Contents

►This section describes the rules on the net determination principle.◄

►The section covers◄

  • Rule (Section 14(1) of PAL)
  • Determining the basis of taxation (Section 14(2) and (4) of PAL)
  • Deductions for tax paid to a country other than Denmark or tax paid to the Faroe Islands or Greenland (Section 14(3) of PAL)
  • The choice of net determination principle is binding (Section 14(5) of PAL)

Rule (Section 14(1) of PAL)

►Those liable to taxation under Section 1(2), Items 1-9 of PAL can determine the yield subject to PAL taxation on a share in a legal person as the sum of the dividends from the share and gains and losses on the share. ◄

 

►For information on who is covered by Section 1(2), Items 1-9 of PAL, see section A.2 Tax liability at provider level◄

 

Conditions for applying the net determination principle

►It is a condition ◄

►a)  that the legal person in accordance with Danish tax rules does not constitute an independent taxpayer and ◄

►b)  that the person liable to PAL taxation at no time during the year of taxation is consolidated with the legal person, cf. Section 5 of the Danish Financial Business Act (Lov om finansiel virksomhed). ◄

 

Re a)

►Entities transparent for tax purposes means legal persons that, in accordance with Danish tax rules, do not constitute an independent taxpayer but the activities of which are regulated by company law provisions, a partnership agreement or the rules and regulations of an association. This means that limited partnerships, partnerships and similar companies are considered to be transparent entities for tax purposes.◄

 

Re b)

►It is irrelevant whether the pension provider has been consolidated with the tax transparent legal person prior to the year of taxation in which the pension providers chooses to apply the net determination principle.◄

 

►In the event that the condition at some point in time is no longer fulfilled, the pension provider will be prevented from applying the net determination principle on this investment again, even though the pension provider at a later point in time is no longer consolidated with the tax transparent legal person.◄

 

Account-holding investment fund

►The pension provider can also choose to apply the net determination principle if the investment is made via an account-holding investment fund, cf. Section 2 of the Danish Act on taxation of members of account-holding investment funds.◄

 

►A pension provider which fully owns an account-holding investment fund can apply the net determination principle on an investment in a tax transparent legal person if the investment is made via the account-holding investment fund. ◄

 

►It is a condition that the pension provider, neither directly nor indirectly, including via the account-holding investment fund, at no time during the year of taxation is consolidated with the tax transparent legal person. This means that the consolidation condition cannot be avoided by inserting an account-holding investment fund.◄

 

Determining the basis of taxation (Section 14(2) and (4) of PAL)
►Gains and losses on a share must be determined as the difference between the value of the share at the end of the year of taxation and the value at the beginning of the year of taxation (inventory principle). ◄

 

Acquisition of share during the year of taxation

►If the share has been acquired during the year of taxation, gains and losses must be determined as the difference between the value of the share at the end of the year of taxation and the acquisition sum of the share. ◄

 

Disposal of share during the year of taxation

►If the share has been disposed of during the year of taxation, gains and losses must be determined as the difference between the consideration for the share and the value of the share at the beginning of the year of taxation. ◄

 

Both acquisition and disposal during the year of taxation

►If the share has been acquired and disposed of in the same year of taxation, gains and losses must be determined as the difference between the consideration for the share and the acquisition sum of the share.◄

 

Adjustment of the basis of taxation

►The basis of taxation ◄►

  • is reduced by a proportionate share of the increase in the value of the share in the legal person which corresponds to the expenses of the person liable to PAL taxation which are non-deductible because such expenses are attributable to transactions between the person liable to taxation and the legal person
  • is increased by a proportionate share of the reduction in the value of the share in the legal person which corresponds to the income of the person liable to PAL taxation which is tax-free because such income is attributable to transactions between the person liable to taxation and the legal person
  • is increased by a proportionate share of the legal person's losses on claims against companies which are consolidated with the person liable to taxation, cf. Section 4(2) of the Danish Gains on Securities and Foreign Currency Act (Kursgevinstloven (KGL)).

 

  Example

►At the beginning of the year, a pension provider owns a 10 per cent share of a limited partnership. On 1 July, the pension provider acquires an additional 5 per cent so that the total share amounts to 15 per cent for the last 6 months of the year. The part of the change in the value of the share for the year which the pension provider must include as the taxable yield from the investment is calculated as 10 per cent of the change in the value of the limited partnership during 12 months plus the difference between 5 per cent of the value of the limited partnership at the end of the year and the acquisition sum for the 5 per cent.◄

►If, for example, ◄

  • the value of the entire limited partnership is 100 at the beginning of the year,
  • the value of the entire limited partnership is 130 at the end of the year and
  • the purchase price for 5 per cent of the limited partnership on 1 July in the same year is 6.

►Gains or losses on the pension provider's share of the limited partnership are calculated as follows:◄

►Gain on share owned during the entire year                          (10 per cent of (130-100))=    3.0◄

►Gain on share acquired during the year  ((5 per cent of 130) - 6)=                                     0,5

►Total gain                                                                                                                3.5◄

 

Deductions for tax paid to a country other than Denmark or tax paid to the Faroe Islands or Greenland (Section 14(3) of PAL)
►The person liable to taxation can deduct tax paid to a country other than Denmark or tax paid to the Faroe Islands or Greenland from tax under Section 20 of PAL if the tax has been added to the basis of taxation under Section 14(1) of PAL. ◄

 

►It is a condition that the person liable to taxation determines deductible tax under Section 20 of PAL for all income from the same country.◄

 

The choice of net determination principle is binding (Section 14(5) of PAL)

►If the person liable to taxation chooses to determine the taxable yield on a share in a legal person under Section 14 of PAL, such choice is binding on the person liable to taxation for as long as the savings are placed in the share.◄

 

The conditions set out in Section 14(1), second sentence of PAL.

►If the person liable to taxation becomes consolidated with the legal person, the person liable to taxation must determine the taxable yield thereon in accordance with the general rules, and the person liable to taxation cannot at a later point in time choose to apply the net determination principle even though the person liable to taxation is no longer consolidated with the legal person, cf. Section 5 of the Danish Financial Business Act. ◄

 

When must the choice be made?

►The choice of the net determination principle must be made in connection with the submission of the final statement of the basis of taxation etc. at the latest. ◄

 

See also

►For additional information about the net determination principle, see also the comments on Section 1, Item 1 in L18 of 5 October 2005.◄