Tax and VAT deductions for restructuring companies

1. Tax deductions

It follows from Paragraph 8J (1) of the Equation Act that there are deductions for lawyers' and accountants' expenses incurred for the establishment or expansion of an existing business. Circular No 72 of 17 April 1996, point 14.10, states that the provision allows deductions for accountants' and lawyers' expenses incurred in connection with the restructuring of a company. Restructuring means:

• Merger
• Cleavage
• Tax-free addition of assets
• Corporate Transformation.

However, it is clear from Section 8 (3) of the Equation Act that there are no deductions in the income statement if the expenditure is in addition to the acquisition amount of the assets acquired.

Until now, the limit has remained unresolved, but Skattestyrelsen has now, in a series of recent rulings, made a more precise definition of when additions to the acquisition amount are involved and when deductions are made.

The leading order in this case concerned the tax-free transfer of assets, but has similar precedent-setting value with regard to other restructurings. The order is followed by a number of orders concerning, among other things, merger, acquisition of business and corporate transformation.

The expenditure referred to in the above orders is:

Auditor expenses for:

• Assessment reports
• Opening balance
• Request permission from the Danish Customs and Tax Agency
• Request for new SE numbers
• Meetings with a lawyer
• Financial Due Diligence.

Lawyers' expenses for:

• Meetings with the auditor
• Establishment of company
• Drafting of statutes
• Notification to the Danish Enterprise and Company Authority
• Correspondence with the Danish Customs and Tax Agency
• Legal due diligence.

Skattestyrelsen concluded that the abovementioned expenses had been deducted under Paragraph 8 J (1) of the Equation Act.

Conclusion

All customary expenses related to restructuring will be tax deductible. If, on the other hand, there are direct expenses related to the purchase of shares, these expenses must be added to the acquisition amount.

Especially about share swaps

In a new decision, the Østre Landsret has ruled that there is no deduction for the costs associated with the creation of a holding company by means of a tax-free exchange of shares, since holding shares in a subsidiary is not a business activity.

2. Deduction of VAT in case of restructuring, etc.

In accordance with past practice, tax authorities have refused to deduct from the VAT of adviser fees in connection with the transfer of a company's assets and liabilities, including shares or shares. The reasoning has been that these expenses were not related to a taxable transaction.

The Land Tax Court has now partially relaxed this practice.

The practice relating to VAT on advisory fees can be summarised in the following main conclusion

1. Transfer of a business subject to VAT
2. Transfer of assets or operating property unrelated to the transfer of a taxable business
3. Transfer of shares and shares.

Ad 1: Transfer of business subject to VAT

In a more recent ruling, Skattestyrelsen has ruled that there is a deduction for advisory expenses incurred in connection with the transfer of a company subject to VAT. There must be a transfer of a single business, which usually means that the seller must cease to operate the business in question and that the business must be continued by the buyer. This condition must also be assumed to be fulfilled in the case of the transfer of a branch of an undertaking by, for example, the addition of assets.

VAT is deductible, regardless of whether the company is generally fully or partially liable to VAT or whether, for example, it is a rental property that is voluntarily registered.

There is also a VAT deduction, even if the transfer itself is exempt from VAT under the special provisions of Section 8 of the VAT Act, on the sale of the whole business or Section 13 (1) (9), on the sale of immovable property.

Ad 2: Transfer of assets or business exempt from VAT

If only individual assets are transferred and not a whole enterprise, there will be no deduction from VAT on the adviser's fee.

If the business being transferred is not subject to VAT or voluntarily registered, the VAT will not be deducted either.

Ad 3: Transfer of shares or shares

VAT on advisory fees in connection with the transfer of shares or shares as part of a comprehensive corporate transformation is not deductible. If the company's capital consists of immovable property, operating assets and shareholdings in, for example, subsidiaries, and in the case of a total transfer, the advisory fee must be divided into a deductible and a non-deductible part. The division is made in proportion to the company's turnover.

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Disclaimer

‍The above information is for guidance purposes only, and we accept no responsibility for decisions made based on this information without prior individual advice. We accept no responsibility for errors or omissions.

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