An American Limited Liability Company considered a transparent entity

Date 27 dec. 2011
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In a recent statement, the National Tax Board concluded that an American registered Limited Liability Company (“LLC”) should be classified as a transparent entity,   and that the activity in the company may be included in the questioner’s Business Taxation Scheme, provided that the activity was regarded as independent business, cf. the Danish Business Tax Act.


The case in brief

The questioner owned and ran, in joint ownership with his son, a personal American registered company. The questioner owned 40 % and the son owned 60 %. The questioner applied the Danish Business Taxation Scheme (in Danish: Virksomhedsskatteordningen) to the activity in the company.


To ensure that the questioner and his son were protected against operational risks and against being made personally responsible towards the customers, they wanted to insert the business into an LLC, i.e. an American company with limited liability for the founders.


Hereinafter, the questioner requested the National Tax Board’s assessment of whether the LLC would be viewed as a transparent entity, and whether the activity in the company could continue to be included in the Business Taxation Scheme, in spite of the activity having been inserted into the LLC.


The legal background

A company is to be considered a transparent entity if the company is not an independent tax subject. Taxation of a transparent entity takes place with the partners directly instead of with the company.


An assessment of how a foreign company is to be classified according to Danish tax law is based on the criteria set up in the Danish Companies Act (“DCA”), according to which Danish companies are independent tax subjects.


According to the Business Taxation Scheme, any natural person who conducts an independent business may apply the Business Taxation Scheme on income from the business. Among other things, the business scheme allows for any independent businessman who runs a personal company to accumulate profits in the business, which will be taxed by 25 %, and to fully gain the benefits of tax relief on interest.

 

The judgment of the National Tax Board

The National Tax Board established that the assessment of whether the LLC was an independent tax subject should be made based on a decision of whether the LLC was classifiable as a company similar to the independent tax subjects mentioned in the rules of the DCA concerning other companies with limited liability, or in accordance with the rules concerning associations etc. An overall assessment was made on the issue.


In its assessment of whether the LLC was an independent tax subject, the National Tax Board put, with reference to the assessment guidelines, the practice of the National Tax Tribunal and the practice of the Board, an emphasis on the facts that the entity’s members themselves were in charge of the management of the entity; that no proof of ownership was issued; that new members must be approved by the present members; that no annual report was issued; that net profits and net losses were distributed between the members and that the company form was not company-like. On this basis, the National Tax Board concluded that the LLC should be classified as a transparent entity due to its character being more like a partnership or a limited partnership than an independent tax subject, cf. the DCA.


On the matter of whether the activity in the LLC could be included into the questioner’s Business Taxation Scheme, the National Tax Board answered confirmatory provided that the activity constituted an independent business.


The consequences of the judgment

The judgment shows that the application of the Business Taxation Scheme is not impossible just because a part of the business is conducted through an LLC.



Should you have questions or wish further information about the judgement, 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.