Skattemæssigt responsum | Opinion Letter regarding Taxation | Limited partnership’s tax liability in Denmark
Skattemæssigt responsum
-concerning a limited partnership’s tax liability in Denmark
This statement can not be regarded as a "legal opinion," as the statement will not encompass a discussion of the legal and juridical issues and relationship between limited partnerships, in addition the situation concerning the establishment, registration and other documentation in relation to the limited partnership will not be dealt with here.
The opinion letter will contain a general presentation of the applicable Danish practice regarding the treatment of limited partnerships for the purposes of taxation specifically in regard to the limited partnership’s tax related status in Denmark when the limited partnership’s place of operations and domicile of its management is not located in Denmark.
The statement will in addition encompass a general description of the material relationship, that determines i.a. if the place of operations and the domicile of its management is for the purposes of taxation located in or outside of Denmark.
The statement will not encompass a discussion of any potential taxation of the limited partnership, general partners or limited partners, and where these have their domicile, place of operations or domicile/significant connection for tax purposes.
The opinion letter is structured as following:
-
A general description of taxation of limited partnerships in Denmark
- independent entity for taxation
- general partners
- limited partners
- summary
-
Tax liability to Denmark
- fixed place of operations
- location of the domicile of the management
- Conclusion
The limited partners who establish a limited partnership will be visible in the Erhvervs- og Selskabsstyrelsen (Danish Commerce and Companies Agency) database, but the new limited partners who enter as the new owners will not be shown in the public record. Which means that the actual ownership will not be able to be found out by outsiders as the list of the limited partners is maintained by the partnership.
1. A general description of taxation of Limited Partnerships in Denmark
Independent entity for taxation
A limited partnership in Denmark in not treated as an independent entity for taxation.
This is an issue concerning a "personal company," where the transparency principal is used, as it is the individuals or companies who are a part of the limited partnership who are taxed on the income of the limited partnership.
Not all countries have the same treatment of taxation of limited partnerships, as some countries regard a limited partnership as in independent entity for taxation, which is required to report the income and pay any tax due on its income.
It will as such be the partners in the form of general partners and limited partners, who in regards to tax obligations in Denmark will be taxed on the income of the limited partnership.
The General Partners
The general partners are required to report the income, that is based on the share of the ownership the general partner has, when the general partners are subject to taxation.
There can as such be unlimited deduction for deprecation on that share of ownership.
As the general partners have unlimited liability for the limited partnership’s obligations, there are no limitations on the possibility to deduct losses and depreciation - but however only to the extent of the share of the ownership which the general partners have.
In connection to the practice relating to taxation, it is not required that the general partners have a share of the ownership.
It is however required in Denmark by the Erhvervs- og Selskabsstyrelsen (Danish Commerce and Companies Agency), under Danish company law when a limited partnership is to be registered.
Limited Partners
The limited partners are required to report the income that relates to their respective income, if the limited partner is subject to taxation in Denmark.
As it is a characteristic of the limited partner’s participation in a limited partnership that the limited partner has only a limited liability for the debts of the partnership in the same proportion to the subscribed share of ownership/capital, and the limited partner does not always have to actually have contributed that capital, that it has obligated itself for, there will often be a limitation in Denmark in the possibility to deduct the losses and the depreciation for tax purposes on real property, plant and equipment.
Summary
As stated above, there will not be an independent tax liability for a limited partnership which is not domiciled in Denmark.
The liability for taxes to Denmark in connection with the profits in a limited partnership domiciled in Denmark will be the responsibility the general partner or limited partners.
The tax liability to Denmark occurs when the limited partnership either operates business activities in/from Denmark or is managed from Denmark, and it will be liable for taxes in Denmark for the general partners and limited partners who have a connection to Denmark for the purposes of taxation in the form of residence, domicile or place of operation.
2. Tax liability to Denmark
If the general partners or limited partners have a connection to Denmark for the purposes of taxation depends on an individual determination, which is why each individual general partner/limited partner and their respective advisors should evaluate a potential tax obligation to Denmark.
The statement presented here will therefore be concentrated on the issue of if there exists a tax liability to Denmark on the part of the limited partnership.
If the limited partnership is subject to Danish taxation, the general partners and limited partners will automatically be encompassed by the full or limited tax liability in Denmark for their respective ownership interests, notwithstanding that they otherwise do not have a connection to Denmark for purposes of taxation.
It is prerequisite for being subject to Danish taxation that the limited partnership is regarded to be domiciled in Denmark, i.e. that it has activity in Denmark in the form of a fixed place of operations or that the management of the partnership occurs from Denmark.
Fixed place of operations
The limited partnership will be considered to have a fixed place of operations ("
fast driftssted") in Denmark if the partnership conducts a significant share of its activities in Denmark, i.e. that the source of the limited partnership’s income originates from Denmark.
A fixed place of operations will as a starting point [in the considerations] has been established in Denmark if the limited partnership has:
- carries out its enterprise in Denmark - a business location
- offices(s) in Denmark
- factory(ies) in Denmark
- a workshop
Investment in real property in Denmark will always be considered as being a fixed place of operations in Denmark.
If there is no fixed place of operations in Denmark, tax liability in Denmark will only arise if the limited partnership is managed from Denmark or has a place from which the partnership is managed.
Location of the domicile of the management
The limited partnership will be considered to be domiciled in Denmark, if it in fact is managed from Denmark or the essential decisions are made in Denmark.
With the evaluation of the location of the management, decisive weight will not be placed on where the location of enterprise’s management is formally located. It is, on the other hand, where the actual management of the business operations takes place that is determinative of where the management’s domicile is regarded to be located.
If the essential operational decisions are made by a representative in Denmark, the domicile of the management will be regarded as being domiciled in Denmark, irrespective of the fact that the partnership’s formal management in the form the Board of Directors and senior management consists of individuals who are not resident in Denmark.
This could be the case for example, if a Danish representative makes decisions on behalf of the limited partnership and the decisions are of an essential character and frequent, so that the formal management does not exercise primary and essential influence on the activities of the enterprise.
There will be a individual and actual evaluation of the decision-making process, where there will be in each case tax liability to Denmark if it is enterprise where it makes very few but essential decisions in Denmark and the activities are characterized by relatively few matters, while the same type of decisions made by a Danish representative in another enterprise will not be regarded as being essential and frequent, so that the actual management in this situation occurs outside of Denmark, and which is why it will not be subject to tax liability to Denmark.
3. Conclusion
A limited partnership in Denmark is not treated as an independent entity for taxation, which is why a limited partnership can not as such be subject to an obligation to pay tax to Denmark.
If the limited partnership has a fixed place of operations or in fact the limited partnership is managed from Denmark, the general partners and limited partners will be subject to taxation in Denmark of the income/profits of the limited partnership.
If a limited partnership is established with the ownership consisting of foreign general partners and limited partners, the income of the limited partnership will only be subject to taxation in Denmark if the limited partnership is regarded as being domiciled in Denmark.
If the limited partnership does not have a place of operation in Denmark and decisions are not made in Denmark (the management takes place outside of Denmark), then neither the limited partnership, general partners nor limited partners will be liable to Denmark for taxes on their income.
In this connection, it must be stressed that individuals and companies - limited partners as well as general partners - with complete tax liability to Denmark in connection with the principle of global taxation (unitary taxation) as the starting point, will be subject to taxation here in this county - Denmark - on the income from a foreign limited partnership, provided that such a taxation in other respects is not in conflict with a double taxation treaty that may have been entered into between Denmark and the country of domicile for tax purposes for the limited partnership.
Nor will tax liability to Denmark will occur solely on the basis of the fact that goods are bought from or sold to Danish enterprises, if the limited partnership’s place of operations and management is located outside of Denmark.
It must be kept in mind, that these concerns an actual and individual evaluation, which is why each limited partnership must be evaluated [individually to determine] if there is a connection to Denmark either due to the place of operations being in Denmark or because the management is domiciled in Denmark.
Copenhagen, 12 April 2006