On 19 December 2024, Bill no. L 28 was passed which abolishes taxation on dividends received by companies on tax-exempt portfolio shares. This amendment is to make it easier for small companies in particular to attract capital by making it more attractive for Danish and foreign investors to make portfolio investments in unlisted companies.
What are tax-exempt portfolio shares?
Tax-exempt portfolio shares are unlisted shares owned by a company which owns less than 10% of the portfolio company's share capital.
Previous rules
Before the amendment, companies taxable in Denmark had to include 70% of dividends on tax-exempt portfolio sharers in the calculation of their taxable income. This meant an effective tax rate of 15.4 % (70% of the corporation tax rate of 22%), whereas any gains on sale of portfolio shares were and still remain tax-exempt.
New rules as from 1 January 2025
As from 1 January 2025, dividends on tax-exempt portfolio shares are tax-free for Danish companies. The purpose of this amendment is to promote investments in small Danish companies in particular and to realise their growth potential. The tax exemption applies regardless of the nature and size of the portfolio company and regardless of whether it is newly established or has existed for many years.
Rules for foreign companies
The tax exemption only applies to foreign companies with Danish portfolio shares if the country in which the companies are established exchanges information with the Danish authorities. Foreign companies may not have a controlling interest in the Danish portfolio company unless they are domiciled in an EU member state or in a country with a double taxation treaty with Denmark. It is possible for a company to have a controlling interest with an ownership share of less than 10%, for instance through a high-voting share class or a shareholders' agreement.
Although a foreign shareholder meets the conditions for receiving tax-exempt dividend, the Danish portfolio company must withhold a dividend withholding tax of 27%, which may subsequently be reclaimed by the foreign shareholder.
Beneficial owner of dividend
The amendment to the Act specifies that a company can only receive tax-exempt dividend if it is the beneficial owner of the dividend. This is the case if the company keeps the dividend or redistributes it without the recipient gaining a tax advantage. If the dividend is meant to "flow through" to a recipient that would not meet the conditions for lower taxation, the company must pay tax on the dividend.
The new condition is meant to prevent that Denmark is used as a conduit country. It means that a foreign company cannot interpose a Danish company between itself and another foreign company to channel funds through Denmark. In such cases of abuse, the Danish company must include the dividend in its taxable income and pay tax at a rate of 22%. The tax rate may be reduced if there is a double taxation treaty with the subsubsidiary's (the beneficial owner's) home country.
Exemptions
The rules do not apply to shares held in a professional capacity, shares in investment companies, or if the portfolio company has a deduction for the dividend payment. In such cases, the dividend is still not exempt from tax.
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