Denmark: Recent changes to share-based investment companies investor tax reporting

Recent changes were made to the investor tax reporting rules for share-based investment companies.

A 2019 law affecting the taxation of investment funds introduced a new distinction between two types of funds: share-based investment companies and bond-based investment companies.

Income from share-based investment companies is taxed as “share income” under two brackets:

• Income up to DKK 57,200 (effective for 2022) is taxed at a rate of 27%.
• Income exceeding DKK 57,200 (again, effective for 2022) is taxed at a rate of 42%.

Income from bond-based investment companies is taxed as “capital income” and thus taxed at a marginal rate of 42%.

The default qualification of investment companies is bond-based. To qualify as a share-based investment company, a fund must invest at least 50% in eligible assets as defined in the Danish Capital Gains on Shares Act, such as equities. Bonds and money market instruments are not considered eligible equity when calculating the ratio. Similarly, derivatives are likely to be considered to be financial contracts, and thus usually not eligible.

In order to comply with the share-based investment company reporting rules, a fund must:

• Register its share classes with the Danish Tax Authority (DTA or Skat) before November 1
• Calculate the Danish asset test (based on the average of a minimum of four data points throughout the calendar year) to ensure the minimum investment in eligible assets
• File the annual declaration with the DTA before 30 June of the following year

Change in certain asset’s eligibility

Two recent rulings provide more clarity on the tax treatment of American Depositary Receipts (ADRs) for purposes of the Danish asset test.

The qualification of an ADR as a “share” depends on the specific ADR contract and on whether the depository/custodian or the holder of the ADR is considered as the owner (shareholder) of the relevant underlying shares. The assessment of whether the ADR’s holder is considered as the shareholder of the relevant shares depends primarily on whether the economic and administrative/governance rights (e.g. voting rights of shareholders) of the shares have been transferred from the depository to the ADR’s holder. In the recent rulings, the ADRs qualified as equity because the depository had contractually assigned the shareholder rights to the ADRs’ holders. However, the qualification of ADR and Global Depositary Receipts (GDR) needs to be assessed on a case-by-case basis.

Tax authorities start from the view that the depository is the shareholder when they hold the economic and governance rights of the shares, whereas the ADR holder has a financial contract based on the share (and thus does not hold an investment in equity). However, based on an assessment of the specific ADR/GDR contract, if it can be concluded that the ADR holder has been assigned the shareholder rights, it could be argued that the ADR may be considered as a share, and therefore eligible for the Danish asset test purpose.

ADR holders have been treated as holding shares in the Danish companies if the following conditions are cumulatively fulfilled:

• The ADR certificate corresponds to one or a number of underlying shares in the Danish company and the shares are not lent out or transferred to a third party.
• The custodian bank has transferred the economic and governance rights (including voting rights) to the holder of the ADR certificate.
• There is no pre-release.
• The bank has not made any reservations of rights in the event of changes in the issuing company that affect the ADR certificate.

Updates to the registration process

Effective 1 January 2023, the DTA will disclose at least at the end of each quarter (currently only once a year) the listing of share classes considered as share-based investment companies.

The deadline for registration of an active share class is 1 November 2022, with effect from the following year, whereas newly launched share classes and sub-funds can now be registered with effect from launch, if registration is made within two months after the inception date. As an example, for a share class launched on 1 December 2022, registration with the DTA may be made during December 2022 for an application in the share-based investment company regime starting from launch. In such case, the annual reporting will be due on 30 June 2023.

Similarly, liquidated share classes have to withdraw from the regime within two months at the latest after the liquidation date, to avoid being subject to potential financial impacts.

The recent updates to the registration process have been positively received as they taken into account the operational constraints of management companies. 

In addition to general monitoring of the Danish asset test, investments in ADRs and GDRs need to be analyzed, especially when the sub-fund is close to the 50% asset test.

Management companies may update their oversight to ensure relevant notifications are submitted in a timely manner during the fund life cycle. Failing to comply with the reporting requirements may lead to penalties and could affect the tax status of the funds and ultimately the taxation of Danish Investors.

Read an October 2022 report prepared by the KPMG member firm in Luxembourg