The Supreme Court recently delivered a judgment in a test case concerning claims for compensation and gifts, including the taxation thereof, between former unmarried cohabitants. During the case it was alleged - in vain - that the differential treatment of the legal position of married persons and unmarried cohabitants on termination of cohabitation was contrary to the European Convention on Human Rights.
Background
A man and a woman had lived together as unmarried cohabitants since the summer of 1993 and until April 2003 when the woman moved out of the cohabitation home together with the children of the relationship. The man had far more assets than the woman.
Further to the termination of the cohabitation, the man informed the woman in an e-mail in October 2003 that he has asked his bank to transfer DKK 6 million to her account.
In connection with the receipt of the amount, the woman signed an antedated deed of gift and a notice of a gift to the tax authorities.
The Supreme Court was the third instance
The Supreme Court determined the case as the third instance court, in that the woman had been granted leave to appeal to a third instance due to the general nature of the case.
The Supreme Court initially stated that the fact that in connection with the receipt of the amount the woman had signed the said deed of gift and notice of a gift, did not prevent her from alleging that the amount was rightfully a compensation amount which she received in connection with the termination of the cohabitation, and to which she had a legal claim.
Therefore, at first the case was whether the amount (in whole or in part) was a tax and charge-exempt compensation claim paid on the occasion of the termination of the cohabitation, or if it was a taxable gift.
Long live-in relationships may cause that an amount is granted to a party
The Supreme Court found as follows, citing previous case law: On termination of a multi-year permanent live-in relationship, an amount can be granted to a party. Through participation in the common expenses of the parties or otherwise, the party must substantially have contributed to the other party's being able to create or maintain significant assets. The amount that can be granted to the other party must be based on an estimate taking into consideration i.a. the duration of the cohabitation and the parties' financial situation at the end of the cohabitation.
The Supreme Court: The woman had no claim for compensation
The woman did not fulfil this requirement, and the Supreme Court refused to extend the scope for compensation claims beyond previous case law which dates back to the middle of the 1980s. The Supreme Court was therefore not satisfied that the woman had a legal compensation claim against the man.
The Supreme Court therefore upheld the judgments of the previous courts, according to which the amount transferred must be considered a gift, which was also in accordance with the notice of a gift filed by the parties.
The Danish Inheritance Tax Act and the promise of a gift
Under the rules of the Danish Inheritance Tax Act, a 15% gift tax must be paid on gifts which exceed DKK 58,700 in a calendar year, between cohabitants with a common address and having had a common address for at least two years, whereas gifts between former cohabitants in their entirety are taxable as ordinary personal income.
During the case, attempts were made to document that the parties' termination of the cohabitation in April 2003 was not definitive, and that the promise of a gift had been given before the man sent the said e-mail in October 2003. However, the Supreme Court held it to be established that the parties did not have a common address after April 2003, and was not satisfied that the promise of a gift had been given before the woman moved out of the common home in April 2003.
The Supreme Court thus held it to be established that the promise of a gift had not been given until October 2003 when the parties no longer had a common address. The provisions of the Danish Inheritance Tax Act had therefore not been satisfied, and the woman must therefore pay ordinary income tax on the gift at DKK 6 million.
During the case the woman also claimed that a gift between former cohabitants which had been granted in connection with the termination of the cohabitation, was to be tax-exempt, just as an unequal distribution of assets between spouses in the event of division of property, legal separation or divorce does not trigger taxation under established case law. Had this not been the case, as a cohabitant she would be exposed to discrimination which would be contrary to and thus entail a violation of her rights under the European Convention on Human Rights.
The Supreme Court: The European Convention on Human Rights not contravened
However, the Supreme Court did not find that the European Convention on Human Rights prevents that unmarried cohabitants are treated financially differently, including for tax purposes, than spouses in the event of legal separation. The Supreme Court hereby cited that in a number of judgments from the European Court of Human Rights it was previously established that the states are entitled, also for tax purposes, to treat unmarried cohabitants differently than spouses.
The judgment shows that transfer of funds should be made before the actual termination of the cohabitation
The judgment illustrates that there is still much difference between the statutory rights of unmarried cohabitants and spouses.
The rules on compensation claims are not statutory, but have solely been developed by case law, and it can often be very doubtful if there is an adequately certain legal basis for an agreement between the parties to the effect that there is a legal compensation claim and thus adequate certainty that such agreement will be acknowledged, also by the Danish Tax Authorities.
If there is no basis for a claim for compensation, including an adequately large one, the unmarried cohabitants should thus remember to be generous before the termination of the cohabitation. Also, the cohabitants therefore have to resort to more uncertain deliberations about any possibilities of letting any generosity be reflected in determining values in connection with the transfer of assets from one party to another or division of assets, which may be jointly owned by the parties as part of the termination of the cohabitation.
Finally, the judgment emphasises once more not least the general need for considering thoroughly the tax consequences of family-law agreements before entering into such agreements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
