Reconstruction of financial basis(Taxwatch (Tax news in english))
02-12-2009 12:42
Af
Karsten Gianelli
The global recession has also reached Denmark and many Danish companies suffer from decreased earnings and decreasing values of their assets. Thus, many Danish companies have a need to reconstruct and improve their financial basis, often on demand by banks or other creditors.
A foreign parent company has basically three different models for improving the financial basis of a Danish subsidiary:
• Guarantee for the subsidiary’s debt
• Loan to the subsidiary
• Capital contribution to the subsidiary.
In evaluating these different models, the tax effects in Denmark as well as in the jurisdiction of the parent company must be taken into consideration.
The Danish tax effects of these different models for the Danish subsidiary are described below.
Guarantee
A guarantee from the foreign parent company does not have any immediate effects on the subsidiary’s tax situation. However, a guarantee premium paid by the subsidiary on an arm’s length basis will – over the loan period – be deductible for the Danish subsidiary.
If and when the guarantee becomes effective – i.e. the foreign parent company has to pay the debt to the creditor – the parent company will have a recourse claim on the subsidiary for the repaid debt. See below regarding the tax situation in case the subsidiary is subsequently released from debt which also covers a release from this recourse claim.
Loan
A loan to the subsidiary from a foreign parent company must carry market interest, normally calculated as the alternative interest rate on a similar loan to the subsidiary from an independent creditor.
In case the subsidiary is able to repay the loan and the interest, the only tax effect for the subsidiary will be that the interest payments are deductible.
If the subsidiary is released from the debt without repayment the released amount will not be taxable for the subsidiary provided, however, that the foreign parent company cannot deduct the loss on the debt for tax purposes pursuant to the tax law in its home jurisdiction. Thus, if the parent company is able to deduct the loss on the debt, the Danish subsidiary will be taxable of the released amount regardless whether the foreign parent company actually deduct the amount or not. However, if the release of debt is regarded as similar to a deed of arrangement, i.e. if it includes the majority of the subsidiary’s debt, the released amount will not be taxable but will only reduce any tax losses carried forward by the subsidiary.
It should be noted that if it is regarded as likely that the subsidiary will not be able to repay the loan at the time the loan is granted, the Tax Authorities may reclassify the payment of the loan as a contribution from the foreign parent company. See below regarding the tax effects of a capital contribution.
Capital contribution
A capital contribution can be made either with or without the issuance of shares.
The capital contribution without issuance of shares will not be taxable for the subsidiary, provided, however;
- it is received from a parent company which – directly or indirectly – holds10% or more of the shares in the receiving company or from another subsidiary of this parent company;
- the contributing company is not allowed tax deduction of the contribution pursuant to the tax law of its home jurisdiction; and
- all group companies between the contributing company and the receiving Danish subsidiary are located in another EC country or in another country covered by a tax treaty with Denmark.
Contributions from all other sources will be taxable for the receiving subsidiary. If the capital contribution is made against the issuance of shares, the paid capital contribution – including a share premium – will not be taxable for the Danish subsidiary.
Questions to this article can be directed to Karsten Gianelli at kgi@bdo.dk
Til nyhedslisten