Structuring the investment
As noted in Section I.iii, above, investments in Danish real property are normally made through a Danish holding company with subsidiaries each owning a single property or a group of properties. The structure creates a profit centre for each property or groups of properties.
Moreover, the structure is tax efficient. The net income from the property will be subject to Danish corporate tax at the rate of 22 per cent for the subsidiary. If the Danish holding company owns 10 per cent or more of the shares in the subsidiary, dividends can be distributed from the subsidiary to the holding company free of tax.
The same applies to dividends from a Danish company to foreign companies that own 10 per cent or more of the shares in the Danish company, if the foreign company is (1) domiciled within the EEA, or (2) within a country with which Denmark has entered into a double taxation avoidance agreement (DTAA)., However, if the foreign holding company is only a 'flow through' company for an ultimate owner in a tax haven (the beneficial owner), this owner becomes liable to tax in Denmark, and the Danish tax authorities will request that 27 per cent withholding tax of dividends be paid by the Danish company.
If the foreign company is domiciled in a country with which Denmark has entered into a DTAA, including countries within the EEA, and the foreign company owns less than 10 per cent of the shares in the Danish company, withholding tax must be paid by the Danish company according to the relevant DTAA. A normal rate for withholding tax in these instances is 15 per cent of the dividends. In any case, where withholding tax must be paid according to a DTAA, either the withholding tax should be credited in the foreign company's domestic taxes, or the foreign company should be able to reclaim the withholding tax from the Danish tax authorities.
If the foreign company is domiciled in a country outside the EEA with which Denmark has not entered into a DTAA, including tax havens, 27 per cent withholding tax of dividends must be paid by the Danish company.
When selling a property owned by a Danish subsidiary, the subsidiary can be sold as an alternative to selling the property itself. Such a sale of the subsidiary will be tax free in Denmark for the parent company. In selling the Danish subsidiary, any agreement regarding, for example, administration or maintenance of the property will be transferred with the Danish subsidiary to the purchaser. Normally the loan agreements, including agreements with Danish mortgage associations, will include change of control clauses. Accordingly, loan agreements will not automatically be upheld in the event of sale of the Danish subsidiary. If the purchaser is well reputed and financially sound, the lender will, however, normally offer to uphold the loan agreements. The sale of the subsidiary instead of the property also means that tax on capital gains in the subsidiary will not be released and there is no issue with registration in the land registry (the property will still be owned by the subsidiary), whereby registration duties will also be saved.
If an investment has been made in residential property not divided into owners' flats, sale of the property and the controlling interest in a company owning the property is subject to a pre-emption right for the tenants according to the Danish Act on Residential Tenancy. If instead a holding company owning the company owning the property is sold, the pre-emption right does not apply. Therefore, a double-holding structure should be considered if investments are made in residential property that is subject to the pre-emption right for the tenants.
The costs of forming Danish companies (A/S, ApS or IVS) and fulfilling financial reporting requirements, etc., are limited, and the number of Danish companies used in the structure has therefore little influence on the cost base for the investor.
In short, and in general, investment in Danish real property through Danish companies provides tax efficiency and flexibility if and when the investor wants to exit.
As an alternative to investing through one or more Danish companies, direct foreign investment in real property or investment through a partnership (I/S), a limited partnership (K/S) or a limited liability partnership (P/S) could be considered. By choosing any of these options, the foreign investor will become the tax subject in Denmark, as the I/S, K/S and P/S are all tax transparent entities. The foreign investor will be liable to pay tax in Denmark on the net income from the property, including an obligation to calculate this net income on an annual basis and to file annual tax returns with the Danish tax authorities.
If the investor or owner is a foreign company, the tax rate for the net income from the property will be the Danish corporate tax rate of 22 per cent. If the investor or owner is a natural person, the tax rate will be between approximately 41 per cent and 56 per cent; however, by choosing the Danish tax scheme for private businesses, and keeping the income in the Danish establishment, the natural person will be able to defer all taxes above the corporate tax rate of 22 per cent until exiting the investment in Denmark.
By investing through a K/S or a P/S, the investor can create a corporate wall around the investment in Denmark and thereby limit his or her liabilities to the amount invested and to possible guaranties that the investor has given to mortgage credit associations, banks or other suppliers to the Danish property. However, as the investor – with the exception mentioned in footnote 22 – is the tax subject in these cases, he or she will not be able to curtail his or her liability in relation to the Danish tax authorities through the corporate wall.
Until around 2012, the Danish property market was regarded as local and non-transparent by foreign investors, who instead focused – as far as Scandinavia was concerned – on Sweden, especially Stockholm. The increased attention given to the safe harbour of the politically stable and economically strong Nordic countries, and the low costs of purchase and financing of Danish properties have, however, drawn interest among foreign investors to Denmark – first and foremost to the Copenhagen region and to residential property – and foreign investments have gone up dramatically. In 2012, foreign investments accounted for around €0.6 billion of a total turnover of Danish investment properties at approximately €2.8 billion, which corresponds to roughly 21 per cent. In 2017, these numbers had increased to around €6.6 billion (foreign investments) of approximately €12.3 billion (total transaction volume) corresponding to roughly 54 per cent. Looking solely at residential properties in Copenhagen, the figures are even more dramatic. In 2017, foreign investors – headed by some very active Swedish real estate funds – accounted for approximately 78 per cent of the transaction volume. In light of this, Denmark cannot be regarded as a local market any longer.
Legally, the Danish property market has been – and still is – open for foreign investors, who in all legal aspects have the same standing as domestic investors.
However, investors domiciled outside Denmark need permission from the Ministry of Justice to acquire real estate in Denmark, unless the investor is domiciled within the European Economic Area (EEA) and needs the property as a permanent residence or the acquisition is a precondition for conducting business or delivering services. As hiring out real estate constitutes service delivery, purchases of both commercial property and residential property for hiring out can be made by investors domiciled within the EEA without permission. For investors domiciled outside the EEA, permission for such purchases can be obtained. If, however, the purchase is made through a Danish company or other legal entity domiciled in Denmark, the rules and permission are in any case irrelevant.
It should be added that the rules effectively prevent investors and other legal or natural people domiciled outside Denmark from purchasing holiday houses in Denmark. As regards such houses, no exceptions for EEA-domiciled buyers exist, and in practice permission from the Ministry of Justice is not achievable. Moreover, the rules are complemented by rules also preventing Danish companies and other legal entities from purchasing such houses without permission. The rules and practice are based on the agreement on Denmark's admission into the EEC. The Danish government negotiated a reservation for fear of great demand for Danish holiday houses from the citizens of neighbouring EEC countries that would prevent ordinary Danes from purchasing a holiday house in Denmark.