Characterisation of American limited liability company

Date 18 nov. 2010

 

The National Tax Board has concluded in a recent statement that an American limited liability company (“LLC”) is a transparent entity.

 

The case in brief

A natural person was resident and fiscally domiciled in the United States and owned 100 pct. of the U.S. tax-domiciled LLC, which owned 50 pct. of a Danish private limited company. The Danish National Tax Board found that the LLC should be classified as a transparent entity, whereupon the main shareholder in the LLC should be taxed personally of profit from the Danish private limited company, because he, as the major shareholder, was considered to personally own the shares in the private limited company.

 

The legal background

If a company is classified as an independent tax subject, all income is subject to taxation directly in the company. On the other hand, shareholders are personally subject to taxation if the company is classified as a transparent entity.

 

According to legal practice, the following speaks for the existence of an independent fiscal entity:

  • The shareholders are not personally liable.
  • Distribution of profit is made based on deposit.
  • The distribution of annual profits is based on turnover, while distribution of profits in case of liquidation is based on the size of the capital.
  • The company has its own articles of association, separate accounts and separate governing bodies.
  • It is possible for the company to expand its circle of shareholders without prior permission from the existing shareholders.
  • It has been decided what should happen with the assets of the company in case of a shareholder’s withdrawal or the dissolution of the company.
  • Contribution of capital has been paid.

On the other hand, the following circumstances speak against the existence of an independent fiscal entity:

  • The distribution of profits and liquidation proceeds is based on turnover.
  • One or more shareholders are personally liable.
  • The distribution of profits is not based on capital contribution.
  • The profit is used for charitable purposes.

In this case the main shareholder in the LLC was the only shareholder. The LLC did not issue any shares or other securities, and the shareholder was not personally liable. Furthermore, the date of the company’s liquidation had been set and it had been agreed that certain events, such as resignation, death or bankruptcy, would lead to termination of participation in the LLC. The LLC was able to lend out money to its shareholders for coverage of taxation due to participation in the LLC. Furthermore, there was not prepared a separate accounting for the LLC.

 

The judgment of the National Tax Board

The National Tax Board found that the only thing indicating that the LLC should be considered an independent tax subject was that the shareholder was not personally liable for the company’s activities. In addition, the other circumstances led to considering the entity as transparent. Hereinafter, the National Tax Board confirmed that the LLC could be qualified as a transparent entity and the main shareholder was regarded to personally own the shares in the Danish private limited company, leading to the result that income of the LLC should be taxed personally and directly with the shareholders of the LLC.

 

The significance of the judgment

In the judgment, the National Tax Board concluded that the limited liability company structure shall be classified as a transparent entity under Danish tax law, so that income is taxed directly with the shareholders, notwithstanding that the company is characterised by limited liability.

 

 

If you have any questions or require additional information on the judgment, please contact Jakob Bundgaard, Partner, jbu@mwblaw.dk, Henning Hedegaard Thomsen, attorney, hht@mwblaw.dk or Kim David Lexner, Junior Associate, kdl@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 for decisions or considerations.