Taxation on capital gains by redemption of debts between a principal shareholder and his company

Date 14 feb. 2011

 

The National Tax Board has established that the realisation principle also applies in cases where a lending condition between a principal shareholder and his company exists.

 

Facts

In 2005, A established B Plc., which during the subsequent years ran up debts of a total of DKK 10 million to A. Until May 2005, the debt was an interest-only loan interest-bearing at market rate.

 

Effective from May 2010, DKK 9 million of the debt was restructured to an interest free loan to be repaid at a premium of 250 1 January 2030.


The issue for the National Tax Board was thereafter when taxation on the capital gains from which A would receive redemption at a premium was to take place.

 

The legal basis

For debts incurred after 27 January 2010 it is, as regards the form of taxation, of no significance which interest is applied to the indebtedness.

 

According to the Gains on Securities and Foreign Currency Act, the so-called realisation principle is to be used in the case of natural persons. The principle entails that taxation on a possible capital gain is only to take place upon complete or partial redemption. The gain is calculated as the difference between the purchase price and the sale price.


The Ruling of the National Tax Council

Initially, the National Tax Council argued that as regards transaction in question, a new debt was established as it involved a substantial change of the lending conditions. Since this was the case, the new rules regarding taxation on capital gains, according to which it is of no significance if the indebtedness carries interest at a minimum interest rate, were to apply.



No taxation will be required as a consequence of the newly established debts, since a debt of DKK 9 million is replaced by a new debt of DKK 9 million, which does not result in any gain.


Subsequently, it was argued that a later redemption of the new debt would entail a capital gain covered by the regulations in the Gains on Securities and Foreign Currency Act, which implied that a calculation of the gain in accordance with the realisation principle must be made.


For that reason, the capital gain was to be taxed at the time of realisation of the gain.



Should you have questions or wish further information about the ruling, you are welcome to contact partner, adjunct professor Jakob Bundgaard (jbu@mwblaw.dk) or junior associate Kim David 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.