Denmark set to simultaneously relax and tighten legislation on companies
The Danish parliamentary year is set to kick off with a number of changes to The Danish Companies Act, including changes to the rules regarding public ownership and a legalization of shareholder loans. According to the proposal, the changes are scheduled to enter into force on January 1st, 2017.
SANCTIONS FOR FAILING TO PUBLICIZE OWNERSHIP
Since June 2015, it has been mandatory for companies in Denmark to register ownership information with The Danish Business Authority. The information is published in The Public Owners Registry and includes the identity of owners with an ownership or voting stake of more than 5 % as well as the date of acquisition and the size of each respective owners’ stake.
Thus far, no sanctions have been imposed for failing to comply with these requirements. However, a number of companies, including ones founded after the rules mandating registration entered into force, have yet to register the necessary ownership information.
A proposed change to The Danish Companies Act would prevent the foundation and registration of a company before proper ownership information has been provided. This also applies to companies which are created as part of a cross-border merger or demerger as well as to European Companies (SE’s).
Additionally, The Danish Business Authority would be authorized to initiate compulsory dissolution of existing companies lacking registration of ownership, if they do not comply with the rules after being prompted to do so.
Company owners and management who received little or perhaps no counseling on their company affairs now face the possibility of a summons to probate court and the compulsory dissolution of their company. The change therefore accentuates the necessity of proper routine and proficient advisors when establishing a company in Denmark.
SHAREHOLDER LOANS NO LONGER ILLEGAL
The provision of funds by a company to shareholders or management is at present illegal in Denmark except in a few select instances. Additionally, the recipient of the loan is subject to taxation of the borrowed amount as dividend or salary, and this taxation is not lifted upon repayment of the loan.
Denmark is one of the few remaining EU countries where shareholder loans are illegal, and this is one of the primary motivations for the proposed change to legalize them. Legislators wish to provide Danish companies with the same level of flexibility that they would enjoy in other countries.
In order for a shareholder loan to be legal according to the proposed changes, the company must have publicized its first annual report, and the size of the loan must be supported by the equity of the company. If the company is subject to mandatory auditing, the auditor is required to assert whether or not the conditions for providing the loan are met, and The Danish Business Authority will conduct sample tests as part of its ordinary review of annual reports.
Simultaneously, the provisions would allow for the possibility of legalizing currently illegal loans if the abovementioned conditions are met.
However, even recipients of a legal shareholder loan will continue to be subject to the abovementioned taxation, which will remain unchanged according to the proposal. The taxation only applies to recipients with a controlling influence in the company providing the loan, but in spite of the legalization, the tax conditions for these types of loans remain rather unfavorable, and it therefore remains to be seen if the proposed changes will create the desired flexibility.
As far as cross-border taxation is concerned, shareholder loans are exempt from taxation in situations where Council Directive 2011/96/ EU on taxation of parent companies and subsidiaries would exempt dividends from taxation. This was specifically decided in order to avoid unintended taxation of financing between companies in the same group across borders.
For further information, please contact assistant attorney Josias Svendstorp at firstname.lastname@example.org.