Taxation of major shareholders and directors, etc., with free accommodation, cottage or yacht available

We have briefly summarised the main points contained in the draft law which is currently being submitted for consultation.

Important: A distinction must be made between employment taxation and dividend taxation in future.

Taxation in employment

The personality of the proposed rules is:

• An employee who is a director, or another employee with a significant influence on his own remuneration.

An employed major shareholder would thus be included.

A major shareholder who is not an employee of the company, on the other hand, will not be subject to these rules. For these, refer to the dividend taxation rules below.

1. Year-round residence

The purpose of the proposed rules is that the valuation is based on the costs that would be incurred if the recipient were to own the dwelling in question. A schematic basis for calculation is therefore introduced.

The taxable value shall be fixed at:

6% of the part of the calculation base below the progression limit in the Property Value Tax Act (DKK 2,650,000 in the year 2000)

and

8% of the portion that exceeds the progression limit.

The basis of calculation is the largest of the following amounts:

a) Property value as at 1 January of the year of income

or

b) The acquisition amount calculated in accordance with Section 4 (2) or (3) of the Property Income Tax Act, plus improvements made after the acquisition, but only improvements made before 1 January of the year of acquisition.

For properties acquired before 19 May 1993 and where an entry value is selected on 1 January 1993 in accordance with paragraph 1 or 2, only improvements made after 19 May 1993 shall be added.

See below under section 3 on the relationship with the Property Avoidance Taxation Act.

Value to Taxation

The amount taxed is thus:

the basis of calculation x the above percentages with the addition of property taxes incurred by the employer,

while any co-payment for the right of advice is due.

In the case of mixed properties, only the part of the property that serves as housing for the employee is included in the calculation basis.

Example

If, in addition, the employer incurs expenses for heating, renovation, cleaning or gardening, these must also be taxed separately.

Summer residence

The presumption rule

It is proposed to introduce a presumption rule according to which the employed majority shareholder and others, with a significant influence on their own remuneration form, has at their disposal a summer residence owned by the company, which is generally considered to have possession of the house throughout the year.

If several employed shareholders and others have at their disposal the summer residence, the tax value is distributed equally.

Taxation is reduced to the extent that relatives do not own the house.

Relatives shall be deemed to be spouses, parents and grandparents, children and grandchildren and their spouses or deceased dependants of such persons. Stepchild and adoptive relationships are equated with true kinship relationships.

Discounts are given for self-payment.

Staff summer houses

In the case of a holiday home rented to other employees for 13 weeks or more per year, including at least 8 weeks in the weeks 22-24, the presumption rule above does not apply.

It is the percentage rules in force in section 16 (5) of the Equations Act that continue to apply, i.e. ½% of the property value per week in weeks 22-34 and ¼% in the other weeks.

Yachts

It is proposed to introduce similar rules as for holiday homes.

It is proposed to introduce a similar presumption rule which does not apply in the case of personnel pleasure boats, i.e. a boat made available to other staff for 13 weeks or more per year, including at least 8 weeks in weeks 22-34.

Taxation is reduced if the boat is used by other people other than close relatives.

The taxable value is reduced by self-payment.

It is the percentage rules in force in section 16 (6) of the Equation Act that continue to apply, i.e. 2% of the boat's acquisition total per week.

Labour Market Contributions

The contribution base for employed shareholders and others is extended to include the taxable value of free housing, cottage and yacht.

However, the taxable value of the availability of a summer residence and a pleasure boat is not included in the basis of the contribution in the case of a staff summer house or a staff yacht, see above.

2. Dividend taxation

Where dividends are granted to shareholders in the form of the provision of a summer residence, a holiday home or a year-round residence, the same valuation principles shall apply to shareholders and others who receive those assets in employment as set out in paragraph 1 above. This dividend is taxed as personal income.

The rule also applies to major shareholders who are not employees of the company.

Labour market contributions must also be paid for this.

However, the taxable value of the availability of a summer residence and a pleasure boat is not included in the basis of the contribution in the case of a staff summer house or a staff yacht, see above.

If the proposal is adopted, SkatteInform anticipates major problems with the tax authorities around the municipalities as to when the free housing can be considered part of the employment contract and when it can be considered a dividend.

The bill refers to the Supreme Court judgment of 24 March 1988, in which the Supreme Court considered value of free housing to be dividends, since the taxpayer's salary was calculated in a completely different way and set at an amount of an order of magnitude different from the salary of equivalent employees employed in the public service.

3. Ratio to later real estate appreciation for properties acquired before May 19, 1993.

In the case of properties which are or have been covered by the schematic basis above, in the case of subsequent disposal of the property, the acquisition amount used or used in the calculation of the basis for taxation of detached dwellings shall be used.

In the case of properties acquired before 19 May 1993, it is proposed that the company should make a choice as to the amount of the acquisition it wishes to use in relation to the taxation of the employed shareholder and others.

There is a choice between 4 input values. This choice is binding, both in relation to the taxation of the employed majority shareholder and others, but also in relation to a later real estate lease. The company will now have to decide how it will make up a real estate lease in due course. According to the comments to the draft law, it is irrelevant whether the input value chosen is actually used as a basis of assessment for taxation, as long as it is included as a basis for comparison, which is always the case when the property was acquired before 19 May 1993.

Skatteinform believes that it would have been more appropriate to establish the basis for calculating the property assessment as of 1 January of the income year. It seems unreasonable to force the company to make a choice in terms of input values under the Property Deduction Tax Act at a time when a disposal of the property is not applicable. It seems even more unreasonable if the comparison with the 1 January assessment leads to the latter value having to be used.

The company finds itself in a conflict of interest between the consideration of the lowest possible taxation of the major shareholder and others and the consideration of choosing the highest possible acquisition amount in order to minimize the real estate reserve.

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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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