Denmark: Tax Treatment Of Securities Lending In Denmark – A Short Overview

Currently, there are no Danish statutes, rules or regulations explicitly regulating the Danish tax treatment of securities. The Danish tax authorities have published a number of rulings and decisions regarding various Danish tax aspects of securities lending, which provides a framework for the Danish tax treatment of securities lending. However, it should be emphasised that as each of these rulings and decisions are based on the specific facts and circumstances set out in the rulings and as the argumentation and statements set out in the rulings does not appear to be 100 percent consistent, the Danish tax treatment of securities lending is subject to some uncertainty.

When is a loan of securities not treated as a sale?

Pursuant to the rulings issued by the Danish tax authorities, a loan of securities by a lender to a borrower should not for Danish tax purposes be treated as a taxable sale or exchange (but instead as a loan), provided that a number of conditions, as outlined below, are fulfilled.

First, the securities lent are listed on a stock exchange or traded on another regulated market. All the rulings and decisions from the Danish tax authorities confirming that a loan of securities did not constitute a sale for tax purposes have concerned securities listed on a stock exchange or another regulated market. Furthermore, in a number of the rulings the Danish tax authorities have explicitly stated that the fact that the securities in question have been listed on a stock exchange or traded on another regulated market has been decisive for the outcome of the ruling. Rulings confirming that a loan of securities did not constitute a sale for tax purposes have been issued both in relation to listed shares and listed bonds.

Second, the lending of securities are governed by certain approved standard agreements. Rulings have been issued on securities lending on the basis of the following standard agreements: (i) Morgan Stanley & Co. International Limited – Overseas Securities Lenders Agreement (version: December 1995); and (ii) International Securities Lenders Association - Global Master Securities Lending Agreement (version: May 2000). Furthermore, it appears from the rulings that the lending of securities under other forms of standard agreements also may be deemed a loan from a tax point of view, provided that it clearly follows from such agreements that the securities are lent and not sold.

Third, the term of the loan. Until 2011, in order not to consider the lending of securities as disposal for Danish tax purposes, it was pursuant to the rulings and decisions published by the Danish tax authorities a requirement that the lending period was maximised to a period of six months. However, in a case decided by the Danish National Tax Board in 2011, a taxpayer requested a binding tax ruling on the Danish tax treatment of a securities lending transaction entered into for short-selling purposes. No maximum lending period was fixed under the terms of the transaction. Instead, the terms provided that the lender was entitled to terminate the loan with three days' notice and that the borrower was entitled to terminate the loan with one day's notice. The Danish National Tax Board found that an agreement to lend securities which can be terminated by one or both parties must be considered securities lending (and not a sale and disposal of shares) for tax purposes, even if there is no maximum lending period.

Following the new ruling, the Danish tax authorities have published a notice that the ruling constitutes a change of practice regarding the Danish tax treatment of securities lending transactions and that this change of practice applies to securities lending transactions entered into on or after 11 October 2011. According to the notice, the change of practice only applies to securities lending transactions with termination provisions similar to those in the recently decided case.

Collateral

In a securities lending transaction the lender will often receive collateral from the borrower in the form of securities. Provided that the above conditions are fulfilled also in relation to the collateral, the transfer of securities as collateral should not be deemed a sale for Danish tax purposes.

Payments of manufactured dividend, etc.

In most cases, dividends, etc., paid on the securities lent to the borrower must in the terms of the securities lending documentation be passed back to the lender in the form of what is referred to as a 'manufactured dividend'.

Provided that relevant conditions are fulfilled, the lender would from a Danish tax perspective be considered the owner of the securities lent to the borrower (as the lending of the securities in such case is not considered a disposal). As a consequence, the lender would from a Danish tax perspective be taxed on payments of manufactured dividend from the borrower in the same way as if the lender had not lent the loaned securities to the borrower and had received the payments on the securities directly. By way of example, if dividends are paid on the securities loaned to the borrower and the borrower therefore pays a manufactured dividend to the lender, such manufactured dividend would, from a tax point of view, be treated as a dividend for the lender.

Likewise, if under the terms of the lending documentation the lender is required to pass on to the borrower any income received on any securities provided as collateral, such payments would, for the borrower, be taxed as if the borrower had received the payments on the securities directly.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.