New advance tax ruling regarding simple agreement for future equity (SAFE)

Published 9 October 2023

PrintCategory: 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.

Tags:  Venture Capital


Also tagged ‘Venture Capital’

6 Nov 2023Trends

The time between investment rounds has increased

According to new data from Carta, time between primary US venture rounds is getting longer.

Venture Capital
17 Oct 2023Trends

California passes law mandating VC firms to release investments’ diversity information

In the first ever US law aiming at increasing diversity within the venture capital landscape, the Californian governor has signed SB 54 into law.

Venture Capital
17 Oct 2023Trends

Senior liquidation preferences create tensions between VCs

A new PitchBook analysis show that senior liquidation preferences create tension between collaborating VCs.

Venture Capital
17 Oct 2023Trends

State of the private markets: Q3 2023

Carta has published a preview of their Q3 2023 private market report.

Venture Capital
17 Oct 2023Trends

Deep dive into Q3 2023’s funding landscape

Jamesin Seidel, Investment Partner at the VC fund Chapter One, has analyzed Q3 data on the funding landscape from Crunchbase, based on US-based investments.

Venture Capital
12 Oct 2023Trends

VCs believe the worst times are over

VCs believe the worst times are over   In Q4 2022, US-based venture capital funds experienced a sharp decline with an IRR of -16.8%, marking the asset class’s worst quarterly return in a decade. The downturn was attributed to the need for venture capital funds to devalue their late-stage portfolio companies, aligning them with comparable […]

Venture Capital
12 Oct 2023Trends

Female GPs are an undervalued asset

A new 2023 report from European Women in VC highlight new findings of diverse investment teams in the growth and venture space.

Venture Capital
12 Oct 2023Trends

LPs push GPs to tie fund fees to impact goals

As the markets have turned for more negotiation power with LPs, expectations are going green, according to PitchBook: LPs are demanding terms aligning managers of impacts funds more closely with their sustainability outcomes.

Venture Capital
12 Oct 2023Trends

VCs shift focus to AI

Pitchbook’s Emerging Tech Indicator (ETI) tracks global investment activity across types of technologies, with special focus on successful VCs.

Venture Capital
12 Oct 2023Trends

New venture report

Aumni, a J.P. Morgan company, have published a new first half 2023 venture report, showing the status of the private capital markets.

Venture Capital
12 Oct 2023Trends

New Nordic Impact Startups 2023 report

Danske Growth, a part of Danske Bank, has published their new Nordic Impact Startups 2023 report.

Venture Capital
5 Oct 2023Trends

VC funding for female founders keep steady

Despite the recent surge in venture capital funding, female founders are still facing challenges.

Venture Capital
7 Jul 2023Trends

Invest Europe Private Equity 2022 Benchmark Report

The 2022 Private Equity Benchmark Report for 2022 has been published.

Venture Capital
27 Mar 2023Impact and ESGTrends

New ESG KPI Report by Invest Europe

Invest Europe, the trade association representing Europe’s private equity and venture capital sector, has published its first ESG KPI report with data from 2021.

GovernanceVenture Capital
22 Oct 2021AIFsEuVECAUpdates

ESMA has Issued Guidelines on Marketing Communication

The guidelines apply to all marketing communication addressed to investors or potential investors for AIFs, including amongst others when they are set up as EuVECAs.

Cross-BorderESMAMarketingPre-MarketingVenture Capital
6 Jul 2021Impact and ESGUpdates

The Value Reporting Foundation – The Merger of IIRC and SASB

The International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) has merged to form the Value Reporting Foundation. 

SustainabilityVenture Capital
6 Nov 2020Taxation / VATUpdates

Ruling on Taxation of SAFE

On 23 October 2020, the Danish Tax Agency published a ruling from the Danish National Tax Board regarding taxation of a SAFE (Simple Agreement for Future Equity) issuable by a US company.

Cross-BorderVenture Capital
25 Sep 2020Taxation / VAT

Rules Concerning the Tax Treatment of Equity Compensation to Employees in Startups

On 21 August 2020, the Danish Ministry of Taxation published for consultation a draft proposal according to which previously adopted amendments to the Danish Tax Assessment Act concerning the tax treatment of equity compensation to employees in “start-ups” will enter into force on 1 January 2021.

Danish RegulationVenture Capital

Other updates

2 Apr 2024AIFsUpdates

AIFMD 2.0 published in the OJEU

On 26 March 2024, directive 2024/927 amending the directives 2011/61/EU (AIFMD) and 2009/65/EC (UCITSD), also known as AIFMD 2.0, has been published in the EU Official Journal.

AIFMDRisk Management
22 Mar 2024Impact and ESGUpdates

News regarding the Corporate Sustainability Due Diligence Directive

15 March 2024, the Committee of the Permanent Representatives of the Governments of the Member States to the European Union (“COREPER”) endorsed the Corporate Sustainability Due Diligence Directive (“CSDDD”) taking the directive one important step closer to finalizing the legislative process.

Sustainability
13 Mar 2024Impact and ESGUpdates

ESG KPI report 2024 by Invest Europe

Invest Europe has published an ESG KPI report covering data from 2022. Compared to their first edition published last year (covering data from 2021), which we touched upon in our previous Pulse update, there has been a 60% increase in the number of firms covered by the survey.

Sustainability
13 Mar 2024Impact and ESGUpdates

Exposure Drafts on sustainability reporting standards for SMEs

The European Financial Reporting Advisory Group (“EFRAG”) has launched a public consultation on the Exposure Draft European Sustainability Reporting Standards for listed SMEs (“ESRS LSME ED”) and the Exposure Draft for the voluntary reporting standard for non-listed SMEs (“VSME ED”).

Sustainability
21 Feb 2024Impact and ESGUpdates

Draft guidelines on Enforcement of Sustainability Information out for consultation

The European Securities and Markets Authority (“ESMA”) has sent draft Guidelines on Enforcement of Sustainability Information (“Guidelines”) out for consultation.

ESMASustainability
19 Feb 2024Corporate RegulationUpdates

EU Proposal to expand the EU FDI-regulation

The European Commission has published a first draft of a revised regulation on the screening of foreign direct investments (“FDI”).

Cross-BorderGovernance