Regulatory obstacles #3: SAFE notes – a Danish tax nightmare

SAFE notes (Simple Agreement for Future Equity) were introduced by Y-combinator in 2013 to provide an equity funding form which offers three main advantages: Simplicity, closing speed and low costs. In the US, more than half of rounds that raised $2M-$2.9M happened on SAFEs – and nearly 25% of rounds over $5M were the same according to Carta data for 2021 – 2024.

The essence of a SAFE note is that an investor pays an investment amount (SAFE premium) to the company against the right to receive a number of shares in the next funding round, calculated based on a discount or a valuation cap.

This concept has been translated into several European jurisdictions; however, not Denmark.

While from a corporate law perspective, a SAFE note can be legally constructed as a warrant under Danish law, SAFE notes offer a tax nightmare. The broader picture is as follows:

• For Danish investors (companies), the Danish tax authorities have reached two different conclusions in their analysis of SAFE notes, which seem dependent on whether the SAFE contains a maturity date or not:

• • In one case, they concluded that the SAFE note should be treated as a financial contract (i.e. taxable as gains and losses on the financial contract).
  • In another case, they concluded that the SAFE note should be taxed as a betting gain (!).

Important to note that this analysis applies also to SAFE notes issued by non-Danish companies as long as the SAFE investor is subject to Danish taxation. Most Danish VC and PE funds are tax transparent entities, and in this event, the decisive factor is if the LP is subject to Danish taxation. Needless to say that in a competitive fund round in a US company based on issuance of SAFE notes, a Danish fund will have little option but to accept the tax risks attached with the SAFE notes.

• For Danish companies receiving the SAFE investment, the SAFE premium may, under certain circumstances, be seen as taxable income by Danish tax authorities.

It should be noted, though, that in none of the cases brought before the tax authorities, the SAFE note was constructed as a warrant implemented in the articles of association in accordance with the Danish Companies Act. Looking at the argumentation from the Danish tax authorities, this may have impacted the decision, and it cannot completely be ruled out that the tax authorities would reach a different conclusion, if the implementation was different.

In all events, as the case is now, the conclusions effectively block the access for Danish companies to raise capital through SAFE notes. And for Danish investors using SAFE notes, the taxation is – to say it least – blurry.