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Tax legislation

Tax legislation

In general, there are three different types of investment funds - investment funds with minimum taxation (IMBs), investment companies and account-based investment funds. All three types are separate entities liable to taxation and comprised by the Danish Company Taxation Act. However, in practice, all three types are exempt from paying tax.

 

IMBs

IMB is the Danish abbreviation for "Investment fund with minimum taxation". An IMB shall each year distribute/report interests, dividends, and returns to the investors less administrative expenses according to the specific rules in Section 16C of the Danish Tax Assessment Act, which are subsequently to be taxed with the investors.

The act distinguishes between equity-based and bond-based IMBs. An IMB has the status as an equity-based investment fund, if minimum 50% of the fund's assets are invested in equities, etc. If this prerequisite is not fulfilled, the IMB has the status as a bond-based investment fund.

The status as an IMB is advantageous in relation to particularly private investors' excess funds, since the investment certificates are taxed based on a realisation principle.

Moreover, as opposed to what applies to an investment company, another advantage associated with IMBs is that dividends on Danish equities are exempt from tax.

 

Investment company

An investment company is exempt from tax on all returns on the invesment fund's assets, including interests, dividends and returns, etc. However, a tax of 15% is payable on dividends on Danish equities.

An investment company is not under the obligation to calculate and distribute/report a minimum income to its investors annually. The investors in an investment company are taxed based on a mark-to-market principle according to the provisions of the Danish Capital Gains Tax Act. This ensures that the entire annual return is taxed with the investor. The investor shall annually add to his income both realised and unrealised returns in the form of dividends and returns on ownership shares. Investment returns on individuals' excess funds are taxed as capital income.

Since the mark-to-market principle applies, investment companies are typically not suitable for the investment of individuals' excess funds.

 

Account-based investment funds

Account-based investment funds do not issue transferable certificates to investors.

Investors are taxed according to a transparency principle pursuant to the provisions of the Act on the taxation of the members of account-based investment funds.  This implies that investors' interests, dividends and returns, etc. on the underlying securities are taxed in the same way as if investors had made direct investments.

Account-based investment funds are typically marketed to professional investors. Typically, the individual sub-fund has one or very few investors. Particularly pensions funds and life insurance companies, etc. demand account-based investment funds.

 

Value added tax - VAT

The management of investment funds are exempt from VAT pursuant to section 135 (1) (g) of the COUNCIL DIRECTIVE 2006/112/EC of 28 November 2006 on the common system of value added tax. The provisions are implemented in Danish law via section 13 (1) mr.11 (f) of the Danish Value Added Tax Act.

Basically, the VAT exemption comprises all administrative services specific and material to the management of an investment fund whether provided by a management company or a sub-supplier.

The purpose of the VAT exemption is to render it easier for investors to invest via investment funds.  

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