Denmark: Holding Companies In Denmark

As from 1 January 1999 Denmark introduced significant tax advantages to holding companies resident in Denmark.

1. Dividends received by a Danish holding company from a foreign, non-financial subsidiary is tax exempt in Denmark. This will apply irrespectively of the taxation of the subsidiary in its home country.
2. Dividends can be remitted to a foreign parent company without Danish withholding tax. This rule is presently proposed changed.
3. No Danish withholding tax is imposed on interest paid to foreign companies.
4. Dividends from subsidiaries resident in other EU countries can generally be remitted to Denmark without foreign withholding taxes.
   Denmark has widespread net of tax treaties under which the withholding tax on dividends from other countries is reduced to 0-15%.
5. Gains on shares of a non-financial subsidiary realised by a holding company resident in Denmark will be tax exempt after 3 years of ownership.
6. Interest expenses relating to a loan financing an acquisition of shares are generally fully deductible in the taxable income of the holding company.
7. There is no capital contribution duty or transfer tax in Denmark, and no registration fees.

Dividends received by a Danish holding company from its foreign non-financial subsidiary are tax exempt in Denmark, irrespective of whether or how the subsidiaries have been taxed in their country of residence. (Previously, - or before 1999 - the tax exemption was dependent on the tax regime in the country of origin of the dividends).

It is a condition for the tax exemption that the Danish holding company holds at least 25% of the share capital in the dividend paying company in a period of at least one year, during which the dividend distribution must fall.

If this holding requirement is not fulfilled, 66% of the foreign dividend received will be included in the taxable income of the holding company.

A subsidiary will be considered a financial subsidiary if at least 33 1/3% of its income arises from financial activities, or if the market value of the financial assets of the subsidiary amounts to at least 33 1/3% of the market value of its total gross assets. "Financial activity" includes among other interest income, dividends, currency gains, royalties, income from financial leasing and income from insurance business.

Dividends from financial subsidiaries which have been subject to foreign taxation that is not materially more favourable than Danish taxation, are tax exempt for a Danish holding company according to the same rules as dividends from non-financial subsidiaries.

Dividends from financial subsidiaries in low taxed jurisdictions will generally be taxable, unless the subsidiary has been subject to Danish CFC-taxation since the acquisition of its shares or for at least 3 years prior to the distribution of the dividend.

Financial subsidiaries are subject to Danish CFC-taxation if the Danish holding company directly or indirectly holds at least 25% of the share capital or controls more than 50% of the voting power in the foreign financial company.

If dividends from a low taxed financial company do not qualify as being tax exempt in Denmark, special relief rules may apply.

Currently Denmark will not impose withholding tax on dividends transferred out of Denmark to a foreign parent company.

This exemption requires that the foreign parent company holds at least 25% of the share capital of the Danish company for a period of at least one year during which the dividend is distributed, meaning that the condition is exactly the same as the condition regarding the tax exemption in the Danish holding company.

If the holding requirement is not fulfilled a 28% withholding tax will apply.

The rate is often reduced to between 0 and 15% (often 5%) under the relevant tax treaty.

On 10 November 2000 a bill was proposed implying that the exception from withholding tax on outbound dividends to countries or jurisdictions outside the EU is conditioned upon Denmark having concluded a Tax Treaty with the country in question.

This bill is still undergoing parliamentary debate, and a proposal for a revision of the bill further reduces the countries where the exception applies, as exception will only apply to countries where the tax treaty abolishes or reduces the Danish withholding tax on dividends.

Danish domestic law does not impose withholding tax on outgoing payments of interest, cultural royalties, including software royalties, equipment rents, or management fees. The withholding tax rate of other royalties is 30%. This rate is reduced to nil under most treaties.

Dividends from subsidiaries resident in other EU member states can generally be remitted to Denmark without foreign withholding taxes.

Denmark has widespread net of tax treaties under which withholding tax on other dividends generally is reduced to 0-15%.

The holding company’s gains on the sale of shares held for more than 3 years are generally tax exempt. Losses on shares held for more than 3 years are not tax deductible.

Gains on the sale of shares held for less than 3 years are taxable. Losses may be deducted against gains on other shares held for less than 3 years only.

There are certain tax planning techniques to reduce a gain on a sale of shares.

1. A (tax-free) dividend payment before closing of the sale will thus reduce the capital gain.
2. If the shares of a company are sold to the issuing company, the total sales price (and not just the gain) is considered dividend, and generally subject to taxation as a dividend distribution. According to the above the sales price may be tax exempt under the dividend rules.

As is the case with regards to dividend, gains on the disposal of shares of financial subsidiaries situated in low taxed countries are subject to income tax irrespective of the period of ownership.

This does not apply if the company has been subject to Danish CFC-taxation for at least 3 years, and the shares have been owned for at least 3 years. In this situation the gain will be tax exempt.

Interest expenses on loans related to the acquisition of Danish and foreign shares are in general tax deductible, but thin capitalization rules may apply.

The general requirement is a debt/ equity ratio not higher than 4:1.

Debt to connected foreign parties, or debt which is guaranteed by such connected parties must fall within this ratio in order for the interest to be deductible.

Debt outside the 4:1 ratio only qualifies for a deduction of interest, if it can be proved that such financing could have been obtained from an independent lender.

There is no capital contribution tax on the issue of shares, on capital increases or on contributions. There is no registration fee to the Danish Commerce and Companies Agency.

The Danish corporate income tax is a flat tax of 30% (2001) which is paid on account twice a year.

There is no additional local taxes, franchise tax or net wealth tax.

Corporations resident in Denmark are liable to Danish taxation on their worldwide income.

The corporate tax rules allow joint taxation of a Danish parent company with any of its qualifying foreign and local subsidiaries. The regime offers the possibility of setting off losses of a foreign subsidiary against Danish taxable income.

The most important requirements for joint taxation are as follows:

• Danish subsidiaries must generally be directly or indirectly wholly owned. In respect of foreign subsidiaries, the maximum percentage allowed under the legislation of the foreign country must be owned.
• All companies included under joint taxation must have the same financial year.
• The shares in subsidiaries included under joint taxation must have been owned for the entire financial year. Newly incorporated companies may be included under joint taxation from the date of incorporation.

The benefit from a deduction of losses in foreign subsidiaries may be permanent or of a timing nature dependent on the actual circumstances.

Denmark has agreed a comprehensive network of tax treaties with other countries in order to avoid double taxation. The treaties are generally based on the principles laid down in the OECD Model Convention. Most treaties apply a credit principle.

Withholding tax on dividends and royalties is normally reduced to 0-15% under the treaties.

Domestic law allows a credit for foreign taxes paid, not covered by a specific treaty. The credit is limited to the Danish tax on the relevant income, calculated on a per country base.

A Danish employer does not pay social security contributions. The employee contributes 9% of his/her personal earned income. This contribution is tax deductible.

The total effective tax rate for earned income, including social contributions, is up to 63%.

However, Denmark offers a favourable tax regime for foreign expatriates on short-term secondments to Denmark.

Expatriates assigned to Denmark can opt for a 25% gross tax on their cash remuneration including benefits-in-kind such as company car and free phone.

Other income, including other benefits-in-kind, is taxed at the general rates.

The 25% tax rate regime requires a monthly gross salary in cash of at least DKK 56,100 (app. USD 6,800). This regime will not apply for more than 3 years. The employment in Denmark may be prolonged with up to 4 years after the 3 years period has expired. During the period of prolongation, the general tax rates apply.

As for all EU countries, the Danish VAT system is based on the EU Directives. VAT should generally not give rise to significant costs. The VAT rate is 25%.