Company Formation in Denmark
Danish Limited Partnerships (KS)

Tax Advantages

When considering the advantages and tax benefits of a Danish KS (Kommanditselskab), particularly when the members (general partners or limited partners) are non-resident in Denmark and clients are based overseas, several factors come into play. The KS structure itself can provide certain benefits, especially when focusing on international operations.

Key Advantages of a Danish KS Structure

Limited Liability for Limited Partners

Protection for Limited Partners – In a Danish KS, the limited partners (silent partners) enjoy limited liability, meaning their liability is limited to the amount they’ve invested in the company. This is an attractive feature for international investors who do not want to be exposed to more significant risks.

Flexibility in Management – The general partner (Komplementar), who manages the daily operations, has unlimited liability, but they can also be a separate entity (often a limited company), thus limiting personal liability.

Pass-Through Taxation (Flow-Through Entity)

Tax Transparency – A key benefit of the KS structure is that it’s typically a pass-through entity for tax purposes. This means that the income generated by the company is taxed directly in the hands of the partners, rather than at the company level. This structure can help avoid the double taxation often associated with corporations (i.e., taxing the company’s profits and then taxing dividends).

Income Allocation Flexibility – he profits are allocated according to the partnership agreement, which means that the income can be distributed in a manner that optimizes tax efficiency. For non-resident partners, this can mean more flexibility in how income is distributed across jurisdictions, depending on where they are taxed.

Low Corporate Tax Rates

Denmark has a competitive corporate tax rate of 22% (as of 2023), which is relatively favorable within the EU and for international operations. While a KS is not taxed at the corporate level, if there is any taxable income at the company level, this rate would apply if the company were structured as a corporation.

Tax Advantages and Considerations for Non-Resident Partners

Exemption for Foreign Income

Tax on Foreign Income – Denmark has a participation exemption for foreign income. This means that income derived from foreign subsidiaries (if the KS is involved in foreign operations or has international business interests) may not be subject to Danish taxation. If the income is earned from activities abroad, there is the potential for a reduced tax burden.

Dividend Tax – For foreign partners receiving dividends from the KS, Denmark’s tax treaties with other countries often reduce the withholding tax rate on dividends. The standard Danish withholding tax rate on dividends is 27%, but tax treaties may reduce this, particularly for countries within the EU, the US, and other jurisdictions.

Foreign Tax Credits – Non-resident partners may be able to claim foreign tax credits in their home country for taxes paid in Denmark on income from the KS, thus avoiding double taxation.

Danish-Non-Resident Partner Taxation

If the limited partners are non-resident in Denmark, they typically only pay tax on income generated within Denmark. If the activities of the KS company are primarily international and the partners are not involved in the day-to-day management, their tax obligations in Denmark may be limited to specific situations (e.g., if they have a permanent establishment in Denmark, or if they are deriving Danish-source income).

Taxable Presence in Denmark – Non-resident partners generally won’t be subject to Danish taxation unless they are engaged in Danish-source income or have a permanent establishment in Denmark. For example, if the KS has employees or fixed facilities in Denmark, it may trigger Danish corporate tax obligations.

Transfer Pricing Considerations

For international operations, especially when dealing with cross-border transactions, transfer pricing rules will apply. Denmark adheres to OECD guidelines on transfer pricing, meaning that if there are intra-group transactions (e.g., between the KS company and its foreign subsidiaries or related parties), those transactions must be conducted at arm’s length prices. Failure to comply with transfer pricing rules could result in additional taxes or penalties.

International Tax Treaties

Denmark has a robust network of tax treaties with many countries, which can help avoid double taxation and provide for reduced withholding tax rates on income such as dividends, royalties, and interest. These treaties are highly beneficial if the KS is dealing with clients or operations in countries with tax treaties in place with Denmark.

For example, if the KS generates income from the US or EU, the treaty can reduce the withholding tax on any payments sent from those jurisdictions to Denmark, thus reducing overall tax liability.

No VAT on International Trade

Export Activities: Denmark generally exempts export activities from VAT (Value-Added Tax), so if the KS is exporting goods or services outside the EU, these transactions are generally VAT-exempt, thus improving cash flow and reducing administrative burdens for international transactions.

Cross-Border Services: For services rendered to clients outside Denmark, VAT may not apply, provided the services are in line with EU VAT regulations (i.e., services provided to non-EU clients are often VAT-exempt).

Considerations for International Clients

When all clients are based overseas, this presents the opportunity for the KS to:

• Expand internationally without facing Danish market restrictions.
• Benefit from lower or no VAT on international sales, depending on the jurisdiction.
• Structure income allocation in such a way as to potentially avoid Danish taxation on foreign income, particularly if the income is not tied to any Danish permanent establishment.

Operational Considerations

• No Physical Presence: If the KS does not have any physical presence or permanent establishment in Denmark (such as employees or offices), it may be seen primarily as an international entity for tax purposes, and this can help minimize Danish tax obligations for foreign partners.
• Managing Non-Resident Partner Status: It’s important for non-resident partners to be aware of their tax obligations in their home country as well. Denmark’s tax treaties can help reduce double taxation, but the partners should consider their own country’s tax treatment of income received from the KS.

Final Consideration

The Danish KS company structure can be highly beneficial for non-resident partners and international business activities, thanks to the pass-through taxation, potential exemptions on foreign income, and tax treaty benefits. It allows for flexibility in how profits are allocated and taxed, with the possibility of reducing overall tax exposure through foreign income exemptions and reduced withholding taxes on dividends, royalties, and interest from foreign clients. However, it’s essential to ensure compliance with both Danish tax laws and international tax treaties, especially in the case of cross-border transactions.