DENMARK: HOLDING COMPANIES

Advantages of the Danish Holding Company Regime

The combination of Denmark's tax treaty network (around 80 treaties) and its holding company regime means that there have traditionally been around 35 major countries which with proper structuring could 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% 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 hundreds of holding companies in the country.

A number of EU countries (namely Spain, France, Germany Austria & Italy) have imposed anti-abuse legislation in their interpretation of the Parent-Subsidiary directive aimed at European holding companies controlled by third country investors.

However Danish holding companies are well placed to counter this threat owing to the aforementioned extensive double taxation treaty network in place. In many cases, 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.

BACK TO TOP

Features of Danish Holding Company Law

Danish holding companies have the following features:

a) Advance Rulings: Advance tax rulings are available thereby allowing the client to decide on whether the fiscal structure contemplated meets his requirements.

b) 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.

c) Extensive Tax Treaty Network: 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.

d) 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.

e) Regulatory Environment: Disclosure requirements are strict. This may be seen as a disadvantage or an advantage depending on the client's needs.

Additional (principally tax-related) advantages of establishing a holding company in Denmark include that: dividends are tax exempt regardless of the underlying taxation of the subsidiaries; capital gains are tax exempt after an ownership period of three years (N.B. new legislation effective from 2010 dispenses with the three-year ownership rule); no Danish withholding tax on dividends paid to foreign parent companies in tax treaty countries; no Danish withholding tax on interest paid to foreign companies; and no capital duty on formation and increase of the capital of a holding company.

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 DKK 125,000 (or equivalent in euro, or another currency if permitted) for a private company and DKK 500,000 (or equivalent in euro, or another currency if permitted) 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. (N.B. If the value of the holding in the subsidiary exceeds the minimum capital requirements no cash injection is 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.
• Cost: Denmark is not a cheap jurisdiction in which to operate. However when one considers the advantages entailed in using the jurisdiction and the potential savings to be made cost may not be such a significant factor.

BACK TO TOP

Comparison of Dutch and Danish Holding Company Regimes

Since Holland has traditionally cornered the market in international holding companies it is useful to compare the relative advantages and disadvantages of both jurisdictions in assessing the impact of the Danish holding company regime:

a) 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 (N.B. the 3-year rule is being elimated from 2010). In Holland the participation exemption (at the time of writing) is 5% with no time limit.

b) Withholding Taxes on Outgoing Dividends: Dividends distributed by a Dutch holding company are subject to a standard dividend withholding tax rate of 15% 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 15% for non-treaty countries.

The current 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 10% participation level.

c) 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.

d) 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 10% of the subsidiary shares for 12 months and the subsidiary is not a "Controlled Foreign Corporation". The threshold for the eligible holding was reduced from 15% as of January 2009. The 12-month holding requirement is due to be eliminated from January 1, 2010.

In Denmark, if the subsidiary is a CFC then 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 favorable 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.

e) Capital Taxes: Denmark has no taxes on the issue or transfer of shares. In Holland the participation exemption (at the time of writing) is 5% with no time limit.

f) Minimum Participation: In Denmark the preferential fiscal treatment given out to Danish Holding companies only applies if the holding company holds at least 10% of the foreign subsidiary's shares for 12 months. In Holland by contrast the favorable fiscal regime applies if the Dutch holding company holds at least 5% of the foreign subsidiary shares with no time limit applied. (N.B. under the EU Parent-Subsidiary Directive dividends paid to subsidiaries in another EU member state are exempt from withholding tax if the parent holds at least 10% of the subsidiary for a minimum period of 12 months.

g) Advance Rulings: Advance rulings in Holland are considerably more effective than those available in Denmark.

h) Withholding Taxes on Royalty Payments: In Denmark 25% (reduced from 30% as of April 1, 2008) 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.

i) Withholding taxes on Interest Payments: The Netherlands imposes no withholding taxes on loan interest payments. In Denmark, interest paid to non-residents is subject to a 25% withholding tax (reduced from 30% as of April 1, 2008).

j) 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.

k) 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.

l) Shelf Companies: Shelf companies are available in Denmark but not in Holland. The Danish authorities allow for the online registration of shelf companies, meaning they can be registered swiftly. Accordingly shelf companies are much sought after.

BACK TO TOP