European Holding Companies: Denmark

Danish friendly international tax rules make Denmark a unique place for setting up a holding company in Europe, especially for a non-European investor. Its legislation encompasses all key factors distinguishing a tax regime favorable to holding companies and currently provides for the following incentives.

Withholding Tax on Incoming Dividends

Denmark is a part of the EU’s Parent-Subsidiary directive providing for withholding tax exemption of dividends remitted by a EU subsidiary to the Danish holding company. To qualify for a holding company status under this directive the Danish company is to control at least 25% of shares in a EU subsidiary within minimum 12 months.

If a subsidiary company doesn’t fall under the EU’s Parent-Subsidiary directive it may count on benefits of one of more than 80 double tax treaties of Denmark. Most of them provide for withholding tax rate of merely 5%.

Obviously, if a subsidiary is located in a tax haven jurisdiction it can remit dividends to the Danish parent holding company free of any withholding tax.

Dividends Received

Danish domestic law generally provides for tax exemption of dividends received from a foreign company if the Danish holding company controls at least 15% of the foreign subsidiary’s shares (10% are proposed for 2009) within at least 12 months. To qualify for exemption one of the following conditions must be met:

  • subsidiary is to be from the EU or a tax treaty country;
  • subsidiary is to participate in a Danish international group taxation;
  • Danish holding company is to have a decisive vote on the subsidiary. The latter covers tax haven jurisdictions.

The rule does not apply to foreign flow-through entities being described below.

66% of the dividends from foreign companies that do not qualify as subsidiaries are taxed at a rate of 25%.

Dividends Paid

Dividends paid by a Danish company to its parent company are free from Danish withholding tax. To qualify for exemption the following conditions should be met:

  • parent company owes not less than 15% of shares in the Danish company (10% threshold is proposed for 2009);
  • holding period is not less than 12 months;
  • parent company is a non-resident from a double tax treaty country.

The rule does not apply to foreign flow-through entities being described below.

Capital Gains from Sale of Shares

Capital gains and losses on shares in foreign subsidiaries are exempted from Danish taxation if held for not less than three years. In case the subsidiary is from a low tax country Danish parent company is to own at least 25% of the subsidiary during the same period to qualify for exemption. The rules do not apply if the subsidiary is a low tax finance company (CFC), to be further described below.

Other Incentives

There are no Danish withholding taxes on outgoing cultural royalties (including software royalties, copyrights of literary, artistic and scientific works, leasing of equipment and management fees) and on interests, except when being paid to individuals resident in Denmark for 5 of the previous 10 years.

Nearly all exchange regulations have been abolished in Denmark, which means there are no restrictions on cross border transfer of capital.

There is no capital duty on formation and increase of the holding company’s capital.

Controlled Foreign Corporation (CFC) Taxation

Denmark has so called CFC (Controlled Foreign Corporation) regulations, which imply that the CFC-income is to be added to the taxable income of the Danish parent company.

Several requirements are to be met to fall under these regulations. The controlling requirement, Danish company meets this if it has a decisive vote on a subsidiary. The financial nature requirement is met when the subsidiary’s CFC-income constitutes more than 50% of its total income and financial assets amounts up to 10% and more of its total assets. Low tax requirement means that the according foreign tax constitutes less than 3/4 of the tax that would be paid in Denmark.

The financial income includes net bank interest, dividends, royalties, lease premiums, profits from sale of financial assets and other profits of similar or related character (income from real estate is not included) and is taxed at general corporate tax rate. A foreign underlying corporate tax paid credit is available.

Dividends To and From Foreign Flow-Through Entities (FTE)

A flow-through subsidiary is a company, which is not the real beneficiary of the dividends and acts only as the administrator or a stepping-stone to a country with no double tax treaty. In this case both dividends being received or paid are subject to general corporate taxation rules.

Simple Example: How to Use Danish Holding Company

Denmark can be involved in a tax effective group structures as an intermediary holding company. For example, if the original structure of Canada-Cyprus companies involves a 15% withholding tax in Canada, a structure with Danish holding company Canada-Denmark-Cyprus results in a 5% rate of withholding tax in Canada and 0% at the second step. It can be developed further as Canada-Denmark-Cyprus-Panama (or other tax haven) with the same effect. Again, the scheme is only feasible if all the companies involved are not solely administrative flow-through entities.

So far, a large number of international companies take advantage of the favorable Danish domestic and international regulations; and Denmark keeps being one of the best jurisdictions for holding companies.