With the plan "A world-class entrepreneurial country" and the political agreement "A stronger business community", the government and political parties in June 2024 proposed a number of initiatives to create the right conditions for business to develop. These initiatives are expected to have a significant impact on investors, entrepreneurs and family-owned businesses. Some of the most important innovations are outlined below.

Capital gains tax on companies' newly listed portfolio shares

In its bill, the government proposes that it should be possible for companies to opt for capital gains tax on newly listed portfolio shares for a period of up to 7 years. The option applies both to shares purchased before and after the IPO; if an election is made, this decision cannot be undone. At the end of the 7-year period, unrealized gains will be taxed according to the stock principle.

The aim of the proposal is to increase the tax incentive for companies to invest in newly listed companies. Thus, it should be attractive for companies to invest in entrepreneurial or growth companies that often find it difficult to raise the necessary capital.

In addition, the intention is to do away with taxation according to the stock principle for portfolio shares (i.e. where the company has less than 10% ownership in the portfolio company) in newly listed companies, which under the current system is considered inappropriate in many cases.

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Repeal of dividend taxation on companies' dividends from unlisted portfolio shares

It is also proposed that the dividend taxation of tax-free portfolio shares (i.e. unlisted ownership of less than 10%) is abolished. 

Today, capital gains (sale/disposal) and dividends (distributed by the company) from portfolio shares are taxed asymmetrically, as capital gains are tax-free, while dividends are taxed at 15.4%. The consequence of the government's proposal will be that distributions/gains from/on unlisted portfolio shares will be tax-free - regardless of whether they qualify as dividends or gains.

The tax exemption will generally apply to both Danish and foreign companies and investors, and foreign investors will therefore not generally have to pay dividend tax on the types of shares mentioned.  

The intention is, as with the proposal to be able to opt for capital gains tax for newly listed portfolio shares, to give Danish and foreign companies a tax incentive to make portfolio investments in unlisted companies, which in turn will increase the possibility of injecting capital into unlisted companies.

An easier exit for key employees

The asymmetry between the taxation of capital gains and dividends has historically allowed taxpayers to 'convert' taxable dividends into capital gains, thereby circumventing the 15.4% dividend tax. Previous governments have tried to stop this circumvention by introducing a number of very complicated safeguards, including the 'intermediate holding rule' and the infamous Section 2D of the Corporation Tax Act.

Section 2D in particular has contributed to unpredictable tax effects for key employees in exit scenarios where the buyer requires the key employees to remain associated with the company. In such situations, the key employee's tax situation depends on circumstances that are completely unpredictable for the key employee, such as whether the buyer's holding company is newly established or whether it owns other companies.

With the government's proposal, the taxation of such key employees will no longer depend on random circumstances in the buyer's structure and among the key employees.

Experimental and research expenses: Extension of the tax credit scheme and the 'super deduction'

Today, with the 'super deduction', development companies can deduct their experimental and research expenses at 108% (and from 2026 at 110%), and development companies - if they have a loss - can receive the tax value of the expenses under the tax credit scheme.

In relation to the super deduction, the government proposes that the deduction percentage be increased to 120% for the income year 2028. This will be done by phasing in 114% for the income year 2026 and 116% for the income year 2027.

Under the tax credit scheme, the maximum tax value (22%) of expenses up to DKK 25 million can be paid out; the government proposes raising this to DKK 35 million as of 2027.

What is considered experimental and development activities is defined in the same way as experimental and research activities in section 8 B of the Tax Assessment Act and section 6(1)(3) of the Depreciation Act. The delimitation of this is not changed or clarified. This would have been welcome, as the delimitation in practice is difficult to determine in a tax case, where the taxpayer is normally forced to obtain an expert opinion. Nielsen Nørager has previously published a newsletter about this, which you can read here.

Legal claim for valuation at succession according to schematic model  

Today, the "market value" of a company is used to determine the estate and gift tax, which is an unpredictable figure for unlisted companies.

The bill proposes that family-owned businesses should have a legal right to have the value of the company calculated according to a schematic method to provide security and predictability regarding the valuation of a company in connection with a generational change.

The bill states that the new schematic valuation method is assumed to replace the current share and goodwill circulars. After the adoption of the bill, the tax administration will issue a control signal on the repeal of the share and goodwill circulars.

In this regard, it should also be noted that the legal requirement for a schematic statement of the company's value cannot be used in the calculation for the purpose of profit taxation, and that it is therefore essential that family businesses - as before - carefully consider the right generational succession model, for example by following the succession rules in the Capital Gains Tax Act.

The proposal should be seen in the context of the proposal to reduce the estate and gift tax on the transfer of businesses to related parties from 15% to 10%, another of the proposed initiatives.

The legal requirement for schematic valuation is proposed to be implemented with effect from October 1, 2024.

Possibility of tax succession when transferring businesses that rent out real estate

The bill is intended to make it easier to transfer companies that operate with rental of real estate, with tax succession.

Tax succession is defined as a transfer where there is no taxation of profits, but where the recipient becomes part of the transferor's tax position, and where taxation is generally deferred until the time when the recipient hands over the business.

A common requirement for a transfer with tax succession is that the business is "active" (as opposed to passive) and thus not a "money tank". A business is typically considered passive when at least 50% of the company's income or assets relate to passive capital investments such as real estate, cash, securities or similar.

With the government's proposal, active real estate rental activities will no longer be considered passive capital investment in relation to the rules on transfer with succession, provided that certain criteria are met.

The first requirement is that the real estate does not serve as the owner's or their household's residence.

In addition, there is a requirement that the family has a controlling influence over the rental business. Thus, the transferor must have control of the business. As a further requirement, the operation - the conclusion of rental agreements and other important agreements - must not be left to an independent third party. Finally, there is a requirement that the property(ies) in question has been owned by the company for more than 1 year and has been actively rented out during this period.

The possibility of transferring real estate companies with tax succession is proposed to be implemented with effect from January 1, 2025.

If you have any questions about the bills and the opportunities they may provide for your business, we're here to help.