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Court Allows Deduction of Management Fee
On 29 November 2011, in the case of Symbion Capital I A/S vs. the Danish Ministry of Taxation the Danish Supreme Court stated, that in order for a company to deduct management fees as operating costs (i) the management services themselves must be part of the ordinary business of the company paying the fee, and (ii) the management company must have taxable income. Taxand Denmark discusses whether the Symbion decision will have a significant impact on investment and holding companies' ability to deduct operating costs in the future.
The key issue in the Symbion case was the possibility for an investment company to deduct management fees as an operating cost in the investment company. The specifics of this case was, that Symbion had employed a management company to conduct a number of tasks in connection with the management of its portfolio companies, including participation in the board of directors, and drafting of interim reports, exploring future means of increasing the value of the portfolio companies. Symbion wanted to deduct the management fees paid to the management company as an operating cost in the investment company rather than in the portfolio companies. The Danish Eastern High Court refused Symbion the right to deduct management fees, saying that a company can only deduct expenses as operating costs if the expenses were paid by the company as part of its ordinary business and with the purpose of realising taxable income.
The Supreme Court restated the decision by the Eastern High Court so far as saying that an expense must be paid as a part of the company's ordinary business of making money in order for it to be a deducible operating cost. However, the Supreme Court further stated that it is not a requirement that the expense was paid with the intent of receiving taxable income, it is sufficient that taxable income was realised. The decision contains no guidance as to the amount of taxable income required, but the deduction was allowed, even though, there as a consequence of the tax losses of the company, was no actual taxable income in the company.
In addition to the requirement of taxable income established in the Symbion decision, the decision also lists a variety of other elements which must be taken into consideration when considering whether or not it will be possible to deduct management fees as operating costs.
Although the Symbion decision may have a positive effect on investment companies entitlement to deduct expenses, it may have the opposite effect on holding companies. The decision provides investment companies, with taxable income, with the possibility to deduct management fees as operating costs, subject to other limitations in the Danish Tax legislation. On the other hand, holding companies, with no taxable income may, for the reasons listed above, be facing serious problems in the future
The key focus areas for investment companies in the future will be the ability to demonstrate that management services are within the business scope of the company, and for holding companies, on ensuring the realisation of taxable income. For both type of companies, it will be important to stay well within the limits of current legislation, especially the rules on transfer pricing.
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