With the number of offshore holding companies on the rise, tax authority Skat has now begun investigating whether they serve as illegal tax shelters, reports Ekstra Bladet newspaper.

A liberal interpretation of the current laws allows for foreign-based companies to be exempt from paying taxes, when certain criteria are met regarding their shareholding and if the parent company is based in a country with which Denmark has a double taxation agreement.

Using that loophole, a company registered in Denmark with a ‘shell company’ in one of those partner countries can often avoid paying taxes in either of the two countries.

‘Offshore Fox’, a consortium promoting offshore the rights of holding companies and individuals to maximise their profits, called Denmark a ‘surprisingly’ good country to look into for those wishing to earn tax-free profits.

‘High-tax Denmark has long provided ways for shrewd non-residents to cut their tax bills – [specifically] the country’s corporate regime allows the registration of respectable, low-profile yet completely tax-free holding companies’, Offshore Fox’s website states.

Although Skat has now decided to crack down on the issue, proving that a company was deliberately created to avoid tax payments (by hiding profits from the authorities) could prove difficult and costly.

According to the central bank, more than 3.4 billion kroner was being held in holding companies registered in Denmark during the first quarter of 2009. Many of these holding companies have addresses at ‘office hotels’ that provide legal address in Denmark for foreign companies. One office hotel is reportedly home to as many as 347 Danish and international companies.

At least 500 holding companies have been established in Denmark in the past two years, including one for Pepsi Cola, according to Operation Fox.