Two decisions by the Danish National Tax Tribunal have caused a change of Danish Merger Tax Act.
On 22 September 2010 the National Tax Board concluded that a vertical merger between a Danish holding company and a parent company in another EU member state with the latter as the surviving company will be considered a distribution of liquidation proceeds. This implies that the distribution will be taxable in Denmark unless such taxation is waived or reduced under the provisions of Directive 90/435/EEC or a double-taxation treaty.
The decision was later changed by the Danish National Tax Tribunal, which found that there was no basis for finding that the proceeds should qualify as a distribution of liquidation proceeds.
On 16 November 2010, in a similar case, the Danish National Tax Tribunal reached the same result. In this decision the Tribunal also found that there is no basis for qualifying the proceeds received by the surviving company as a distribution of liquidation proceeds. Consequently, no taxation was triggered due to the cross-border merger, since the surviving company only held tax-exempt subsidiary shares in the Danish subsidiary.
This meant that the safeguards - which should prevent dividends from flowing tax-exempt to tax havens - were without any substance. The Danish safeguard rule could be circumvented - rather than by paying dividends - by performing a cross-border merger of a Danish holding company with a parent company in another EU member state. Immediately following the merger, the proceeds may be distributed tax-exempt from the merged company to a company located in a tax haven (provided that there are no rules regarding withholding tax in the country of the surviving company).
Due to the decisions by the Danish National Tax Tribunal a Danish bill was introduced to create clarity in this area.
The change of the Danish Merger Tax Act
The change of the Danish Merger Tax Act implies that a receiving parent company in a vertical merger must pay tax on distributions from the cancellation of the shares in the contributing subsidiary ("liquidation proceeds").
Consequently, if a foreign company owns a Danish company and the Danish company is merged with the foreign company, the foreign company will be liable to pay tax on the "liquidation proceeds" received as dividend. Such dividend is taxable to Denmark unless the taxation is waived or reduced under the provisions of Directive 90/435/EEC or a double taxation treaty.
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.
