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Shift to Territorial Tax System Creates Opportunities for Use of Danish Companies to Hold Foreign Real Property

Denmark has traditionally taxed companies on the basis of their worldwide income but recent legislation moved comprehensively away from that principle to a form of the territoriality concept (note that it is not all non-Danish source income that is exempt for example interest on a foreign bank account where there is no Permanent Establishment (PE) abroad will be taxed in Denmark.)

A Danish company is now fully exempt from taxation in Denmark on income that relates to profits and losses from a foreign permanent establishment (PE) or from immoveable property. The introduction of the territoriality principle can be seen as a positive development for tax planning in Denmark in general in that there is no need for advisors and consultants to be involved in cumbersome calculations relating to credits, and potential difficulties with differences in the rates of taxation between Denmark and the source country affecting the effective tax rate, as the relevant income is quite simply exempt. In addition, a Danish company will be solely taxed at the local rate of taxation where the PE is situated, whereas previously this income would be subject to Danish taxation. This clearly raises some interesting possibilities, although it should be noted that it is imperative that the foreign PE will not be classified as a Controlled Foreign Company in Denmark. This will not occur where the foreign PE of a Danish company is generated by the assets of the DK Co being in the form of directly held real estate. Further, real estate located abroad will not be subject to tax in Denmark in relation to either rental income or capital gains. This provides potential possibilities in selected jurisdictions where the domestic laws and/or tax treaty with Denmark combine to give a lower rate of taxation than would otherwise be the case in different circumstances, such as New Zealand, the UK, and Dubai.

Advantages of Direct investment in New Zealand real estate
There is no capital gains tax on the sale of real estate in New Zealand, unless the investor is speculating short term in the real estate market.
Stamp duty has been abolished in New Zealand.
Standard income received from the NZ real estate would be taxed in NZ but not in Denmark.
Capital gains on the eventual sale of the property would not be taxed in Denmark.

Advantages of Direct investment in UK real estate
Under UK domestic law, non-UK resident companies are only liable to corporation tax on capital gains to the extent that the gains are attributable to a UK permanent establishment. Presuming that the DK Co did not have a PE in the UK (e.g. via contracting out the management of the property to a third party), there should be no UK CGT on the sale of the real estate.
Capital gains on the eventual sale of the property would not be taxed in Denmark.

Advantages of Direct investment in Dubai real estate
There is no income tax or capital gains tax applicable on property sales or rentals in Dubai.
There is no stamp duty, legal fees on freehold property in Dubai - apart from a 1.5% land registry fee on completion.
Income received from the Dubai real estate would not be taxed in Denmark.
Capital gains tax on the eventual sale of the property would not be taxed in Denmark.

More information can be found by visiting our website at www.ibcf.com, or by emailing us at [email protected].

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