Dear Commissioner Monti

I write to you in a matter of great importance to Denmark. It concerns the possibility for Danish credit institutions to make loan loss provisions in relation to the Community rules on state aid.

The case has its background in a long standing practice in Denmark according to which a credit institution's loan loss provisions are tax deductable. This rule on loan loss provisions should be seen in conjunction with the fact that Danish credit institutions are immediately subject to tax on capital gains.

By law no. 911 of 16 December 1998 this practice became statutory so that a credit institution can take into account its loan loss provisions when stating its taxable income. The law, however, has not yet come into force since a notification to the European Commission was considered appropriate. The law was notified to the European Commission in the beginning of 1999.

Subsequently, several meetings have been held with the European Commission, i.a. the Permanent Secretary of the Ministry of Economic Affairs Michael Dithmer has met with Director General Alexander Schaub, and the questions posed by the European Commission have been answered. We have had the impression of a mutual understanding with the European Commission.

The matter is of great importance, since absence of approval from the European Commission could imply an abolition of the right to tax deductable loan loss provisions, risking thereby a situation of too limited loan loss provisions in Danish credit institutions. This in turn could lead to a less stable financial system in Denmark. Moreover, it is questionable for how long a law can exist without entering into force. Thus, a prompt resolution of the matter would be welcomed.

In addition, I would like to draw your attention to the existence of similar loan loss provisions schemes in other Member States. In the IMF Working Paper "Regulatory and Tax Treatment of Loan Loss Provisions", it is stated that specific loan loss provisions are a normal operating expense, which should be taxdeductable, and that deductibility of loan loss provisions does not constitute a special subsidy for banks.

Yours sincerely

Marianne Jelved

Directorate General XV

Rue de la Loi 200

B-1049 Bruxelles

Belgien

Refering to our meeting October 22 1999 and my letter of March 28 2000, we have not yet solved the dossier concerning the Danish legislation concerning tax deductions in the credit institutions of expected losses.

On November 3 2000 my minister, Minister for Economic Affairs, Marianne Jelved has written a letter to Commissioner Mario Monti concerning the issue, where she emphasizes the great importance Denmark attach to receive a quick answer from the Commission in order to put this important legislation into force. It is a legislation, which formalises a long existing practice, and we consider it to be a part of a sound banking system.

In follow up to the letter from my minister I can inform you that the Government has reached an principal agreement on the budget for 2001. This agreement includes a proposal, which will significantly reduce the interest income from the postponed taxation, which results from tax deductions in the credit institutions of expected losses. The change will come into force January 1 2001.

I hope these new information are helpful in your deliberations on the Danish legislation concerning deductions in the credit institutions of expected losses in order to enable to give us a quick and positive reaction.

The Ministry of Economic Affairs will be at your disposal, if you have any questions. In this case your services should call director Jens Pagter Kristenssen at ph. +45 3392 4183.

Yours sincerely

Michael Dithmer

Director-General Alexander Schaub

Directorate General XV

Rue de la Loi 200

B-1049 Bruxelles

Belgium

Dear Mr. Schaub

I would like to thank you for a very positive meeting on 22 October 1999 concerning Danish banks' provisions in relation to the Community rules on State aid.

At the meeting I described the background of the Danish taxation and accounting rules in the field, emphasizing

1. that the stability of the financial system is aided by the fact that the obligation of credit institutions to make provisions has resulted in the provisions being made on a continuous basis when it has become probable that a risk of loss will arise.

1. that the requirement of provisions for accounting purposes at an early stage reduces the capital and reserves of the credit institution and that this is one of the reasons why it is not obvious whether the provision rules are to the advantage or disadvantage of the credit institutions.

1. that, as to the question of deductions in respect of losses, such deductions are simply made at different points in time. In the end, credit institutions will have been allowed the same deductions as other enterprises because provisions which do not lead to a loss must be recognised as income in

This provision system is compulsory for the institutions, and they are not allowed to change the calculation principle.

Also other enterprises than banks may make writedowns on debtors for tax purposes. This applies, for example, to financial institutions, hire-purchase shops and other enterprises where exceptional circumstances such as a very substantial increase in the number of debtors make it appropriate.

Mention should also be made of the fact that banks as enterprises subject to tax liability in respect of business activities are always liable to tax on, for example, a share gain (irrespective of the period of ownership) while, for example financial institutions and other companies which are not subject to tax liability in respect of business activities are subject to a three-year rule so that gains may be realised exempt from tax after three years of ownership.

Against this background, Denmark is of the opinion that the financial institutions - all things considered - are not placed in a more favourable position than other institutions as special tax adjustments have been made for these, too.

I hope that you share this point of view. Should you find that some of the facts given above need amplification, we are, of course, prepared to help you.

Yours sincerely

Michael Dithmer

Directorate General IV

Rue de la Loi 200

B-1049 Bruxelles

Belgium

Dear Mr. Schaub,

I would like to thank you very much for giving The Danish Ministry of Economic Affairs the opportunity to talk with you about the following topics with regard to the EU´ rules on state aid.

1. Danish provisions concerning banks´ and mortgage banks´ bad debt as described in our letter of 17 August.

1. Danish provisions concerning deposit guarantee systems, especially the statutory limit with regard to the amount of the contributions from the Danish Deposit Guarantee Fund.

We are looking forward to our meeting on 22 October. The meeting will be attended by Mr. Michael Dithmer, Mr. Thomas Kjøller and me.

Yours sincerely

Torben Weiss Garne

Director

Directorate General XV

Rue de la Loi 200

B-1049 Bruxelles

Belgium

Dear Mr. Feltkamp,

Following our very useful meeting on March 24, 1999, I can inform you that we have now drawn up a memo explaining our point of wiew on the issue of Danish provisions concerning banks´ and mortgage banks´ bad debt with regard to the EU´s rules on state aid.

You will find the memo, which also will be forwarded to Director-General Alexander Schaub, enclosed.

Yours sincerely

Torben Weiss Garne

Director

The aim is to provide a clear legal basis for deductions made by the credit institutions and by the mortgage credit institutions for provisions for losses on loans and advances and guarantees etc. It is suggested to codify the existing practice according to which credit institutions and mortgage credit institutions may base the taxable income on the provisions made for accounting purpose.

A main principle in the accounting rules for credit institutions and mortgage credit institutions is, that all assets are valued mark-to-market.

The fact that credit institutions and mortgage credit institutions have a special right to deduct for provisions is due to the special accounting requirements on the institutions. Credit institutions and mortgage credit institutions must, according to the accounts law rules, each year make the necessary and adequate provisions required to cover as well actual losses as foreseeable losses on loans, advances and guarantees etc. It is the management of the particular institution that will de cide the current amount of provision required. Provisions are generally made following individual evaluation of the risk involved in the particular loan etc. Provisions may be made on groups of small loans and advances based on statistical calculations.

In the long run the tax deductions will be the same in credit institutions and mortgage credit institutions compared with other companies. The reason is, that the credit institutions and the mortgage credit institutions are to enter as income

provisions not resulting in losses in the year of income in which it is found that there are no longer any reasons for the particular provision. Credit institutions and mortgage credit institutions as well as other businesses will thus get a deduction for the same provisions, i.e. the provisions actually closing in a loss.

There is no free access to provisions. As the annual accounts shall give a true and fair view, the Danish Financial Supervisory Authority will intervene if provisions are considered to be too small or too heavy.

Foreign financial institutions in Denmark are also taxed to the rules described here. These financial institutions are not subject to supervision by the Danish Financial Supervisory Authority.

According to current practice, institutions may deduct accounting provisions for taxation purposes. The accounting criteria for establishing when a provision is necessary are, however, not necessarily convergent with the criteria which need to be met for tax purposes before losses may be deducted. Practice for credit institutions and mortgage credit institutions may in this context differ from the general tax law principles for the making up of losses on accounts receivable by which losse s may generally not be deducted until an actual particular loss has been taken.

However, as noted above, credit institutions and mortgage credit institutions as well as other businesses will in the end get a deduction for the same provisions i.e. the provisions actually closing a loss.

Only financial institutions in a narrow sense of the term are covered by the act, i.e. only institutions subject to special supervision by the Danish Financial Supervisory Authority.

At the same time, the provision system is mandatory. There is no freedom of choice for the institutions to apply the provision system or some other principle. Institutions are thus effectively prevented from choosing at their discretion to use deductions for accounting provisions in years of good earnings and thus a possibly large taxable income, and then possibly opting out of the provision system in years of large losses.

According to the accounting principles the institution must, for each year of income, enter as income the year-end provision of the preceding year and deduct the year-end provision of the year of income. In case the accounting year-end provision of the year of income exceeds the year-end provision in the preceding year of income, the institution will get a deduction for the additional amount. In case the year-end provision of the preceding year exceeds the year-end provision in the year o f income the institution shall enter the difference as income. The net effect thus is that the changes in provisions from one year to the other are included in the making up of the taxable income.