New decision on tax-free exchange of shares without authorization – profit reduction as a consequence of deficit

Date 29 okt. 2008

In order to carry out a tax-free exchange of shares without authorization, it is, among other things, a condition that the company (the purchasing company) acquiring the shares of another company (the purchased company) does not, within a period of 3 years from the time of the exchange, receive a profit from the purchased company which exceeds the purchased company’s share of the ordinary result in the financial year which the distribution concerns. If this condition is not met, the consequence will be that the exchange of shares will be considered taxable. 

 

The purchasing company’s share of the ordinary result from previous years’ results, which have not formerly been distributed, may also be distributed without the exchange becoming taxable. However, it must be noted that it is not possible to distribute results of financial years further back than the financial year corresponding to the income year before the exchange year.

 

However, the right to distribute profits is limited if a deficit is established within the exchange year and/or the two following financial years. In this situation, the purchasing company’s share of the negative result must be deducted at the estimation of the amount which may be distributed to the purchasing company.

 

In a fairly new statement, published in SKM 2008.547.SR, the National Tax Board defines the rule on deduction of deficits.

 

In connection with the case, it needed to be clarified whether or not the company could distribute the ordinary result of approx. MDKK 133 for the financial year 2007 at the general meeting in 2008 without the exchange becoming taxable.

 

Furthermore, it needed to be clarified whether or not the company could distribute the ordinary result of approx. MDKK 133 for the financial year 2007 without the exchange becoming taxable, regardless of when the distribution was performed.

 

During the case, it was stated that the company expected a deficit for the financial year 2008 of approx. MDKK 50.

 

The National Tax Board answered in the affirmative to the first question.

 

In its answer, the Tax Board primarily stated that the result of MDKK 133 which the company had earned by selling shares in subsidiary companies and which, in the annual report for 2007, was included in the company’s ordinary result could not be considered extraordinary  income according to the definition of the Accounts Act. Thus, the profit in question was considered ordinary and could be distributed.

 

The board also stated that the fact that the company at the time of the approval of the accounts for 2007 – in 2008 – expected a deficit of approx. MDKK 50 did not prevent the company from distributing the full profit for 2007 of approx. MDKK 133. A distribution of this amount did, thus, not entail that the exchange of shares became taxable.

 

The National Tax Board answered in the negative to the second question.

 

It was the opinion of the Tax Board that pursuant to the distinct wording of the provision there was no exception to the rule on deficit reduction of a potential return from former income years.

 

The fact that the Tax Minister, in a hearing statement, had stated that distribution of a positive result in the first year did not entail annulment of tax-freedom for a tax-free restructuring without authorization if a deficit was established in the following years, did not change this fact, according to the Tax Board. In the present case, this was due to the fact that the distribution of the positive result – unlike the situation dealt with in the hearing statement – had not taken place at the time when the deficit was established.

 

The profit of approx. MDKK 133 could thus not be carried on and distributed at the ordinary general meeting in 2009 or later without the expected deficit of the financial year 2008 being deducted from the maximum distribution which could be carried out.

 

With its decision, the tax board has determined that a deficit reduction of distributions of former years’ results must take place within the 3-year period if the distribution is not carried out until a time when a deficit in the company has been realised. Whether or not a deficit reduction must take place is, thus, not determined by the time at which the profit is realised but by the time at which the profit is distributed.

 

Therefore, if a deficit is expected in a financial year following a completed tax-free exchange of shares without authorization, it is important to secure that any distribution of former years’ profit is carried out before this deficit is realised in that the distribution potential, otherwise, must be reduced by the deficit later established.

 

If you have questions or comments regarding the above, please contact attorney Dan Moalem (dmo@mwblaw.dk) or attorney Henning Hedegaard Thomsen ( hht@mwblaw.dk ).

 

The above does not constitute legal counselling, and Moalem Weitemeyer Bendtsen does not warrant the accuracy of the information. With the above text, Moalem Weitemeyer Bendtsen has not assumed responsibility of any kind as a consequence of a reader’s use of the above as a basis of decisions or considerations.