Tax-free corporate transformation - bill passed

On 17 December 1998, the Minister of Taxation tabled a bill to amend the provisions on tax-free corporate transformation. After a lengthy discussion in the Danish Parliament and substantial amendments, the bill has now been adopted.

The adopted bill had the following content:

General requirements

Application of shell companies

The Act specifies that only “virgin” shell companies may be used in the case of conversion, understood as requiring the company to be definitively incorporated on the date of conversion and that the entire equity since incorporation has remained unencumbered in a bank account.

Founding receivables

Under the rules in force so far, a tax-free business transformation could be carried out by paying up to 25% of the remuneration in the form of a founders' receivable. This possibility is removed by the amendment of the law, making it conditional that the entire consideration be made in the form of shares or shares or, if a “virgin” shell company is used, by an increase in the value of the shares or shares.

Anpartmental intervention

The amendment introduces a provision according to which the conversion of companies covered by Paragraph 4 (1), Nos 10, 12 and 13 of the PSL (companies covered by the private equity intervention) cannot be carried out tax-free. The previously existing condition under which all owners after conversion had to have majority shareholder status is removed.

This means that stakeholders and limited partnerships, regardless of the number of owners, have the opportunity to complete a tax-free corporate transformation.

What should be covered by the transformation

Under the new rules, all assets and liabilities of the company must, as a rule, be subject to the transformation.

Two exceptions are made to this:

1. The owner can choose whether a property used in whole or in part by the business should be included in the corporate transformation or whether it should be kept out. Other mixed used assets must be taken into account in the conversion.
2. The owner may decide that amounts in the corporate scheme intended for later actual withdrawal as well as amounts in the intermediate bill account are to be kept out of the conversion. This exception, introduced by means of an amendment, makes it possible to adjust the capital base of the company. In the original bill, there was a provision to prevent loans from being taken out prior to the conversion, where only the debt obligation is covered by the corporate transformation, while the loan proceeds are held in arrears. The amendment removes that provision.

Negative acquisition sum - all companies must be transformed

During the Parliament's consideration of the Act, a condition was introduced according to which the tax acquisition amount for the shares/units must not be negative. If the corporate tax scheme has been applied in the year preceding the conversion, it can be done despite negative acquisition amount, however, the owner must transfer to the company an amount equal to the negative deposit account.

In these situations, it will be necessary to inject an amount equal to the negative acquisition amount in the undertaking to be converted, in order to avoid the negative acquisition amount.

If there is a negative acquisition total, it is also a condition that all companies in the corporate tax system are converted together. The latter condition seems likely to cause problems if you have invested in, for example, real estate through a K/S or I/S, since a share in it cannot be converted independently.

This part of the Act has effect for conversions carried out on or after 1 July 1999.

It is specified that, in the event of a reduction in capital or resale to the issuing company, a negative tax acquisition sum must be taxed, even if the amount of disposal pursuant to LL § 16A or the

distributed amounts under LL § 16 B amount to 0 kr. At the same time, it is clarified that taxation of negative acquisition amount occurs as share income.

Provision for tax

It is introduced as a condition for the application of the rules on tax-free corporate transformation that provisions for deferred and latent taxes are made in the opening balance sheet in accordance with recognised Danish accounting standards. These provisions are not included in the calculation of the purchase price of the shares or the parties.

Untapped losses

It is clarified that unused deductible losses pursuant to KGL § 32 (3), ABL § 2 (2) and EBL § 6 (5) before conversion cannot be carried forward in the company.

Breakdown of account for saved profits

The provision of the Corporate Tax Act on the distribution of saved profits (Section 16 C (3)) in connection with tax-free corporate transformation is amended by the Act.

The proportion of the profit saved which can reduce the acquisition amount must now be calculated as the ratio between the part of the capital return base at the end of the previous year of income attributable to the converted enterprise and the entire capital return base at the same time.

Multiple owners

Under the rules in force in the past, it was a condition for multiple-owner companies to convert tax-free that, upon conversion, they became major shareholders. That requirement has now been lifted.

Furthermore, under the rules in force in the past, it was a condition that all owners have used the same operating accounts and the status of the company, including common tax depreciation and amortisation. That condition has now been lifted.

Instead, rules on offsetting have been put in place in cases where owners have not made proportionately equal depreciation. The company is included in the owners' depreciation base, which is why a different depreciation profile causes some owners to incur a greater amount of deferred tax than others. The new rules aim to offset that disparity. An “offsetting payment is included in the statement of the acquisition sum of the shares/parties.

The other conditions for multi-owner companies to convert tax-free are unchanged:

1. Everyone applies the rules on tax-free corporate transformation
2. All have used the same accounting period
3. Remuneration in proportion to their shares in the company.

Entry into force

As a rule, the Act has effect for conversions occurring on or after 1 January 1999.

The condition that there shall be no negative acquisition sum shall have effect for conversions carried out on or after 1 July 1999. Similarly, the provisions of the Corporate Tax Act on the offsetting of negative acquisition amount apply

The amendments made to the provisions on the taxation of negative acquisition amounts on resale to the issuing company and on capital reductions have effect for disposals and capital reductions implemented on or after 1 July 1999.

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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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