Denmark as a tax haven

30 January 2014

Danish media have recently been occupied by a story that certain tax advisers market Danish limited partnerships as a useful element of international tax planning. 

DR – the Danish national radio – recently broadcast a documentary on marketing of Danish limited partnerships to especially East European businesses.
The documentary concerned a very big Uzbek oil company which was allegedly owned by a Danish limited partnership whose owners are unknown, but probably are companies in Cyprus and Belize or the Seychelles.

This ingenious structure should enable distribution of dividend from the oil company to the Danish limited partnership and then to the actual owners without taxation of the dividend in any of the places. 

The documentary resulted in wide media coverage in Denmark and the Danish Minister of Taxation immediately requested a report from the tax authorities. 

BDO's opinion

Danish limited partnerships are not required to provide information on their owners. If anonymity is desired, it may therefore be a solution to include a Danish limited partnership in a group structure.

As regards the tax side of the matter, it may be difficult to see the advantages. The businesses that have purchased advice in this respect have most likely ”bought a pig in a poke”.

The present rules provide already good possibilities for the Danish tax authorities to charge tax on the money distributed by the Danish limited partnerships to foreign owners.

Danish limited partnerships – that are not independent taxpayers – are subject to tax as ordinary capital companies if the company has a controlling principal shareholder and this is person or a company resident in a tax haven, or resident in a non-tax haven which considers the Danish limited partnership an independent taxpayer.

The rule is supplemented by a practice according to which the Danish tax authorities charge tax on distributions of dividend from Denmark to a company in e.g. Cyprus, which is owned by a company in a tax haven and this is considered the beneficial owner of the dividend.  The reason is that the tax haven company is the actual recipient of the dividend.

A number of cases are pending at the Danish courts concerning the latter issue. The companies involved claim all that the Danish tax authorities are not allowed to charge the tax because neither the Danish company law nor EU’s parent/subsidiary directive contains any misuse provisions.

The outcome of the cases is much anticipated. It is not certain, in our opinion, that the case of the authorities will be upheld. Should they lose the cases it will probably be a short respite. The EU is in the process of implementing a misuse clause in the directive, maybe already this year. And Denmark will no doubt implement the clause in Danish legislation immediately after.

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.