05 October 2018 Danish Government proposes to ease taxation of Danish and foreign investment funds The Danish Ministry of Taxation has released a draft bill for public hearing that proposes to change:
The draft bill proposes to change the taxation of individual investors investing in "equity-based" mutual investment funds classified as "investment companies" under Danish tax law. Most foreign mutual investment funds and exchange-traded funds meet the criteria for being an "investment company" for Danish tax purposes and the intention is to increase the competitiveness for equity-based foreign mutual investment funds and exchange-traded funds on the Danish retail market. It is proposed that returns from shares and units in Danish and foreign "investment companies" that primarily invest in equities is taxed as "equity income" for Danish individuals. Under current rules such returns are taxed as "capital income," where tax rates may be higher compared to those of "equity income." "Investment companies" will classify as either "equity based" or "bond based" under the proposed rules and only returns from funds classified as "equity based" are within the scope of being taxed as equity income. Returns from "bond based investment companies" will continue to be taxed as "capital income" for individuals. Under current rules, capital gains and losses from "investment companies" must be included in accordance with a mark-to-market principle and the draft bill does not include any changes to that principle. Danish mutual investment funds targeting the retail market are often opting for status as "investment institutes with minimum taxation" where capital gains and losses are included in accordance with a realization principle. As another easement of the current taxation of investment companies, the draft bill proposes that losses from listed equities and "equity-based investment institutes with minimum taxation" can be set off against returns from "equity-based investment companies." In order to be classified as an equity-based "investment company," the"investment company" must meet the following requirements:
The draft bill proposes to change the rules on Danish taxation of dividends received by foreign investors from Danish mutual investment funds. The proposed dividend tax exemption for foreign investors would cover dividends from Danish "investment companies" and "investment institutes with minimum taxation." The exemption on Danish outbound dividends will only apply if the Danish mutual investment fund pays tax at a rate of 15% on dividends received by the fund from Danish equities. Under current rules, Danish "investment companies" are subject to a 15% tax on dividends from Danish equities, while "investment institutes with minimum taxation" are normally tax exempt through a tax exemption certificate. Investment institutes with minimum taxation must thus abolish their tax exemption certificate if they want the benefit of their foreign investors to be exempt from Danish dividend tax on dividend distributions from the fund. The draft bill does not change the withholding requirements on dividend distributions. The Danish mutual investment funds will still be required to withhold tax at a rate of 27% on dividend distributions to foreign investors and the foreign investor must file a reclaim to recover the Danish withholding tax. The draft bill states that the withholding requirement is expected to be changed in a separate legislative amendment introducing a Danish relief at source system. The draft bill also takes account of certain fund-of-funds structures. A Danish mutual investment fund (feeder fund) is thus not liable to tax on dividends received from a Danish mutual investment fund (master fund) if the master fund has paid tax at a rate of 15% on dividends from Danish equities. The draft bill proposes to abolish the rule classifying redemptions and share buy-backs in certain "investment companies" as dividends for Danish tax purposes. The current rule applies if an investment company does not fulfill certain requirements regarding risk spreading and marketing. An abolishment of the rule means that redemptions and share buy-backs will be treated as capital gains and are thus not subject to dividend taxation. The tax rates for Danish individuals investing in foreign equity-based mutual investment funds and exchange traded funds will be aligned with the rates for investments in Danish retail funds, if the draft bill is enacted. The intention is to increase the competitiveness of foreign mutual investment funds and exchange-traded funds in the Danish market. Investments in foreign funds will, however, still be taxed on a mark-to-market basis while Danish mutual funds may be taxed on a principle of realization. Further, the draft bill intends to remove tax barriers for distributing Danish mutual investment being marketed abroad.
Document ID: 2018-1980 |
