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Using Denmark as a Holding Company Jurisdiction
Since 1999, the combination of Denmark's extensive treaty network and beneficial tax holding company regime has meant companies have been able to route their income through Denmark without incurring withholding taxes at any stage. While some legislative restrictions of Danish tax law subsequently rendered Denmark less attractive as a holding company jurisdiction, in May 2009, this course was reversed when the Danish government adopted the 2009 Danish tax reform, which has improved the holding company regime. Particularly, the 2009 Danish tax reform improves the Danish participation exemption applicable to dividends and capital gains realised on the transfer of shares by abolishing the holding periods of one year and three years, respectively (effective as of 2010).
Taxand Denmark reviews the benefits to international corporate investor's of using Denmark as a holding company jurisdiction.
A Danish company may be set up either as a private limited company or a public limited company. The setup can be completed within a day. Alternatively, a shelf company can be acquired. The share capital may be paid up in cash or by contribution of assets in kind.
A new 2010 company reform allows for only partial payment of the capital. Any premium and contribution of assets must be paid in full.
Denmark has more than 80 international tax treaties, which makes it easy for many international companies and investors to route their income through Denmark to fully eliminate or substantially reduce any withholding taxes on inbound and outbound dividends. The majority of Denmark's tax treaties are based on the OECD model treaty.
No Capital Duties
No capital duties are imposed on the formation of a subsidiary, and no stamp taxes or duties apply to the issue of shares, the increase of share capital or the transfer of shares.
Beneficial Participation Exemption
Under the 2009 Danish tax reform, for the 2010 tax year, shareholdings are divided into three groups depending on the ownership percentage. Shareholdings of less than 10% of the share capital are considered portfolio investments, shareholdings of 10% or more of the share capital are considered subsidiary investments (if the shareholding qualifies for a tax reduction under the Parent-Subsidiary Directive or an applicable tax treaty), and shareholdings of 50% or more of the share capital are considered related company investments (if the shareholding does not qualify for a tax reduction under the Parent- Subsidiary Directive or an applicable tax treaty).
Dividends received from portfolio investments and capital gains realised on the transfer of shares in portfolio investments are subject to tax. However, dividends received from subsidiary investments and capital gains realised on the transfer of shares in subsidiary investments are tax exempt (irrespective of the holding period) provided that the subsidiary qualifies for a tax reduction under the Parent- Subsidiary Directive or an applicable treaty. Dividends received from related company investments (which do not qualify under the Parent-Subsidiary Directive or an applicable tax treaty) and capital gains realised on the transfer of shares in related company investments are also tax exempt. Anti-avoidance provisions have been introduced to prevent structures established for the sole purpose of meeting the 10% or 50% threshold.
Capital gains realised on the transfer of shares in Danish companies (regardless of the ownership percentage) held by foreign investors are not subject to Danish taxation except in limited circumstances when the Danish company is treated as disregarded for foreign (mainly U.S.) tax purposes. The abolishment of the former three-year holding period requirement applicable to the tax exempt treatment of capital gains realised on the transfer of shares in subsidiary investments improves the flexibility of the holding company regime.
Dividends received from subsidiary investments and related company investments, as of the 2010 tax year, are tax exempt regardless of the ownership period; dividends received from portfolio investments are subject to Danish tax. The abolishment of the former one-year holding period requirement (effective as of the 2010 tax year) significantly improves the flexibility of the holding company regime.
Withholding Tax on Outbound Dividends
From the 2010 tax year, no withholding tax will apply to dividends distributed to foreign shareholders from subsidiary investments if Danish taxation is reduced under the Parent-Subsidiary Directive or an applicable tax treaty. If the dividend recipient is not located in an EU jurisdiction or a jurisdiction with which Denmark had a tax treaty, the recipient will be subject to Danish dividend withholding tax regardless of the size of the shareholding (no exception for related company investments). If the shareholder holds a portfolio investment and is located in a jurisdiction with which Denmark has an exchange of information agreement, withholding tax of 15% will apply to any outbound dividend distributions. For all other shareholders, a dividend withholding tax of 28% (27% as of 2012) will apply to any outbound dividend distributions. The tax exempt distribution of dividends is subject to a beneficial ownership requirement.
Withholding Tax on Interest Payments
Generally, no Danish withholding tax is imposed on interest payments from a Danish company to a foreign lender. Interest payments on loans granted by a foreign related company may, however, be subject to 25% withholding tax if specific requirements are met and only if the recipient of the interest is located in a tax haven country. Interest payments to related lenders in the European Union or a country with which Denmark has signed a tax treaty are not subject to withholding tax.
Withholding Tax on Royalties
A 25% withholding tax applies to royalty payments from sources in Denmark. However, the withholding tax may be reduced under a Danish tax treaty or the Interest and Royalties Directive. The Danish statutory definition of royalties does not include compensation for the use of copyrights.
Interest Deduction Limitations
Interest is generally deductible for Danish corporate income tax purposes. However, the deductibility of interest payments may be reduced under the Danish thin capitalisation rules and the Danish interest deduction limitations known as EBIT and asset limitations. The thin cap rules prescribe a debt-to-equity ratio of 4 to 1. Any interest on debt to related parties in excess of this ratio will be subject to deductibility limitations. The thin cap rules only apply if the debt to related parties exceeds DKK 10m (EUR 1.34m). Under the EBIT limitation, net financing expenses must not exceed 80% of EBIT. Under the asset limitation, net financing expenses are limited to an amount corresponding to 5% of specific qualifying assets. The EBIT and asset limitation tests only apply to interest in excess of DKK 21.3m (EUR 2.86m).
Low Corporate Income Tax Rate
Corporate income is taxed at a flat rate of 25%.
Territorial Taxation Principle
Denmark operates with a modified territorial taxation principle, which means that income and capital gains from Danish companies' permanent establishments and real property located outside of Denmark are not subject to Danish taxation.
Joint Taxation Regime
Denmark has a mandatory joint tax consolidation regime applicable to Danish affiliated companies (defined by controlling interest) and affiliated permanent establishments located in Denmark.
International joint taxation may be elected but is generally not advantageous because of its all-inclusive characteristics.
Like many other countries, Denmark has enacted a controlled foreign corporation regime to reduce tax evasion. The Danish CFC rules apply when:
- a parent company controls more than 50% of the voting rights in the subsidiary
- more than 50% of the total taxable income of the subsidiary consists of financial income
- more than 10% of the subsidiary's assets are of a financial nature
If CFC taxation is applicable, the total income of the subsidiary must be added to the income of the Danish parent company.
As of the 2010 tax year, a carried interest regime will apply to some individual private equity partners in private equity funds. The carried interest regime will result in taxation of carried interest as ordinary income (up to 56.5%). Today, carried interest is taxed as share income (up to 42%). Under the carried interest regime, only the yield that exceeds the yield that the other investors are entitled to, proportionately, will be treated as carried interest. Yield up to this threshold will be taxed as share income.
Acquisition Structuring and Debt Leveraging
A common acquisition technique is the use of a Danish holding company financed with debt and equity to acquire a Danish target company. The holding company and the target company will be subject to mandatory tax consolidation; the interest expenses of the holding company may be set off against the operating income of the target company. The model is also commonly used to debt leverage existing Danish group companies. No restrictions apply to these types of transactions except from the thin cap rules and interest deduction limitations described above.
Taxation of Individuals
Denmark's individual tax rates are among the highest in the world. The tax reform introduces several changes to the individual tax regime, the most important being a reduction of the marginal individual income tax rate from 63% to 56%.
The combination of Denmark's extensive treaty network and beneficial tax holding company regime has meant companies have been able to route their income through Denmark without incurring withholding taxes at any stage. What's more the revised 2009 Danish Tax Reform means international corporate investor's can continue to benefit from using Denmark as a holding company jurisdiction.
Your Taxand contact for further queries is:
Anders Oreby Hansen
T. +45 72 27 36 02
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