Denmark Tax Alert - 14 December 2012
Parliament passes dividend anti-avoidance rules and exemption for capital gains on portfolio shares
By Kim Wind Andersen, Erik Banner-Voigt and Birgitte Tabbert
The Danish Parliament passed two important bills on 14 December 2012, one of which contains measures to prevent the circumvention of Danish and foreign taxation and the other grants a tax exemption for capital gains derived by companies from the sale, etc. of unlisted portfolio shares. The bills still have to be published in the official gazette before they can enter into force. Once published, the dividend anti-avoidance rule with respect to group transfers of shares will come into force on 20 December 2012 and will apply retroactively to transfers taking place as from 3 October 2012. The other measures will apply as from 1 January 2013.
Dividend anti-avoidance rule
The most significant measures targeting abuse relating to dividends are as follows:
- Group-related transfers of shares will be treated as dividends subject to dividend taxation where the remuneration for the transfer is either entirely or partly not in the form of shares. The transfer will trigger a 27% Danish withholding tax -- regardless of whether the transferring company is resident or nonresident -- if the taxation cannot be eliminated or reduced under the EU parent-subsidiary directive or an applicable tax treaty or if the transferor is unable to receive tax-exempt dividends. As noted above, this measure will apply retroactively as from 3 October 2012.
- It may not be beneficial to use Denmark as a “conduit country” if the beneficial owner is resident outside the EU, in a non-treaty country or in certain tax treaty countries. The 27% Danish dividend withholding tax will be imposed on dividends declared on or after 1 January 2013 if the Danish company is not the beneficial owner of dividends received directly or indirectly on subsidiary or group shares and taxation of the on-declared dividend is not eliminated under the EU parent-subsidiary directive. The withholding tax can be reduced under an applicable tax treaty if the recipient is the beneficial owner of the dividends. Foreign groups using Denmark as a conduit country should consider restructuring before 1 January 2013 to avoid Danish withholding tax.
- The Danish tax liability rule that depends on the place of registration will be expanded to include any company registered with the Central Business Registry. The tax liability of a company, other than a public or private limited company, currently depends on the company having its effective place of management in Denmark.
Taxation of capital gains on portfolio shares
The second bill provides a tax exemption for capital gains derived by companies from the sale, etc. of unlisted portfolio shares, but dividends from unlisted portfolio shares will remain taxable. The salient features of the exemption are as follows:
- The exemption will apply only to gains derived from the sale of unlisted portfolio shares held by a company that owns less than 10% of the share capital of the portfolio company (i.e. the company cannot have a decisive influence on the portfolio company). Unlisted portfolio shares are shares that are not traded on a regulated market or a multilateral trading facility. As a result, it will be essential for companies to distinguish between listed and unlisted shares.
- The exemption will apply only to shares in public or private limited companies or foreign companies of a similar nature. In the case of a foreign company, it will be essential for the owner of the capital to only have limited liability and be entitled to dividends and have influence in proportion to the injected capital.
- The exemption will not apply to shares held by life insurance companies, convertible bonds, subscription rights to convertible bonds or shares held as part of a trade.
- To prevent abuse, capital gains and losses on the unlisted shares will taxable if more than 85% of the unlisted portfolio company’s assets consist of listed shares. This determination will be made on the basis of the average value of the listed shares as a percentage of the average value of the portfolio company’s assets, as reflected in its accounts for the previous year. The rule will prevent listed shares from being “wrapped up” in an unlisted company. Other rules will prevent a corporate shareholder from selling a portfolio share before the declaration of dividends in order to convert otherwise taxable dividends into tax-exempt capital gains or taxable dividends to tax-exempt liquidation proceeds and the sale of shares to a subsidiary of the issuing company.
The tax exemption implies that capital gains and losses on unlisted portfolio shares will not be included in calculating taxable income. Companies with a balance of unutilized, realized losses still will be able to offset these losses against gains on other portfolio shares taxed on a realized basis.