Fund Taxation Alert 2022-08

Danish Investor tax reporting: share-based investment companies

Danish Investor tax reporting: share-based investment companies

As announced in 2019, a change of the Danish Act regarding the Taxation of Gain on Shares (“ABL”) came into force and impacted the taxation of investment funds (the "Law"). The Law introduced a new distinction between two types of funds: share-based investment companies and bond-based investment companies.

Income from share-based investment companies will be taxed as ‘share income’ under two brackets:

  • Income up to DKK 57,200 (2022) will be taxed at a rate of 27%; and
  • Income exceeding DKK 57,200 will be taxed at a rate of 42%.

Income from bond-based investment companies will be taxed as ‘capital income’ hence taxed at a marginal rate of 42%.

The default qualification of investment companies is bond-based. To qualify as share-based investment company, the Investment Fund has to 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 as financial contracts, hence usually not eligible either.

In order to comply with the share-based investment company reporting rules, the fund has to follow the requirements below:

  • Register its share classes with the Danish Tax Authority (“DTA” – the so-called Skat) before November 1st;
  • Calculate the Danish Asset Test to ensure the minimum investment in eligible assets. The asset test will be based on the average of min. four data points through the calendar year;
  • File the annual declaration with the DTA before June 30th of the following year.

Recent developments

Change in the assets’ eligibility:

Two recent rulings provide more clarity on the tax treatment of American Depositary Receipts (“ADR”) for the Danish asset test purpose. The qualification of the ADR as ‘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 above-mentioned cases the ADR’s were to be qualified as equity, given that the depository had contractually assigned the shareholder rights to the ADR’s holders. However, the qualification of ADR and Global Depositary Receipts (“GDR”) should be assessed on a case-by-case basis.

The 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’s may be considered as a share, and therefore eligible for the Danish asset test purpose.

It has been concluded in the specific cases that ADR holders should be 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; and
  • The bank has not made any reservations of rights in the event of changes in the issuing company that affect the ADR certificate.

Updates in the registration process

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

The deadline for registration of active share class is November 1st, 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 June 1st, 2022, the registration with the DTA is possible within two months from launch for an application in the share-based investment company regime starting from launch. The annual reporting will be due in such case on June 30th, 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 guidelines give a positive sign to the market participants, as the local tax authorities have taken into consideration the Management Companies operational constraints. 

Action points

In addition to the monitoring of the Danish asset test, investments in ADRs and GDRs should be analysed specifically when the sub-fund is close to the 50% asset test.

The deadline to register your share classes as share-based investment companies for the calendar year 2023 is November 1st, 2022.

The management company may update its 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 your funds and ultimately impact the taxation of Danish Investors.

KPMG can assist throughout the entire process.