An unambigous tax position combined with a flexible legal
regulation of Danish limited partnerhsips will make Denmark
attractive for setting up private equity, venture and
infrastructure funds, argues Erik Banner-Voigt.
For several years, it has been debated
whether non-Danish investors undertaking long-term investment
activity in Denmark would be considered as having a permanent
establishment in Denmark. The investment activity in Denmark
may either be carried out by the investor or through a third
party provider, typically in the form of a private equity,
venture or infrastructure fund.
Several binding rulings have been issued by the Danish Tax
Assessment Council (Skatterådet) regarding
Danish private equity, venture and infrastructure funds
structured as Danish limited partnerships. The Tax Assessment
Council has changed its opinion several times over the years,
leading to more and more complex corporate structures to avoid
permanent establishments on behalf of the investors.
This legal position is unattractive, and the industry has
pushed for a legislative clarification. Some advisory firms
have participated in the process, providing recommendations on
how the issue may be solved in a way that would comply with the
OECD Model Tax Treaty and Danish tax practice.
On February 23 2018, the Ministry of Taxation presented a
draft bill that specifically states that long-term investments
into securities will not be considered to create a permanent
establishment in Denmark for non-Danish investors. It is
expected that the bill will pass parliament during spring 2018
and will have effect from the income year 2017.
In the following sections, the draft bill is analysed in
Long-term investments and permanent
If a non-Danish investor carries out long-term investment
activity in Denmark, and this activity is not carried out
through a tax-resident Danish company it is relevant to
consider, whether the activity may lead to a Danish permanent
establishment. Such activity is usually carried out through
Danish private equity, venture and infrastructure funds that
are structured as Danish limited partnerships.
A Danish limited partnership is tax transparent. Non-Danish
investors will therefore not be subject to Danish corporate tax
and will not have filing obligations in Denmark, unless the
activity of the limited partnership constitutes a permanent
establishment in Denmark.
The Danish definition of a permanent establishment refers to
the OECD Model Tax Convention art. 5, according to which a
permanent establishment is a fixed place of business through
which the business of an enterprise is wholly or partly carried
on or through which business is carried out through a dependent
Based on case law, it has been the opinion of the Danish
National Assessment Council that long-term investment into
securities including the activity carried out by private equity
and infrastructure funds were a "business of an enterprise"
that could potentially create a permanent establishment.
However, by setting up independent boards passing the
investment and divestment decisions and by not having employees
in the limited partnership, it has so far been possible to
avoid creating a permanent establishment for non-Danish
However, based on the 2017 version of the Model Tax Treaty,
the definition of the agency rule in relation to a permanent
establishment has been expanded to also cover anyone that
"habitually concludes contracts, or habitually plays the
principal role leading to the conclusion of contracts that are
routinely concluded without material modification by the
enterprise". It is unclear whether or not this new and expanded
definition of a dependent agent could result in non-Danish
investors investing into private equity, venture and
infrastructure funds being considered as having a permanent
establishment due to the agency rule.
The draft bill
The draft bill proposes incorporating into the Danish
Corporate Tax Act that investment in shares, receivables, debt
and financial contracts will not be considered to be a
"business of an enterprise" that may create a permanent
activity may be considered a trading activity (in Danish:
non-Danish investor or related parties already have a permanent
establishment in Denmark whereto the non-trading investment
activity may be allocated.
Hereby the draft bill resolves the risk of creating a
permanent establishment in Denmark for non-Danish investors
carrying out long term investment activity in Denmark by
stating that such activity will not be considered to be a
"business of an enterprise".
However, a Danish permanent establishment will be created if
activity in Denmark is trading in shares or other securities,
investor or any related party has a permanent establishment in
Denmark whereto the investment activity may be allocated.
It is clear from the case law that the activity of private
equity, venture and infrastructure funds will not be considered
as trading in shares. Such activity will therefore not create a
permanent establishment for non-Danish investors.
However, if the non-Danish investor is trading in shares or
other securities in its home country, there may be a risk that
such investor will also be considered as trading shares or
other securities in Denmark, irrespective of whether the
activity in Denmark is trading activity or not.
The new rules are in accordance with the OECD Model Tax
Convention as it is up to each member state to define which
activities may be considered to be "business of an enterprise"
in relation to the definition of a permanent establishment.
Although the Danish National Assessment Council has
previously determined that investment in shares and other
securities may be considered a business activity, the meaning
of a business is not otherwise defined in Danish tax laws.
This draft bill clarifies the tax position for non-Danish
investors performing long-term investments in Danish private
equity, venture and infrastructure funds. As such, activities
will not be considered a business activity creating a Danish
permanent establishment, if the bill is passed in its present
form. This would be a highly welcomed clarification.
The draft bill facilitates that Danish private equity,
venture and infrastructure funds may set up their funds in a
simpler manner, and it will be easier to attract non-Danish
investors into Danish funds as the legal framework will be
clear and simple.