Companies usually enlist legions of lawyers and even move headquarters to minimize tax payments. In Denmark, they could be better off overpaying.

That's an unexpected side effect emerging from the extraordinary monetary easing unleashed by the country's central bank. The government now pays higher interest on overpaid taxes in corporate accounts than banks do on deposits. That makes the Tax Ministry a more attractive place for companies to store surpluses - costing the government and potentially even diluting central bank policy.

"It's clear there's an incentive," said Jacob Braestrup, head of tax policy for the Confederation of Danish Industry, which represents about 10,000 companies. "If you have to pay to put money in the bank but you get interest if you pay too much to tax authorities?"

While flows so far suggest there hasn't yet been a mass shift by companies to park cash at the ministry, legislation is now on the table to head the trade off at the pass.

Companies can earn one per cent on overpaid taxes and there's no limit on how much they can accumulate in accounts at the ministry. By contrast, Danish lenders are charging some of their corporate customers to hold money after the central bank lowered its key deposit rate to minus 0.75 per cent.

Capital Inflow
The central bank cut the rate four times starting in January to stop the krone from appreciating after speculators flooded the currency market, betting Denmark's peg to the euro would break. The bank built up record foreign currency reserves and stopped issuing government bonds to halt inflows that followed Switzerland's lifting of the franc's cap to the euro.

The low rates are rippling throughout the Danish economy. Apartment prices climbed 10 percent in the past 12 months, the Danish statistics agency said today.

Over the years, the amount of overpaid taxes has roughly equaled the amount of owed taxes, which this year will be about 8 billion kroner ($1.2 billion), according to the Tax Ministry. But the amount in overpaid taxes risks climbing if low rates persist for several years, which is what the ministry forecasts.

To discourage companies from using the ministry as a bank, Denmark's former government in April introduced legislation to change the ministry's rate so it equals the central bank's deposit rate plus 75 basis points, or zero currently.

It also proposes a negative rate of 0.55 per cent on prepaid taxes, capping corporate accounts at 200,000 kroner above owed amounts, and limiting interest payments to accounts larger than 5,000 kroner.

Tackling Issue
The measures, the government said, are needed to ensure the central bank's ability to influence the krone through rates.

While the central bank's extraordinary measures fended off speculators and most Danish investors, pension funds have purchased kroner every month this year, the bank said last month. That's keeping foreign reserves high and delaying any rate increases. Danske Markets said June 30 the bank is likely to raise rates twice later this year, to minus 0.50 per cent.

The legislation, which is expected to be reintroduced by the newly elected government, is also backed by the central bank.

"The proposal addresses this issue in an environment with negative interest rates," Julie Holm Simonsen, a spokeswoman for the bank, said in an e-mail in response to questions. "Interest paid on deposits with the tax authorities should not be more favorable than similar deposits with banks."

The industry confederation has resigned itself to the inevitable. The group is trying to convince lawmakers that the rate companies pay on outstanding tax bills also should be tied to central bank rates. It's set much higher at 4.5 per cent now.

"That's missing," Braestrup said. "We understand that it's not good that businesses use the tax authority as a bank."