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Exit Tax Challenged By European Commission

On 25 January 2013 Denmark received a reasoned opinion from the European Commission, whereby Denmark is formally urged to amend its rules regarding exit taxation of unrealised capital gains on shares held by individual shareholders.

Taxand Denmark discovers how the Government can conform with treaty provisions.

The European Commission has maintained that the Danish rules regarding exit taxation of unrealised capital gains on shares held by individual shareholders moving to another member state are not in conformity with the treaty provisions on free movement of workers and the freedom of establishment.

Pursuant to the current Danish rules, an exit tax on accrued gains on shares and certain other securities held by individual taxpayers is triggered when the individual moves tax domicile while holding shares. Under specific conditions the tax authorities must grant a suspension with the payment of the tax, but it is noticeable that the system does not ensure that the tax payment is suspended until the gains are actually realised. A significant element of the rules is that the deferred tax becomes due not only when the shares are sold, but also when dividend distributions are made, loans are obtained from the company or in other comparable situations where the value of the shares are reduced.

The Commission holds that these partial payments of the deferred capital gains tax constitutes an unjustified restriction on the individual exercising its freedom rights, and has given Denmark 2 months to bring its rules in line with the EU law.

The dialog between the Danish Government and the Commission is not public, and it has not been announced whether the Danish rules will be changed before the 2 months deadline given by the Commission.

Your Taxand contacts for further queries are:
Anders Oreby Hansen
T. +45 72 27 36 02

Poul Erik Lytken
T. +45 72 27 35 31

Taxand's Take

The Commission has requested that the Danish exit tax rules for individual shareholders be amended with regards to the partial payments of the capital gains tax in connection with dividend distributions and in similar situations where the value of the shares is reduced. It is questionable whether the legislation will be amended as requested. An additional substantial problem with the Danish exit rules is that they do not allow a taxpayer to use the possibilities of succession in the balance of deferred tax, as would be possible if the taxpayer had stayed in Denmark instead of re-domiciling to another member state.

Taxand's Take Author