New advance tax ruling regarding simple agreement for future equity (SAFE)
Published 9 October 2023
Category: Taxation / VAT
On 3 October 2023, an advance tax ruling (in Danish: bindende svar) was published according to which the National Tax Board (in Danish: Skatterådet) has decided that an investment product structured as a Simple Agreement for Future Equity (SAFE) was not a “subscription right” (in Danish: tegningsret) covered by the Danish Share Capital Gains Act (in Danish: aktieavancebeskatningsloven) but was deemed a “financial contract” governed by article 29 of the Gains on Securities and Foreign Currency Act (in Danish: kursgevinstloven).
Facts of the case
The subject matter of the case was an investment product structured as a Simple Agreement for Future Equity (SAFE) (referred to as a “Warrant Agreement”), under which an Investor was to pay an amount (a “Warrant Premium”) in cash to the Company. In consideration hereof, the Investor was granted the right – but no obligation – to subscribe for shares of the Company at the earlier of:
- a capital increase of the Company of a certain amount (a “Qualified Investment”);
- the Maturity Date fixed in the Warrant Agreement; and
- a Change of Control of the Company (i.e. a person directly or indirectly acquiring minimum 50% of the shares or voting rights of the Company).
Upon such event triggering the Investor’s subscription right, the Investor could subscribe for new shares of the Company at par value. The calculation of the number of shares the Investor could subscribe for depended on the type of event that triggered the subscription right. For instance, should the Maturity Date be the earlier of the events set out above, the Investor was entitled to subscribe for a specific number of shares fixed in the Warrant Agreement, and in the event of a Change of Control by way of a sale of shares, the Investor was entitled to subscribe for such number of shares as would secure that the Investor by sale of such shares in the Change of Control event would receive a sales price equal to 2 x the Warrant Premium.
The Investor’s subscription right under the Warrant Agreement was not formally issued in accordance with the Danish Companies Act (in Danish: selskabsloven) (article 167ff.), and the rights attaching to such new shares (as listed in article 158/159 of the Danish Companies Act) were not determined in the Warrant Agreement (or elsewhere). The Investor’s subscription right was solely based on the Warrant Agreement entered into between the Investor and the Company and its shareholders. Hence, upon the Investor’s exercise of its right to subscribe for shares of the Company, the shareholders of the Company would be obliged to resolve to carry out a cash capital increase of the Company.
Question submitted in the application for advance tax ruling
The question under the application for advance tax ruling submitted by the Investor was as follows: “Can it be confirmed that the Warrant Agreement (as defined below), under applicable tax law, is a subscription right (warrant) covered by the Danish Share Capital Gains Act, and consequently that the payment for entering into the Warrant Agreement (Warrant Premium as defined below) is not taxable for the Company in the event of exercise of the Warrant Agreement?”
The National Tax Board’s decision
The National Tax Board’s answer to the Investor’s question was “no”.
The National Tax Board did not find that the Investor’s right to subscribe for shares of the Company under the Warrant Agreement was a “subscription right” covered by the Danish Share Capital Gains Act.
Under applicable tax law, a ”subscription right” is defined as a right – and not an obligation – to subscribe for new shares at a fixed time or during a fixed period of time at a price fixed in advance. The National Tax Board found that the terms of the Warrant Agreement did not fit into this definition. In the decision, it was stated that it is uncertain whether the Investor would in fact be entitled to subscribe for shares, as the triggering events may not occur in the lifetime of the Company. Further, it is uncertain how many shares the Investor may subscribe for, as would depend on different variables, including which event that would trigger the subscription right. Hence, the Investor’s right to subscribe for shares under the Warrant Agreement was not sufficiently specific and concrete to fit into the definition of a “subscription right”. Further, the fact that the Investor’s right to subscribe for shares under the Warrant Agreement was not formally issued as a subscription right (warrant) in accordance with the Danish Companies Act (but only based on an agreement) was highlighted by the National Tax Board as a matter of relevance to its decision.
According to the National Tax Board, the Warrant Agreement was instead an option to receive a subscription right under certain conditions, and such option was a financial contract governed by article 29 of the Gains on Securities and Foreign Currency Act. Consequently, the Investor’s and the Company’s losses and gains on the Warrant Agreement (the financial contract) would be taxable and tax-deductible, respectively, in accordance with chapters 6 and 7 of the Gains on Securities and Foreign Currency Act.
The advance tax ruling is available here.
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