Denmark holding company formation
Advantages of the Danish holding company regime
The combination of Denmark’s tax treaty network (currently 80 treaties) and its holding company regime means that there are 35 major countries which, with proper structuring, can route their dividends through Denmark and not incur any withholding taxes at any stage. These countries include: Argentina, Austria, Belgium, Brazil, China, Cyprus, Finland, France, Germany, Greece, Iceland, India, Ireland, Italy, Luxembourg, Malaysia, Mexico, Netherlands, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, UK and Malta. In about 40 other countries withholding taxes are substantially reduced owing to the double taxation treaty network.
However, most companies can avoid such routing measures since Denmark eliminated its 10 per cent withholding tax on January 1, 1999, in a bid to draw a bigger slice of the billions of corporate cash that moves across Europe’s borders. This has proved lucrative for Denmark as corporations have set up around 500 holding companies in the country.
However, Danish holding companies are well placed to counter this threat owing to the extensive double taxation treaty network in place. Treaties with Spain and France reduce withholding taxes to nil whereas treaties in place with Italy and Austria stipulate reduced withholding taxes of 15% and 10% respectively. Thus, even if the corporate structure envisaged falls foul of parent-subsidiary directive anti-avoidance provisions, the existence of Danish double tax treaties can largely help to avoid this problem.
Features of Danish holding company law
Advance Rulings: Advance tax rulings are available thereby allowing the client to decide on whether the fiscal structure contemplated meets his requirements.
Company Taxes: There are no taxes on the issue of shares, on an increase of share capital or on the transfer of shares. Other than corporate income tax there are no further taxes on a company. Provincial taxes and taxes on a company’s capital net worth do not exist in Denmark.
Extensive Tax Treaty Network: The Danish holding company regime is backed up by an elaborate double tax treaty network. Denmark currently has 80 double taxation treaties. Double taxation treaties are a necessary part of ensuring that the standard rate of withholding tax deducted in a subsidiary’s jurisdiction on outgoing dividends is either substantially reduced or completely eliminated altogether. The existence of a double taxation treaty between a foreign subsidiary’s jurisdiction and Denmark can completely change the economics of routing dividends through this jurisdiction.
Shelf Companies: Off the shelf companies are available in Denmark. The availability of shelf companies means that an investor can put his plans into operation at once instead of having to wait up to 3 months for the company to be incorporated.
Regulatory Environment: Disclosure requirements are strict. This may be seen as a disadvantage or an advantage according to the client’s needs. Danish holding companies have the following characteristics:
- Loans to Shareholders: companies cannot lend funds to shareholders or directors.
- Audit: Accounts must be audited and, after auditing, are lodged in a registry to which the public has access.
- Minimum Share Capital: The minimum share capital requirement is high being approximately US$18,000 for a private company and US$75,000 for a public company. All the share capital must be fully paid up in cash or in kind before registration. In the event of the contribution being in non-liquid assets an accountant must confirm the value. (NB: If the value of the holding in the subsidiary exceeds the minimum capital requirements no cash injection would be required).
- Bearer Shares: Private companies cannot issue bearer shares whereas Public companies can.
- Shareholder Register: There is no public shareholder register unless in the case of a private company which has a single shareholder or in the case of a public company which has a shareholder who has more than 5% of the shares.
- Directors: A minimum of 3 directors is required for a public limited liability company of which at least 2 must be resident in Denmark. One manager must also be resident there. In the case of a private company neither directors nor managers need be domiciled in Denmark.
Compairison of Dutch and Danish holding company regimes
Capital Gains Tax: The Danish holding company is exempt from capital gains taxes on the sale of a shareholding in its subsidiary if it has held the shares for at least 3 years. In Holland the participation exemption is 5% with no time limit.
Withholding Taxes on Outgoing Dividends: Dividends distributed by a Dutch holding company are subject to a standard dividend withholding tax rate of 25% unless the provisions of the EU Parent-Subsidiary Directive apply or unless the rate is reduced by way of a double taxation treaty. Under the current network of double taxation treaties this rate is reduced to 5% in the case of a few countries, 7.5% in the case of the Dutch Antilles, 10%-15% in the case of most treaty countries and 25% for non-treaty countries. The situation in Denmark is that there is exemption from withholding tax for outgoing dividends to countries which have double tax treaties with Denmark, subject to a minimum 20% participation level.
Withholding Taxes on Incoming Dividends: Holland has slightly more double taxation treaties than Denmark and so has slightly more leverage in reducing withholding taxes deducted on incoming dividends remitted to a holding company based in its jurisdiction. Denmark is nonetheless in the top 10 worldwide jurisdictions from the point of view of the number of double taxation treaties negotiated.
Corporate Income Tax on Dividend Income: Dividend income received by a Danish holding company is exempt from corporate income tax in Denmark provided it has held 20% of the subsidiary shares for 12 months and the subsidiary is not a “Controlled Foreign Corporation”. In Denmark, if the subsidiary is a CFC them it must have paid tax at 75% of the Danish rate; in Holland an offshore subsidiary must have paid some tax in its own jurisdiction if the favourable holding company fiscal regime is to apply. Thus income received from subsidiaries located in the Middle East or offshore havens such as Gibraltar in which no tax or low tax is paid may not qualify for the special treatment available under the participation exemption rules.
Capital Taxes: Denmark has no taxes on the issue or transfer of shares whereas Holland has a 1% tax.
Minimum Participation: In Denmark the preferential fiscal treatment given out to Danish Holding companies only applies if the holding company holds at least 20% of the foreign subsidiary’s shares for 12 months. In Holland by contrast the favourable fiscal regime applies if the Dutch holding company holds at least 5% of the foreign subsidiary shares with no time limit applied.
Advance Rulings: Advance rulings in Holland are considerably more effective than those available in Denmark.
Withholding Taxes on Royalty Payments: In Denmark 30% withholding taxes are deducted from royalties relating to patents, trademarks or information concerning industrial commercial or scientific expertise whereas royalties relating to copyright, literary, artistic or scientific work are exempt from withholding taxes. In the case of Holland no withholding taxes are deducted for royalty payments made by a Dutch company irrespective of their nature.
Withholding taxes on Interest Payments: Neither jurisdiction imposes withholding taxes on loan interest payments.
Regulatory Environment: disclosure is comprehensive in Denmark and audits are required for all companies. In Holland by contrast audits are only required for large companies and reporting requirements are much less detailed.
Infrastructure: Holland has a well developed infrastructure for the provision of fiscal and related holding company services whereas Denmark is a relative newcomer in this field.
Shelf Companies: shelf companies are available in Denmark but not in Holland. It generally takes 8-14 weeks to incorporate a company. Accordingly shelf companies are much sought after.
Danish holding company fiscal regime
Withholding taxes on incoming dividends
Corporate income tax on dividend income received
Capital gains tax on the sale of shares
Withholding taxes on outgoing dividends
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 least 25% 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 80 double taxation treaties in place (Belgium has 66 and the UK has 110). 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.
Corporate tax on dividend income received
The Danish corporate income tax rate is 30%. 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):
- 20% Shareholding: The Danish holding company must hold a minimum of 20% of the shares in the foreign subsidiary (the required minimum was 25% until 2001).
- 12 Month Period: The 20% shareholding must have been held for a minimum continuous period of at least 12 months.
- 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, 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.
Capital gains tax on the sale of shares
Capital gains tax in Denmark ranges from 39%-59%. 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.
- 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).
- 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).
Withholding taxes on outgoing dividends
The standard rate of withholding taxes levied in Denmark on outgoing dividends is 28%. 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 20% of the shares in the intermediate Danish holding company. (NB: If the shareholding is less than 20% 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 (if the shareholding is 20% but the shares have not been held for 12 months then a withholding tax rate of 30% will be levied on 66% of the dividend income making an effective rate of 22%).
International Comparison: Dividends paid out by a holding company incorporated in Austria, Belgium, France, Germany & Netherlands are subject to withholding taxes of 25% unless the provisions of a double taxation treaty apply in which case the rate of withholding taxes is usually reduced to 5%-10% or unless the provisions of the EU Parent-Subsidiary directive apply in which case no withholding taxes are deducted. In the case of Luxembourg double taxation treaties reduce the rate of withholding tax on outgoing dividends to 15% whereas in the case of the Spanish ETVE the rate is 0% provided the non resident parent corporation holds at least 25% of the Spanish holding company shares, is not located in a tax haven and the source of income did not originate in a tax haven (in default of which conditions the rate of withholding tax is 25%).
Provided certain conditions are met the UK, Greece and Ireland do not deduct withholding taxes on dividends remitted by intermediate holding companies to foreign parent corporations.
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