Denmark: Holding Company Fiscal Regime

Denmark has high rates of corporate and personal income tax and has never been considered a financial centre. However changes to its holding company law in 1999 provide outstanding opportunities for the international investor, and subsequent adjustments to the law have if anything increased its attractiveness.

For a country to be an attractive location in which to set up a holding company 4 criteria must be satisfied:

Incoming Dividends: Incoming dividends remitted by the subsidiary to the holding company must either be exempted from or subject to low withholding tax rates in the subsidiary's jurisdiction.

Dividend Income Received: Dividend income received by the holding company from the subsidiary must either be exempted from or subject to low corporate income tax rates in the holding company's jurisdiction.

Capital Gains Tax on Sale of Shares: Profits realized by the holding company on the sale of shares in the subsidiary must either be exempt from or subject to a low rate of capital gains tax in the holding company's jurisdiction.

Outgoing Dividends: Outgoing dividends paid by the holding company to the ultimate parent corporation must either be exempt from or subject to low withholding tax rates in the holding company's jurisdiction.

By these criteria Denmark is a fiscally attractive jurisdiction in which to locate a holding company:

Withholding Taxes on Incoming Dividends

As a member of the EU Denmark is governed by the provisions of the EU's Parent-Subsidiary directive, whose effect is that where a Danish holding company controls at 10% of the shares of an EU subsidiary for a minimum period of 12 months any dividends remitted by the EU subsidiary to the Danish holding company are free of withholding taxes.

Where the provisions of this directive do not apply (or where anti-avoidance provisions are in place) Danish holding companies can rely on an extensive network of double taxation treaties the effect of which is to obtain a reduction in withholding tax rates on dividends remitted to Denmark from the subsidiary jurisdiction.

Denmark has around 80 double taxation treaties in place. The greater a country's network of double taxation treaties the greater its leverage to reduce withholding taxes on incoming dividends. An elaborate network of double taxation treaties is thus a key factor in the ability of a territory to develop as an attractive holding company jurisdiction.

Most offshore jurisdictions of course do not impose withholding tax on dividends remitted internationally. It follows that almost all dividend income received in Denmark will be free of withholding tax.

BACK TO TOP

Corporate Tax On Dividend Income Received

The Danish corporate income tax rate is 25%. However incoming dividends received by a Danish holding company from its foreign subsidiary are exempt from corporate income tax in Denmark provided the holding company satisfies the following criteria (NB: Bill L99 passed in 2001 introduced changes to the legislation which are incorporated below and had effect from 2002):

• 15%/10% Shareholding: The Danish holding company must hold a minimum of 20% of the shares in the foreign subsidiary. The required minimum was reduced from 25% to 20% in 2001 and from 20% to 15% in January 2007. It is due to be reduced again to 10% as of January 2009.
  
• 12 Month Period: The eligible shareholding must have been held for a minimum continuous period of at least 12 months. The 12 month holding period is due to be abolished from January 1, 2010.
  
• Not a Controlled Foreign Corporation: The foreign subsidiary must not be a "CFC". A company is a CFC if it meets the following 2 criteria:

• 33% of Assets or Income: 33.3% or more its assets are "financial assets" or if it earns at least 33.3% of its income from "financial activities", including net bank interest (it was gross interest until 2001), dividends, royalties, lease premiums and any profits on the sale of financial assets being assets which give rise to these sorts of income. Related tax deductible expenses can be netted off against the other kinds of CFC income in calculating total CFC income.
  As from 2002 income from real estate is no longer included in the definition of financial income. An insurance company or a bank will almost always be a financial company, although CFC waivers can often be obtained for banking and insurance subsidiaries of Danish companies. And:
  
• Lower Level of Taxation: The foreign company's income has been subject to tax at less than 75% of the rate of tax as calculated under Danish law (this was administrative practice until 2001 but is now statutory).

For holding companies qualifying under the above rules, at the time of writing Denmark is alone among European countries in not taxing dividends received from offshore jurisdictions. Qualifying dividends received by a Danish holding company from an offshore subsidiary are not subject to corporate income tax irrespective of whether or not tax has been paid in the offshore location on the profits out of which the dividends have been paid.

Prior to 1999 the level of tax paid in the subsidiary jurisdiction was a relevant factor in determining whether Danish corporate income tax was to be levied on the dividends received by a Danish holding company from a foreign subsidiary.

In the seven other principal EU onshore holding company jurisdictions (Austria, Belgium, France, Germany, Luxembourg, the Netherlands and the UK) incoming dividends received by an intermediate holding company from a foreign subsidiary are exempt from corporate income tax in the intermediate holding company only if the foreign subsidiary has paid tax in the foreign jurisdiction on the profits out of which the dividends are paid.

Along with Denmark only Switzerland, Malaysia and Australia in the main exempt incoming dividend income from corporate income tax.

BACK TO TOP

Capital Gains Tax on the Sale of Shares

Recently, capital gains tax in Denmark has ranged from 39%-59%, but is usually imposed at a rate of around 25%. However by way of exception capital gains taxes are not levied on any profits realized by a Danish holding company on the sale of its shares in a foreign subsidiary provided the following criteria are satisfied:

• Shares held for 3 Years: The shares sold must have been held for at least 3 years. The 3-year holding period is due to be ablished from January 1, 2010.
  
• Not a Controlled Foreign Corporation: The foreign subsidiary must not be a "CFC". At the time of writing, a company is a CFC if it meets the following 2 criteria:
  
  • 33% of Assets or Income: 33.3% or more its assets are "financial assets" or if it earns at least 33.3% of its income from "financial activities", including net bank interest (it was gross interest until 2001), dividends, royalties, lease premiums and any profits on the sale of financial assets being assets which give rise to these sorts of income. Related tax deductible expenses can be netted off against the other kinds of CFC income in calculating total CFC income.
    As from 2002 income from real estate is no longer included in the definition of financial income. An insurance company or a bank will almost always be a financial company, although CFC waivers can often be obtained for banking and insurance subsidiaries of Danish companies. And:
  • Lower Level of Taxation: The foreign company's income has been subject to tax at less than 75% of the rate of tax as calculated under Danish law (this was administrative practice until 2001 but is now statutory).

International Comparison: Holding companies incorporated in France and the UK are taxed on any capital gains realized on the profitable sale of shares held in a foreign subsidiary. Holding companies incorporated in Austria, Belgium, Germany, Luxembourg, the Netherlands, Spain & Switzerland are not taxed on the capital gains realized on the sale of shares in a foreign subsidiary (provided the appropriate criteria can be met).

BACK TO TOP

Withholding Taxes on Outgoing Dividends

The standard rate of withholding taxes levied in Denmark on outgoing dividends is 15% (reduced from 28% on April 1, 2008), provided that the recipient holds less than 10% of the shares in the distributing company and there is a tax agreement in place between Denmark and the state where the non-resident is located (e.g. a double tax treaty of other administrative agreement). This rate can be reduced by both the provisions of a double taxation treaty and by the provisions of the EU Parent-Subsidiary Directive. Alternatively where the dividends are remitted by an intermediate Danish Holding Company to a foreign parent corporation no withholding taxes are deducted provided that there is a double tax treaty in force between the two countries, and:

• The foreign parent corporation holds a minimum of 10% of the shares in the intermediate Danish holding company. (N.B. If the shareholding is less than 10% then the double tax treaty rate will apply);

• The parent corporation is non-resident; and

• the shares must have been held by the parent corporation for a minimum continuous period of at least 12 months (the 12-month holding period is due to be abolished on January 1, 2010).

BACK TO TOP