distortions.

### Fundamental reform option: Allowance for Corporate Equity (ACE) and alternatives
- ACE concept:
  - Maintain deduction for interest expenses and give a tax allowance for equity; alternative ACC eliminates interest deductions and offers allowance for notional return independent of financing source.
  - No country has implemented a full ACE system as a universal solution.
- Implementation considerations:
  - Incremental ACE (base as new equity relative to reference year) avoids revenue loss from past decisions and evolves to total stock of equity over time.
  - Budget proposal for 2017 proposed an ACE for Denmark but it was not implemented.
  - Ministry of Finance estimates: an ACE would boost GDP by 1.7 percent in the long run via positive investment impact.
- Short- and long-term cost considerations:
  - Rate of ACE should approximate the “risk-free” rate; long-term government bond yields used as proxy.
  - Long-term (10-year) government bond yield reached 0.64 percent in March 2018.
  - Introduction cost in first year likely moderate but long-run cost increases as interest rate rises and base converges to total book value of equity.
  - Ministry of Finance study suggests a long-run cost of DKK 8 billion after dynamic scoring (compared to total company tax revenue of DKK 65 billion in 2017), reducible to DKK 5.4 billion with an interest rate cap of 3 percent.
  - IMF staff preliminary estimate (ORBIS data, excluding banks, assuming notional interest rate of 2 percent) suggests a long-term reduction in the corporate tax base by 12 percent; data caveats noted.
  - A cap on the ACE rate is generally not recommended because it relinquishes neutrality properties.
- Empirical evidence:
  - ACE regimes generally reduce corporate leverage, including for banks.
  - Evidence on investment effects is mixed; anti-avoidance measures important when adopting ACE.

### Multilateral reform option: Common Consolidated Corporate Tax Base (CCCTB)
- October 2016 EC proposal re-launched CCCTB in the EU:
  - Single EU-wide rules for computing tax base, then consolidate and apportion tax base among Member States.
  - Mandatory for multinational groups with global consolidated revenues of at least EUR 750 million and optional for others.
  - Proposed common tax base would include an ACE and a super-deduction for R&D expenditures.
  - Apportionment proposed using three equally weighted factors: labor, assets and sales.
- Potential effects:
  - Would constrain intra-EU profit shifting but may intensify CIT rate competition, factor reallocation, and regulatory competition.
  - Incentives to shift profits out of the EU could remain or increase.
- Denmark-specific considerations:
  - Denmark should study revenue and other implications carefully; Denmark cannot implement CCCTB unilaterally but can support it in the EU.
  - The CCCTB tax base appears narrower than Denmark’s current base, though differences may recede as Denmark increases R&D super-deduction or introduces an ACE.
  - Formula allocation may reduce share attributed to Denmark given Denmark’s strong production and R&D position but small domestic market (sales).
  - Small revenue loss may be acceptable if weighed against reduced need to control intra-EU transactions.

### Country experiences and empirical studies (high-level)
- Several countries have implemented ACE or similar systems with varying bases and rates; some abolished ACE regimes.
- Table 5 summarizes empirical studies:
  - General finding: ACE regimes tend to reduce corporate debt (negative effect on debt).
  - Investment impacts: mixed results (zero, weakly positive, positive for passive investment, negative, or no impact depending on study/country).
  - Studies on banks show negative effects on leverage and mixed effects on credit supply.

*Source: IMF staff report (chapter excerpt).*

### 5.05 percent in 2010, 4.37

### cr18178 - 5.05 percent in 2010, 4.37

### Notional interest / modified equity regimes — design features and parameters
- The deduction is equal to the specified percentage of the retained earnings of the immediately preceding taxable period.
- 5.05 percent in 2010, 4.37 percent in 2011.

- Liechtenstein (Since 2011)
  - Instrument: Notional interest deduction (Modified equity).
  - Base: Specified annually based on market developments (currently: 4 percent).

- Portugal (2010–2013)
  - Instrument: Notional interest deduction.
  - Base: Share contributions 2010–2013 or share capital.
  - Feature: SME's held by individuals, venture capital companies and business angels can benefit for a three-year period from a notional interest deduction of 3 percent on the amount of cash contributions by shareholders to share capital made during 2010–2013.
  - From 2014: individual-owned micro, small and medium-sized enterprises may deduct 5 percent of the company’s share capital for three years (limited to EUR 200,000).

- Cyprus (Since 2015)
  - Instrument: Incremental equity in the form of issued share capital and share premium (provided fully paid).
  - Rate benchmark: 10-year government bond yield of the Republic of Cyprus, or if higher, 10-year government bond yield of the country in which the new equity is invested. In either case 3 p.p. are added.

- Turkey (Since July 2015)
  - Instrument: Notional interest deduction.
  - Base: Incremental cash capital.
  - Rate benchmark: 50 percent of the annual weighted average interest rate applied to Turkish-denominated loans provided by banks.
  - Limitations: Not applicable to companies with high passive income or high financial assets, shares in subsidiaries or participations.

- Malta
  - Instrument: Notional interest deduction.
  - Base: Share capital, including any share premium, interest-free debt, positive retained earnings and contribution reserves.
  - Rate benchmark: The current yield on 20-year Maltese government bonds plus 5 p.p.
  - Limit: Limited to 90 percent of taxable income. Excess can be carried forward.

### Key statistics and parameter values (verbatim)
- 5.05 percent in 2010
- 4.37 percent in 2011
- Liechtenstein: currently: 4 percent
- Portugal: 3 percent (2010–2013 notional interest deduction on cash contributions)
- Portugal (from 2014): 5 percent of the company’s share capital for three years (limited to EUR 200,000)
- Cyprus: 10-year government bond yield of the Republic of Cyprus; add 3 p.p.
- Turkey: 50 percent of the annual weighted average interest rate applied to Turkish-denominated loans provided by banks
- Malta: current yield on 20-year Maltese government bonds plus 5 p.p.; limited to 90 percent of taxable income

### Observations on scope and limits
- Several regimes tie the notional deduction rate to observable market yields (government bond yields, bank loan rates) and add fixed percentage points (e.g., Cyprus +3 p.p., Malta +5 p.p.).
- Some regimes are time-limited or targeted (Portugal’s SME provisions for 2010–2013 and the 2014 micro/small/medium-sized enterprise rule with EUR 200,000 cap).
- Eligibility exclusions can apply (Turkey: exclusions for firms with high passive income or high financial assets, shares in subsidiaries or participations).
- Carryforward of excess deductions is explicitly allowed in at least one regime (Malta: Excess can be carried forward).

*Source: IMF Staff Compilation*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18178.pdf_