A new bill makes proceeds from certain tax free share sales taxable

24 April 2014

The Danish parliament has passed a bill making previously tax free proceeds from certain sales of shares taxable.

Generally, capital gains received by companies from disposal of unlisted portfolio shares are tax free while dividends stemming from such shares are taxable. Naturally, this difference makes it interesting to consider whether it is possible to convert taxable dividend to a tax free capital gain.

However, the Danish parliament has recently passed a bill designed to neutralise such deliberations.

Not only are capital gains from disposal of unlisted portfolio shares becoming taxable according to the bill, the acquisition price of the shares cannot be deducted when calculating the taxable income because the income is treated as dividend instead of a capital gain. Hence, the entire proceeds are taxable.

Apart from companies’ disposal of unlisted portfolio shares, reclassification from capital gain to dividend takes place when company or individual shareholders are remunerated in other assets than shares in connection with tax free or taxable company reorganisations.

The new rules mainly apply to companies’ transfer of shares to “empty” companies, when the remuneration or part hereof stemming from such transfers consists of other assets than shares in the acquiring company or connected group companies. This also applies to non-resident individual shareholders living in a country outside the EU having no double tax treaty with Denmark. For non-resident individual shareholders, this means that the proceeds will be taxed in Denmark with 27 pct. – income that was previously tax free in Denmark.

In reference to taxable company reorganisations, the new rules apply in cases where company shareholders holding unlisted portfolio shares are remunerated in other assets than shares in the receiving company or connected group companies.

Concerning tax free company reorganizations, all remuneration in cash must be treated as dividend when the shareholder (company or individual) owns shares in one of the companies involved in the reorganisation - or connected group companies after completion of the reorganisation.

The above applies to Danish companies holding shares in Danish or foreign companies and to foreign companies holding shares in Danish companies. The new bill entered into force on 1 April 2014. However, the bill largely takes effect from 20 November 2013.

The above article is taken from tax:watch, our electronic English newsletter on Danish Tax and VAT matters. tax:watch is issued on the last Friday of each month and is free of charge.