On 8 October 2008 the Danish Minister of Taxation presented a bill to amend Danish tax legislation on investment funds making it easier for foreign investment funds to obtain status as share-based distributing investment funds
TAXATION OF GAINS ON UNITS IN INVESTMENT FUNDS
Under Danish law the tax treatment of gains on units in an investment fund depends on the tax status of the investment fund.
For individuals gains on units in an investment fund are taxed as share income if the investment fund qualifies as a share-based distributing investment fund. If this is not the case, gains will be taxed as capital income. Generally, capital income is taxed more heavily than share income.
For companies gains on units in investment funds are generally taxed at a rate of 25 %. However, gains on units in a share-based distributing investment fund may be exempt from taxation if the units have been held for 3 years or more.
Consequently, the tax treatment of units in share-based distributing investment funds is generally more favourable than the tax treatment of units in other investment funds.
In order for an investment fund to qualify as a share-based distributing investment fund the following conditions must be met:
- the investment fund must calculate and report a so-called minimum dividend pursuant to Danish tax rules; and
- the assets of the investment fund shall only be invested in securities, etc. comprised by the Danish Act on Taxation of Capital Gains on Shares (save for convertible bonds, shares in so-called investment companies and units in distributing investment funds that are not share-based) and in the investment funds administration building. However, up to 25 % of the assets of the investment fund may be invested in certain financial instruments or held in cash.
EUROPEAN COMMISSION REQUESTS DENMARK TO CHANGE TAX REGIME
On 26 June 2008, the European Commission announced that it had issued a reasoned opinion requesting Denmark to change certain tax provisions dealing with the taxation of income from investment funds as the Commission considers these provisions incompatible with the freedom to provide services and the free movement of capital as set out in Articles 49 and 56 of the EC Treaty.
In theory, income from non-Danish investment funds may benefit from the more advantageous tax treatment available to share-based distributing investment funds, provided the investment funds satisfy the requirements of Danish tax law as set out above.
However, the European Commission considers these requirements so strict that only Danish investments funds are in practice capable of satisfying them and the Commission is, therefore, of the opinion that these requirements discourage investors from investing in non-Danish investment funds. The Commission considers these provisions to impede the freedom to provide services and the free movement of capital set out in Articles 49 and 56 of the EC Treaty.
PROPOSED AMENDMENT
The Danish Minister of Taxation proposes to soften the requirement restricting the types of assets in which a share-based distributing investment fund may invest.
Thus, it is proposed that the provision allowing a share-based distributing investment fund to invest up to 25 % of its assets in certain financial instruments be expanded, allowing 25 % to be invested in any form of assets (e.g. bonds, etc.). If passed by the Danish Parliament the proposal will imply that a non-Danish investment fund may benefit from the more advantageous tax treatment available to share-based distributing investment funds if the investment fund calculates and reports the minimum dividend and 75 % of the assets of the investment fund are invested in securities, etc. comprised by the Danish Act on Taxation of Capital Gains on Shares (save for convertible bonds, shares in so-called investment companies and units in distributing investment funds that are not share-based). The remaining 25 % may be invested in any type of assets.
It remains to be seen whether the proposal will satisfy the European Commission as to the compatibility of the Danish tax regime on investment funds with the freedoms set out in the EC treaty.
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