Amendment of Section 2C of the Danish Corporation Tax Act regarding reclassification of transparent entities

Section 2C of the Danish Corporation Tax Act regards the situation where a Danish corporate entity which is considered transparent for Danish tax purposes (e.g. a limited partnership) is treated as a tax opaque entity (an independent tax subject) in the jurisdiction(s) of its owner(s) (as well as certain other scenarios). In such cases, and under certain conditions, the Danish transparent entity is reclassified to an independent tax subject (and becomes subject to ordinary corporate taxation) under Danish law to eliminate the unintended tax advantages resulting from the asymmetric tax classifications.

On 9 April 2025, a new bill was introduced according to which it is proposed to implement certain adjustments to Section 2C of the Danish Corporation Tax Act.

Section 2C currently in force

According to the provision, a Danish tax-transparent entity (i.e. that is either required to register, have its statutory domicile or the seat of its management in Denmark) shall be reclassified to an independent tax subject under Danish law, if one or more “related parties” of the Danish entity, who collectively, directly or indirectly, hold at least 50% of the voting rights, capital, or the economic interests of the entity:

• are domiciled in jurisdictions that consider the entity to be an independent tax subject,
• are domiciled in jurisdictions that do not exchange information with the Danish authorities, or
• are direct owners and are domiciled in one or more jurisdictions outside EU that do not have a double taxation agreement with Denmark, where withholding taxes on dividends to companies are to be waived or reduced.

“Related party” is defined in Section 8C, subsection 1, no. 17, of the same Act, and in the context of Section 2C, this includes (among others) an individual or an independent tax subject who, directly or indirectly, holds minimum 50% of the voting rights, shares or economic interest in the Danish entity.

The purpose of Section 2C of the Danish Corporation Tax Act is to deal with asymmetric tax classifications of certain Danish entities that are treated as transparent for Danish tax purposes (e.g. limited partnerships) but regarded as non-transparent in the jurisdiction(s) of their owner(s). Such mismatches in classification can give rise to unintended tax advantages, including non-taxation of income (if, for instance, under the laws of the jurisdiction of the owner of the Danish entity, the income shall be taxed in the Danish entity, but under Danish law, the entity is not a tax subject).

Proposed amendments

The intended effect of the proposed amendments set out in the new bill is that certain scenarios currently not covered by the provision will be covered as well. Today, the provision allows a group to establish a structure whereby up to half of the taxable profit generated by a Danish entity — which is considered tax transparent under Danish law — is tax-free.

This could, for instance, be achieved by a foreign group dividing the ownership of a Danish limited partnership into two parts. One part (50.1%) is owned by a foreign group company domiciled in a jurisdiction that treats the Danish limited partnership as transparent for tax purposes, while the other part (49.9%) is owned by another foreign group company domiciled in a jurisdiction that treats the Danish limited partnership as an independent tax subject. Both group companies are owned by a common parent company domiciled in a jurisdiction that treats the Danish limited partnership as tax transparent. The provision will not apply in this structure, as the ownership interests that are subject to a classification mismatch equal only 49.9% of the share capital. Consequently, up to half of the profits of the limited partnership may not be subject to taxation, even though the limited partners are part of the same group.

Where owners, who are not related parties, act in concert with respect to their investment in the entity with the intention of securing partial tax exemption for one or more of the owners, the outcome is the same.

Accordingly, it is proposed to amend Section 2C of the Danish Corporation Tax Act to implement the following:

• If the owners are related parties (i.e. part of the same group), then for the purpose of litra (a) above, each of them shall be deemed to hold all the voting rights or shares in the Danish entity held by the related parties collectively (i.e. the tax-transparent entity will be reclassified into an independent tax subject if they jointly hold minimum 50% of the voting rights or shares in the Danish entity, and just one of them is domiciled in a jurisdiction not treating the Danish entity as tax-transparent).
• If individuals or independent tax subjects act in concert with other individuals or independent tax subjects in exercising voting rights or ownership of capital in the Danish entity, and the main purpose or one of the main purposes is to obtain the hybrid mismatch, then for the purpose of litra (a) above, each of these individuals and independent tax subjects shall be deemed to hold all the voting rights or shares held by them collectively.
• as an exception to item (i), where related group entities (the owners), who meet the criteria set out in litras (a)-(c) above, directly hold less than 5% of the share capital or the economic interest in the entity, item (i) shall only apply, if the main purpose or one of the main purposes of the ownership structure is to obtain the hybrid mismatch.

The new bill can be found here.

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