This article sets out the main rules on taxation of Danish corporations' sale of shares, etc. It is not intended to cover the rules in detail and the rules on shares in cooperative entities are specifically omitted. Though cooperative entities are commonly used in Denmark, foreign investors are not often found among their shareholders. Unless necessary for the description of other rules, the rules on investment fund certificates in distributing investment funds are also omitted.
Companies, etc. subject to the Act on Capital Gains Tax on Shares
Companies and certain foundations/trusts which are fully tax liable to Denmark at the time of sale are subject to the Act on Capital Gains Tax on Shares. Companies, etc. which are not fully tax liable to Denmark are not subject to the Act on Capital Gains Tax on Shares unless buying and selling shares is part of their ordinary course of business or trade and the shares in question are connected with a permanent establishment in Denmark.
Securities covered by the Act on Capital Gains Tax on Shares
Shares in limited liability companies, shares in cooperative societies, membership certificates in associations, negotiable certificates for deposits in investment funds and similar certificates are subject to the Act on Capital Gains Tax on Shares as well as bonus rights (right to bonus shares) and subscription rights (right to subscribe for shares).
In certain cases the Act also covers convertible bonds and subscription rights to convertible bonds.
Date of Acquisition
The date of acquisition is important with regard to the question of taxation in connection with the subsequent sale of the shares.
If a company was formed by the present shareholder, the shares are deemed to be acquired at the time of the company's establishment. The date of the founding general meeting constitutes the date of acquisition, not the date of the signature of the memorandum of association.
The shares may also be purchased. In this case the date of acquisition is normally the date of the signature of the transfer agreement. If the shares are listed on an official exchange, the date of acquisition is the date of the sale note.
If bonus or subscription rights have been allotted to or acquired by the shareholder, specialized advice should be obtained.
The date of sale
The tax consequences normally arise in connection with sale of the share. However, businesses which deal in shares and similar securities and which use the inventory principle use other rules.
A share, etc. is considered as sold
Furthermore, under certain conditions a change in the company's articles of association may be treated as a sale of the shares. This is the case when the change in the articles of association results in considerably changed conditions for the share, eg. a change in the right to dividends. The same applies to the exchange of shares with different rights.
- i) when the shareholder sells the share,
- ii) when the company holding the share ceases to be a Danish company because it moves its registered address abroad,
- iii) when a foreign company holds the share in a permanent establishment in Denmark and the activity constituting the permanent establishment ceases,
- iv) when a convertible bond is redeemed,
- v) when the company which has issued the share is wound up voluntarily or in bankruptcy, or
- vi) when the company holding the shares is wound up.
As a capital reduction is considered as distribution to the shareholder it will generally not be subject to the Act on Capital Gains Tax on Shares. However, depending on the circumstances, dispensation may be obtained whereby the reduction is considered to be a sale of the share instead, see below. Similar rules apply in connection with the sale of shares to the issuing company.
Taxation
Companies are taxed on profits from the sale of shares which are sold within 3 years of acquisition. Losses on shares which are sold within the first 3 years can only be offset against profits on other shares which are sold within 3 years of acquisition. The loss cannot be offset against other company income, but can be carried forward for up to 5 years.
A special loss limitation rule applies for companies whereby the loss is only deductible to the extent it exceeds tax exempt dividend received from the subsidiary. Tax exempt dividends are mainly dividends from subsidiaries, cf. the EU Parent/Subsidiary Directive.
Capital gains on shares, reduced by a deductible loss where applicable, are included in the company's ordinary taxable income which is taxed at 34 per cent.
Profits on shares which are sold after a period of ownership of at least 3 years are not taxable for companies, etc. nor are losses on such shares deductible. However, there are special rules for certain shares acquired for borrowed capital before 1 January 1994 and shares in certain foreign investment companies.
In principle, limited tax liable companies where the tax liability presupposes that the share is connected to a business activity in Denmark cannot sell shares tax exempt after 3 years of ownership, see above, although most double tax treaties will allow a tax exempt sale. This also applies to certain associations. Profits and losses on shares are included in the taxable income, ie. losses are also included in the ordinary taxable income.
When determining the period of ownership, the shares acquired first are considered as the first sold (the so-called FIFO (first in - first out) principle).
Calculation of profit or loss
Companies always calculate profits or losses on shares according to the average price method. However, certain associations and limited tax liable companies in which the tax liability presupposes that the share is connected to a business activity in Denmark use the share-for-share method instead.
The average price method
When calculating share profits or losses according to the average price method each share's purchase price, or base cost in the case of a sale, is calculated as the average of the purchase prices for all the shareholders' shares in the company in question.
Profit or loss is subsequently calculated as the difference between the sales and the purchase price according to the average method.
Example
DKK Purchase 1 Jan. 1994 Nom. DKK 100,000 at 380 Price 380,000 Purchase 15 Aug. 1994 Nom. DKK 83,000 at 347 Price 288,010 Purchase 12 Feb. 1995 Nom. DKK 240,000 at 280 Price 672,000 Total Shareholding Nom. DKK 423,000 Total price1,340,010 Sale 7 March 1995 Nom. DKK 150,000 at 295 Value 442,500 Purchase price: DKK 1,340,010 (total purchase price) x DKK 150,000 (nom. value of sold shares) DKK 423,000 (nom. value of total shareholding) Which gives a total purchase price for shares sold DKK 475,181 Loss on the sale is consequently: Sales price DKK 442,500 Less purchase price as calculated above DKK 475,181 Total loss DKK 32,681The new total purchase price of the remaining shareholding can thereafter be calculated at DKK 1,340,010 less DKK 475,181 = DKK 864,829 and the new nominal value amounts to DKK 423,000 less DKK 150,000 = DKK 273,000.
The rules are complicated and specific advice must be obtained in situations where a shareholder holds both shares and subscription rights in the same company.
Purchased subscription rights are considered as purchased at the price paid.
The value of the subscription rights is also included in the calculation of the average purchase price. Allocated bonus rights and bonus shares are considered as acquired at a price of DKK 0.
As described above, companies, etc. are not tax liable on profits on shares cannot deduct losses on shares which are sold after at least 3 years.
Therefore, even though a shareholding is considered sold after 3 years' ownership according to the above-mentioned FIFO principle, and the sale is thus not tax liable, these shares must still be included in the average method calculation, ie. the average purchase price will thus always be influenced by the total purchase price for shares, subscription rights and bonus rights in the company.
According to a special transitional scheme, shares which were acquired on or before 18 November 1990 are excluded from the calculation unless the company subscribed for shares at a premium on or after the said date.
Share-for-share method
The associations and limited tax liable companies, which use the share-for-share method, calculate profits or losses as the difference between the sales price and the actual purchase price for the specific shares which are considered sold according to the above mentioned FIFO method.
Trade in stocks and shares
Taxation
Companies which trade in the purchase and sale of shares and similar securities are always taxed on capital gains and can always deduct losses on shares, regardless of the period of ownership.
Companies are considered as engaged in the trade of buying and selling shares, etc. if this is the company's business, eg. banks and stockbroking firms. Other businesses are considered as engaged in the trade if a considerable part of their line of business is trading in shares and similar securities. In this respect the holding must not be merely an investment portfolio.
Shares, etc. which have been acquired as payment for goods or services are deemed to be acquired as part of the trade in question and gains, and losses are part of the taxable/deductible income.
Businesses which trade in stocks and shares, etc. may in certain circumstances be considered as having shares which constitute an investment portfolio in addition to the trade portfolio. This investment portfolio is taxed according to the ordinary rules.
The calculation method
Companies which trade in stocks and shares may chose to calculate profits or losses according to the same rules which govern other companies, ie. according to the average price method. Alternatively, they may chose to calculate profits or losses according to the inventory principle.
According to the inventory principle, the income year's profits or losses are in general calculated as the difference between the value of the shares at the end of the income year and at the beginning of the year.
Convertible bonds
The conversion of bonds to shares is not considered a sale and no tax is triggered. The shares are deemed to be acquired at the time of acquisition of the convertible bond, ie. the date of purchase of either the bond itself or a subscription right to the bond.
The purchase price is calculated as the subscription price of the bond plus any expenses. The purchase price of a convertible bond acquired by exercising a purchased subscription right is calculated as the subscription price plus payment for the subscription right and any expenses.
When using the FIFO principle, convertible bonds are kept separate from a shareholding, if any.
The redemption of a bond by the issuing company, or sale to the issuing company, is taxed as dividend, see below, except in cases where the redemption is made at the price and time set out in the bond.
If the sales price is not covered by the aforementioned dividend tax rules, it will be taxed according to the Act on Capital Gains Tax on Shares, or according to the Act on Capital Gains, see below.
A convertible bond surrendered within 3 years of purchase which is not covered by the special rules for shares in certain foreign investment companies, credit financed shares, or shares connected to a trade is taxed according to the Act on Capital Gains Tax on Shares, ie. a capital gain is included in the company's ordinary income, and any loss can only be deducted from other similar capital gains.
Gains on bonds surrendered after a period of ownership of at least 3 years, and not covered by the above mentioned special rules are not taxed according to the Act on Capital Gains on Shares, nor are losses deductible.
However, in this situation taxation may take place according to the Act on Capital Gains.
A convertible bond in Danish currency on which the rate of interest is not equal to or above the official minimum interest rate requirement is taxed according to the Act on Capital Gains, and any profit earned is included in the company's taxable income, whilst a loss is not deductible.
Profits or losses on convertible bonds in foreign currency are included in the company's taxable income even if the interest is equal to or above the official minimum interest rate.
Shares in certain foreign investment companies, etc.
There are special rules for the taxation of shares in investment companies in low tax countries.
The following shares are covered by the rules:
1. Shares in companies which are or have been resident abroad, including the Faroe Islands or Greenland, if: A. The shares were acquired or held principally in order to earn a capital gain on them, and B. the company's activity was mainly of a financial nature, and C. the total yield of the activity is taxed considerably more leniently than according to Danish taxation rules. or 2. Shares in companies which directly or indirectly own or have owned a considerable amount of shares in companies, etc. which are or have been resident abroad, including the Faroe Islands or Greenland, if: A. The foreign company's activity was mainly of a financial nature, and B. the total profits are taxed considerably more leniently than according to Danish taxation rules, and C. any dividends from the foreign company, etc. are taxed at a total rate which is considerably lower than the Danish tax rate.Thus, the rule covers both the shares in financial companies in low tax countries which the company owns directly, and the shares in low tax countries indirectly owned by the company.
Shares covered by the provisions cannot be sold tax free after 3 years' ownership. Regardless of the period of ownership, the profits are always taxed as part of the taxable income.
When calculating the gains on such shares, the actual gain is increased by 1 per cent for each year of ownership, however not less than 10 per cent. This does not apply to companies which trade in stocks and shares. Profits are always calculated according to the average price method.
In accordance with a number of transitional schemes a company which is tax liable on shares covered by the criteria mentioned under item 2 may chose to utilize the value of the shares as on 19 May 1993 instead of the original purchase price.
Losses on shares which are covered by the above mentioned rules and which are not connected to trade in stocks and shares cannot be offset against similar gains, and are not deductible against other types of income.
Sale of shares taxed as dividend
As mentioned, in certain situations the sale of shares is taxed according to the rules on taxation of dividends and not according to the Act on Capital Gains Tax on Shares.
1. This applies to liquidation proceeds in connection with the winding up of a company unless the proceeds are distributed in the calender year in which the company is finally liquidated, or special dispensation is received. The liquidation is regarded as a sale of the shares if the distribution takes place in the year of liquidation, or if dispensation is received.
2. Furthermore, a reduction of the share capital is covered by the rules on taxation of dividend even if there is nothing to distribute to the shareholder. If no repayment of capital is made in connection with the capital reduction a loss on the shares is not deductible even in situations covered by the rules on taxation of capital gains, see above.
Under certain circumstances, a dispensation can be received whereby the capital reduction is subject to the Act on Capital Gains Tax on Shares instead. As a main rule, dispensation is granted on the condition that all shareholders are equally affected by the capital reduction, and that the capital reduction is justified by the company's situation.
However, dispensation is only relevant for shareholders which are companies if it is possible for the company to utilize any loss on the shares, or if the company cannot receive tax exempt dividends from its subsidiary. It is not necessary to apply for dispensation if the company may receive tax exempt dividends from its subsidiary.
The company may receive tax exempt dividends from its subsidiary if it has owned at least 25 per cent of the subsidiary's share capital either for the (parent company's) entire income year in which the dividend is received, or for a consecutive period of at least 2 years up to the time when the dividend is received. It is furthermore a condition that in case of dividends from foreign subsidiaries, the profit out of which the dividend is paid must be taxed in a way which is not significantly more lenient than according to the Danish rules.
3. The surrender of shares to the issuing company is taxed as dividend unless dispensation is received. As previously mentioned, dispensation is only relevant if it is possible for the company to utilize a loss on the shares, or if the company may not receive tax exempt dividends from its subsidiary.
Normally dispensation is only granted if the shareholder in question sells all his shares when the resale is part of a generational change over 5 years, or if the shareholder is prohibited from selling the shares to others than the issuing company.
Mergers
A merger may either be tax liable or tax exempt.
If the merger is tax liable, the shares in the transferring (discontinuing) company are considered sold, and capital gains tax on shares is triggered.
If the merger is tax exempt, the shares in the transferring company are not considered as sold. The receiving company assumes the tax position of the transferring company and the shareholders in the transferring company become shareholders in the receiving company.
The merger may be tax exempt if this is elected in connection with the merger and if certain conditions are met.
In connection with tax exempt mergers, the shares in the transferring company which are converted to shares in the receiving company are not considered as sold to the extent they are exchanged for shares in the receiving company. The shares in the receiving company are regarded as purchased at the same time and for the same price as the shares in the transferring company. The status of stocks and shares received in the line of business or shares covered by special tax rules described above is transferred to the new shares.
If the shares are acquired at different times or with different rights, a proportional distribution will be made on the new shares, or their value on the date of merger.
Shares in the contributing company which are not converted to shares in the receiving company are regarded as sold at the current market value on the merger date, and are taxed according to the Act on Capital Gains Tax on Shares.
Danish corporation law still does not provide for mergers between Danish and foreign companies.
Division
Similar tax rules are applicable to the tax exempt division of a Danish company if the company which is being dissolved without going into liquidation transfers all its assets and liabilities to one or more existing or new companies. The shareholders receive shares in the new company/companies in accordance with a pro rata rule, and a cash payment not exceeding 10 per cent of the nominal value of the shares.
From a tax point of view, the shares are treated as described above, see Mergers.
Division of a Danish company where one of the new companies is foreign is not yet possible according to corporate law.
Transfer of Assets
A transfer of assets is the transaction whereby a company, without being wound up, transfers one or more branches of its activity to another company against shares in the receiving company.
From a tax point of view, the shares which the contributing company receives as payment for the activities are regarded as acquired at a price corresponding to the tax value of the contributed assets and liabilities on the date of contribution calculated according to special rules.
Exchange of Shares
From a tax point of view it is possible to exchange shares in two EU companies, so that they are treated in the same manner as described above, see Merger.
An exchange of shares is the transaction whereby a company acquires part (or all) of another company's share capital and thereby a majority of the votes in the company, and as consideration issues shares in the acquiring company to the shareholders in the acquired company. A cash compensation of a maximum of 10 per cent of the shares' nominal value may be given in return for part of the acquired shares.
Both Danish and foreign shares can be exchanged. According to prevailing rules, a tax exempt exchange of shares with non-EU companies requires permission from the tax authorities. According to these rules, an exchange of shares is only allowed if the acquiring company acquires all the shares in the other company.
According to a Bill which has not yet been finalized an exchange of shares between EU companies will also require permission from the tax authorities.
Permission will not be granted if the purpose of the conversion is tax avoidance or tax evasion.
This article is intended to provide general information, and no transaction should be undertaken without prior advice on the specific situation.
If you have any further questions, please do not hesitate to contact Senior Tax Manager Niels Villadsen or Tax Manager Elizabeth Brandt at Coopers & Lybrand Tax Department Lyngbyvej 16-28 2100 Copenhagen Denmark. Tel. + 45 3927 7200 or Fax. + 45 3927 2815.
