Denmark – A Tax Haven?
Artur Bugsgang, partner at leading Danish law firm LETT looks at Denmark’s tax advantages.
Denmark currently ranks fifth in the world in their ease of doing business index. The country is significantly less bureaucratic than the majority of its European neighbours, especially in regard to establishing and operating companies. Despite its ‘high tax’ reputation, Denmark offers tax benefits to individuals and businesses more akin to havens such as the Seychelles, Cyprus, Hong Kong and the Cayman Islands.
Danish limited partnerships have become highly popular with overseas businesses, due to limited civil regulation of partnerships and favourable tax rules, both in terms of tax rates and reporting requirements.
Individuals and legal entities domiciled outside Denmark prefer to establish Danish limited partnerships as owners of shares and as lenders – and, consequently, as the rightful owner of proceeds, e.g. dividends and interest payments, in order to give the enterprise a solid reputation in the European Union, and because limited partnerships are tax-exempt and may provide anonymity and discretion to its owners.
COMPANY LAW AND LIMITED PARTNERSHIPS
Limited partnerships are not subject to the Danish Companies Act.
Partners in a limited partnership are either general partners (“komplementarer”) or limited partners (“kommanditister”). General partners are liable for all obligations of a limited partnership; liabilities of limited partners are restricted to contributed capital, or the agreed amount of capital, that they have undertaken to contribute to the partnership.
There may be one or more general partners in a limited partnership. Often there is only one general partner, which could be a private limited company (ApS) with the minimum capital. A general partner need not be an owner, but must hold financial and administrative powers in relation to the limited partnership based on the partnership agreement. Profits are to be distributed in proportion to their respective share of ownership.
It is possible to set up a Danish limited partnership even if all the limited partners and general partners are foreign resident individuals or foreign legal entities, or a mix of such individuals and companies.
If all general partners are limited liability entities, the limited partnership must be registered with the Danish Business Authority. Registered limited partnerships are subject to the rules on mandatory audit stipulated in the Financial Statements Act, which means that audited financial statements must be filed. However, small limited partnerships need not file.
Limited partnerships need not file cash-flow statements, and are therefore not obliged to disclose the amount of money passing through them. Names of limited partners will are neither public nor specified.
Limited partnerships under Danish law are tax transparent. Tax subjects are general partners and limited partners proportionately based on their respective share of ownership. Therefore, if not an owner, the general partner will not be liable to pay tax on profits generated by the limited partnership, even if the general partner is an individual or a legal entity resident in Denmark.
If the limited partnership’s income originates from sources outside of Denmark, such income cannot entail limited tax liability in Denmark. Consequently, general and limited partners will not become tax liable in Denmark on income that originates from countries other than Denmark, despite the fact that the income passes through the Danish limited partnership.
If more than 50 per cent of the ownership of the limited partnership is held by individuals or legal entities domiciled in a country that defines a limited partnership as a non-transparent entity for tax purposes, then the Danish tax authorities will change the Danish tax position of the limited partnership and no longer accept its tax transparency, i.e. the limited partnership will become a Danish tax subject and fully tax liable.
It is not possible to find information that reveals to what extent the Danish tax authorities use serious control measures in the search for limited partnerships that may be tax liable under these conditions. A limited partnership is not required to assess its income nor report its assets and liabilities to the Danish tax authorities. Danish tax authorities have no central register containing this information on limited partnerships.
In conclusion, Denmark offers the easy establishment of well-regulated limited partnerships that can be used for collecting income from several non-Danish sources without taxation. At the same time, partners can remain anonymous – so discretion is ensured both in Denmark and in the source-of-income country.
However, one must bear in mind that Danish politicians are naturally keen to protect and secure tax revenue whether it originates in Denmark or abroad, and anti-money laundering measures are ever on the increase. Caution concerning the activities of the partnership and taxation of its partners domiciled abroad is definitely advised.