Contents

The section covers

• Rule
• Covered
• Definition of forward contracts
• Definition of options (agreements on rights to purchase and sell)
• Definition of swap agreements

 

Rule

Gains and losses on financial contracts must be included in the basis of taxation under Sections 3, 6 and 7 of PAL. Gains and losses are determined according to the inventory principle, cf. Section 15(3) of PAL. See also section C.2.2, Determining the basis of taxation according to the inventory principle.

 

When determining the basis of taxation for financial contracts under PAL, the principles set out in Section 29 of the Danish Gains on Securities and Foreign Currency Act is applied. Financial contracts covered by Section 29 of the Danish Gains on Securities and Foreign Currency Act are characterised in that they consist of the following three components:

 

• Agreement. There must be a binding agreement either in the form of a separate agreement or, e.g., an agreement incorporated in a shareholders' agreement. Offers not accepted, either by individuals or following adoption at, e.g., the general meeting of a company, are not included. It is irrelevant whether the agreement is written or oral. A decision to enter into an agreement does not suffice.

 

• Temporal difference. There must be a temporal difference between the time of conclusion of the agreement and the time of execution (optionally the time of delivery). A contract may thus be for both a limited and unlimited duration. A contract for an unlimited duration will usually be characterised in that the rights under the contract cannot be exercised until the occurrence of an agreed event. Examples of this are shareholders' agreements where a shareholder wishing to sell his or her shares is under an obligation to first offer his or her shares to the other shareholders in the company. A pre-emptive right without a fixed price is, however, not covered. Even though financial contracts often have a short term, they may have a term of several years. An option to purchase, e.g., gives the purchaser the right to purchase a block of bonds at a price fixed in advance in three years' time.

 

• Settlement price. When the contract is concluded, a settlement price must be agreed. The agreed settlement price need not be a specifically agreed price of the underlying assets. It may be agreed that the price is a formal price or a calculation model provided that it ensures that there is no material uncertainty in respect of the future transfer price, cf. Danish Ministry of Taxation notice SKM2007.637VLR.

Covered

Examples of financial contracts include

• forward contracts
• options (agreements on options to purchase and sell)
• agreements on cash settlement
• swap agreements

The list is not exhaustive.

 

Definition of forward contracts

A forward contract is an agreement concerning an obligation to transfer an asset or a debt at a price and on a date agreed on in advance. The execution of the contract takes place at a date later than the date of conclusion of the agreement.

 

If the execution takes place within the execution time that usually applies within the area, the contract is not a forward contract.

 

For forward contracts, there is symmetry between the risk assumed by the purchaser and by the issuer as the obligation is mutual.

 

Example

A forward contract or agreement may, e.g., be

• a tangible asset (e.g. foreign currency, a claim, a share or goods),
• an index,
• interest, or
• a debt

A forward purchase contract is an obligation on the part of the issuer/purchaser to sell/purchase a fixed quantity of a specific asset or liability on an agreed future date stipulated in the contract.

 

A forward sale contract is an obligation on the part of the issuer/purchaser to purchase/sell a fixed quantity of a specific asset or liability on an agreed future date stipulated in the contract.

 

Futures are standardised forward contracts in terms of, e.g., term, size of contract and underlying assets.

 

Not covered

An example of something which is not a forward contract is a spot contract where execution takes place within the execution time which is deemed to be customary within the area. See also the Assessment Guide, General part, section A.D.2.18.

 

Definition of options (agreements on options to purchase and sell)

An option is a right to purchase or sell an asset or liability at a price agreed on in advance before a certain date. It is, in other words, a right, but not an obligation to purchase or sell.

 

An option to purchase (a call option) entitles the purchaser to purchase an asset or liability at a price agreed on in advance or before a certain date. The issuer is obliged to sell if the option to purchase is exercised.

 

An option to sell (a put option) entitles the purchaser to dispose of an asset or liability at a price agreed on in advance or before a certain date. The issuer is obliged to purchase if the option to sell is exercised.

 

Agreement on settling difference

An agreement which may be performed by settling a difference between the price agreed on in advance and a price calculated based on the content of the contract is also considered to be a forward contract or an option to purchase/sell.

Definition of swap agreements

►A swap agreement is an unconditional mutual obligation entered into on the date of conclusion of the agreement between, usually, two parties to swap one cash flow for another cash flow.◄

►A swap agreement may e.g. be◄

►
• Interest swap - where the parties swap a variable interest rate for a fixed interest rate or vice versa.
• Currency swap - where the parties agree to swap interest payments and principal denominated in two different currencies.
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