Ruling on Investments Through Transparent Entities (e.g. K/S)
Published 7 February 2020
This article is delivered in collaboration with CORIT Advisory.
With effect of January 1st, 2020 the Danish tax rule on “hybrid entities” was amended. Going forward a Danish transparent entity (e.g. K/S) may be reclassified and thereby considered opaque for Danish tax purposes, if a participant – alone or acting together with other persons – directly or indirectly holds at least 50 percent of the voting rights or capital ownership or is entitled to receive at least 50 percent of the profits, and:
- The participant is tax resident in a State, where the Danish entity is treated as a separate entity (company) for tax purposes (“hybrid”); or
- The participant is tax resident in a State that has not entered into an agreement on exchange of information with Denmark (“black box”); or
- The participant is a direct participant and is tax resident in a non-EU State that has not entered into a double tax treaty with Denmark (“WHT on dividends”).
The 50% threshold includes voting rights/capital ownership held by other taxpayers if they are “acting together”. It has been unclear to what extent the participation in a partnership (K/S) in itself is sufficient to be considered “acting together” and thus triggering the mismatch rule.
Based on a ruling published 23th January 2020, the mere participation in a partnership does not entail that the investors are considered “acting together” in regard to the partnership itself even if the investors have entered into agreements on administration and management of the partnership (insofar they are not associated due to group connection, family relation or similar). However, even though the investors are not considered “acting together” in regard to the partnership itself, the investors are considered “acting together” in regard to the investments made by the partnership in question. As such, investors in a partnership must carefully consider whether other investors may taint the structure, especially in a fund of fund structure.
You can find the ruling (in Danish) here.