Taxation of profit-sharing in limited partnership

Date 18 nov. 2010

 

In a recent judgment, the National Tax Board adopted the Danish Tax Authority’s recommendation for judgment regarding taxation of profits of a limited partnership, distributed independently of ownership and in accordance with principles set out in a limited partnership agreement.

 

The facts of the case

A public limited company was owned by several holding companies which were owned by natural persons.

 

Almost all activities of the public limited company sought transferred to a newly formed limited partnership, and the holding companies would be limited partners.

 

The founders of the limited partnership wanted to distribute profits regardless of ownership, but in accordance with principles laid down in the limited partnership contract. Therefore, the founders wanted the tax authorities to respect the profit distribution that was agreed in the contract, so the shareholders were taxed by the profit they actually received.

 

The judgment of the National Tax Board

Both the Danish Tax Authorities and the National Tax Board noted that limited partnerships are not regulated by law, and the members of a limited partnership can independently agree on how the profits of the company shall be distributed.

 

If a profit-sharing agreement between the limited partners is made, this distribution shall be the basis for taxation by the individual limited partners.

 

It was then concluded that the limited partnership should be subject to taxation in accordance with the profit-sharing that had been agreed in the partnership contract. It was further concluded that it did not make a difference whether the members of the limited partnership were natural or legal persons.

 

The significance of the judgment

The decision illustrates that there is a considerable freedom of contract for limited partnerships and other partnerships regarding the distribution of profits. The tax authorities will generally respect the agreed profit distribution. This applies whether the limited partners are natural or legal persons.

 

 

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.