Cessation taxation of an electricity supply company due to the sale of a windmill to a subsidiary after 1 January 2010

Date 24 nov. 2010

 

The Danish Tax Board has in a ruling made a decision on whether the transition from taxation under the Corporation Tax Act governing the taxation of electricity companies to taxation under the Corporation Tax Act governing the taxation of associations, in connection with the sale of a windmill, would result in cessation tax. The transition from one taxation form to another was due to the fact that the owner of the windmill (a company with limited liability (a.m.b.a) was no longer running an electricity supply company. The windmill was sold to a 100 percent owned subsidiary, and the Tax Board concluded that a cessation tax was to be imposed accordingly with the Capital Gains Tax Act provisions on subsidiary activities, with the effect that the sale of the windmill did not trigger taxation.

 

The facts

In 2007, a.m.b.a. transferred all assets and liabilities, with the exception of a windmill, to the subsidiary. The transfer agreement explicitly stated that the transfer did not include the electricity supply business owned by a.m.b.a. in the form of the windmill.

 

The total transfer price was corrected by a capital increase in the subsidiary company in connection with the issuing of new shares, plus a premium. A.m.b.a. thus owned the windmill as well as the 100 percent owned subsidiary.

 

At a subsequent sale of the windmill, a.m.b.a. would surpass from taxation under the rules of Corporate Tax Law governing the taxation of electricity companies to taxation under Corporate Tax Law governing the taxation of associations, because, due to the sale of the windmill, the company ceased to operate an electricity company business.

 

The legal basis

Electricity supply companies are subject to taxation under the Corporation Tax Act. If a company ceases to run an electricity company business, and the company is transferred to taxation under the Corporate Tax Act governing taxation of associations, a cessation tax must be imposed. The transition from one taxation form to another is, under Danish law, comparable to the cessation of business.

 

The sale of subsidiary shares, i.e. shares owned by a company which owns at least 10 per cent shareholding in the company, is tax free.

 

The Tax Board’s decision

The Tax Board’s conclusion was that the transition from taxation under the rules for electricity companies to taxation under the rules of association is comparable with cessation of the company. Cessation of the company means that subsidiary shares are sold, and these sales are tax free. In this case, a.m.b.a. could sell the windmill without being taxed on the sale of shares in the subsidiary.

 

The significance and consequences of the ruling

It appears from the ruling that the sale of the windmill to the subsidiary resulted in a.m.b.a. ceasing to operate the electricity company and, therefore, no longer had to be taxed accordingly with the Corporate Tax Act rules for electricity supply companies but accordingly with the Corporate Tax Act governing associations. As a consequence of the transition from one taxation rule to another, the company is considered terminated, as described above, and therefore, taxation, including taxation of the sale of its shares, must be imposed onto the company. However, since this was a case of subsidiary shares, the sale was tax free.

 

What matters in this case is that the sale of the windmill meant that a.m.b.a. no longer was an electricity supply company, as provided in the Corporation Tax Act, and therefore, the sale of the windmill would result in cessation tax.

 

 

If you have questions or need further information, please contact Partner Jakob Bundgaard (jbu@mwblaw.dk) or junior associate David Kim Lexner (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.