Demerger refers to aprocess where a business is divided into two or more separate entities. This can happen by transferring part of the business's assets and activities to anew business, while the original business continues with the remaining assets andactivities. Demerger can have tax consequences and often requires approval fromthe authorities.
Frequently Asked Questions About demerger
What is a demerger?
A demerger is a restructuring where a company transfers its assets and liabilities to one or more other companies. The purpose can be to divide activities, change ownership structure or create a more appropriate company structure.
A distinction is made between two forms of demerger:
Termination demerger: In a termination demerger, all assets and liabilities are transferred from the transferring company to one or more receiving companies. The transferring company ceases without liquidation, and its activities are continued in the receiving companies.
Partial demerger: In a partial demerger, only part of the transferring company's assets and liabilities – typically an independent branch of the business – is transferred to one or more receiving companies. The transferring company then continues its business with the remaining activities.
What is the difference between a taxable and a tax-free demerger?
A demerger can be carried out either as taxable or tax-free, and a tax-free demerger can take place with or without permission from the Danish Tax Agency.
In a taxable demerger, the transferring company is considered to have sold its assets and liabilities at market value, and there is therefore taxation of any gains. Such a demerger is typically carried out when a change in ownership is desired that does not meet the conditions for tax exemption.
A tax-free demerger, on the other hand, can be carried out without immediate tax settlement, as the tax values (acquisition sums, depreciation basis, etc.) are carried forward to the receiving companies according to the principle of succession.
What are anti-avoidance rules in tax-free demergers?
In tax-free demergers without permission from the Danish Tax Agency (the objective model), a number of anti-avoidance rules apply, which are intended to prevent the demerger from being used for tax avoidance or unjustified postponement of taxation.
What is the three-year rule in demergers?
The three-year rule means that there must not be significant changes in the ownership of the participating companies within three years after the demerger.
The purpose is to prevent the tax exemption from being exploited to carry out a tax-free change of ownership or transfer of capital shares shortly after the restructuring.
What is the holding requirement in demergers?
The holding requirement means that a receiving holding company after the demerger must own capital shares in an active subsidiary for at least three years.
The purpose is to prevent tax-free demerger from being used to establish passive holding companies without a real operational purpose as part of tax planning.
What is the rule about cash consideration in demergers?
The purpose of the rule is to ensure that the transaction genuinely has the character of an exchange of ownership shares and not a partial cash sale.
If the cash consideration exceeds the 10% limit, the demerger loses its character as a tax-free restructuring and becomes taxable – regardless of whether permission has been applied for or not.
What happens if the anti-avoidance rules are not complied with?
If one or more anti-avoidance rules are not complied with, the tax exemption lapses, and the demerger is instead considered taxable.
This means that taxation of any gains occurs in both the transferring and the receiving companies as well as for the capital owners.
Disclaimer
As the above is for guidance purposes only, we accept no liability for decisions that may be made based on the above without prior individual advice. We accept no liability for errors and omissions.