The Danish Parliament has adopted the final version of the legislative proposal relating to the taxation of investment funds (‘the Law’), following a political agreement announced in November 2017.
The Law changes the tax regime of both domestic and foreign investors in Danish investment funds.
New tax regime for Danish investors holding shares in an Investment company:
The law amends the tax treatment of investments in so-called ‘investment companies’ by Danish individuals.
Under the current rules, individuals investing in investment companies are taxed under the ‘mark-to-market’ principle.
Namely, income that they receive from investment funds are included in their regular taxed return (so-called capital income taxed at around 42%) but losses on their investments can in many situations depending on their other income and expenses/losses only lead to a tax deduction of about 25%.
Based on the new regime, income from ‘share-based’ investment companies will receive tax treatment as share income, which will in most cases be more favorable than treatment as capital income.
Namely, a 27% tax rate will be applied up to DKK 54,000 per year (2019 threshold) and a 42% rate above this amount. In addition, losses on such investments will be fully deductible against positive share income.
The taxation of income from share-based investment companies will still be subject to taxation under the mark-to-market principle.
An investment company can be qualified as share-based if at least 50% of its assets (computed on a yearly average) consist of shares and the rest of the assets only consist of securities.
The investment company will also have to fulfill administrative requirements and make an election to be qualified as share-based.
Companies that do not meet the above conditions will be regarded as bond-based and will still be taxed as capital income according to the mark-to-market principle.
Those provisions will be effective from tax year 2020.
New tax regime for non-resident investors investing in IMBs:
Under the current rules, a 27% withholding tax (WHT) is generally levied on outbound dividends distributed by Danish investment companies and from the minimum distribution by investment institutes with minimum taxation (“IMBs”).
From now on, IMBs and investment companies will be allowed a WHT exemption for dividends paid to foreign investors. For IMBs, the exemptions are subject to the condition that the IMB is subject to a 15% WHT on dividends received or that the IMB cannot invest in Danish shares, etc.
IMBs will have to elect for this regime before their activities are launched, i.e. default is taxation under the 'old regime'. This exemption is not applied at source (a reclaim must be filed).
Those provisions will be effective from 1 March 2019.
Decision from the Danish Supreme Court following the Fidelity Case (C-480/16)
Further to the Court of Justice of the European Union (“CJEU”) ruling in case C-482/16 (Fidelity Funds), confirming that the Danish legislation is in breach of the free movement of capital, a Danish High Court ruling should come out in the coming weeks (expected on 2 April 2019) and a legislation should be voted afterwards.
The Danish government is further expected to introduce a net withholding model (relief-at-source model).
The preparatory work to the above-described law confirms that a net withholding model is not likely to be ready to come into effect before 2022. Should you have any question related to the above, please contact us.
This new piece of legislation is especially beneficial to Danish individual investors, as it still requires for foreign investment funds to opt for the IMB regime if they want to benefit from a preferential tax treatment in Denmark.
The situation of foreign IMBs investing in Danish companies should not change for now and the latter should still be taxed on dividends received corresponding to amounts allocated to foreign investors.
One can however hope that the Danish High Court decision will lead to a legal reform in favor of foreign investment funds.
For any question regarding the above, please contact us.