Improved conditions for transfers of business within family

A transfer with succession means that the original owner is not taxed at the time of transfer; instead, the recipient assumes the tax position of the transferor, with taxation only occurring upon a subsequent transfer, if succession is not also applied for in this transfer. Consequently, taxation can be postponed until a transfer is not done with succession. The recipient is partially compensated for assuming the tax burden of the transferor. 

Certain conditions apply to be able to transfer with succession. Specifically, no more than 50% of the business income or assets may consist of passive income/investments. In other words, the business must primarily engage in active commercial activities to qualify.

There is often uncertainty surrounding the determination of market value, and the new legislative proposal is expected to introduce a legal right to use a standardised valuation scheme for transfers of businesses and companies to close family members. This option may be utilised for the calculation of estate and gift tax.

Under current practice, when no objectively determinable market value exists, the value is estimated based on guidelines outlined in the two departmental notes from year 2000 concerning the valuation of shares and goodwill, or more complex valuation methods, such as discounted cash flow, may be used. These valuation methods can result in significantly different valuations, and there is no guarantee that the Danish Tax Agency will accept the method chosen by the parties in the transfer.

The intent behind the standardised valuation scheme is to make the valuation process easier and more predictable. The proposal stipulates that the value of a business is to be determined by the equity value with the addition of capitalised goodwill. The calculation of goodwill is based on the earnings before tax for the last five income years subject to certain adjustments. The goodwill is then capitalised, with a maximum lifetime of 15 years.

In certain situations, the standardised valuation scheme cannot be applied during the family transfers. These primarily include cases involving newly established businesses, particularly where a significant portion of the business has been engaged in commercial sales for less than three years at the time of transfer. Also, where the principal activity consists of the development and ownership of intangible assets that have not yet generated returns the rules on standardised evaluation cannot be used. 

Unfortunately, together with the legislative upcoming proposal it is expected that an initiative will be made to abolish the two departmental notes from 2000. This means that in cases where the standardised rules cannot be applied, only the more complex valuation methods such as the discounted cash flow method mentioned in the Tax Agency's published guidelines will remain. This is unfortunate news, as the two mentioned departmental notes have been widely used and serve as a valuable supplement to the more advanced valuation methods, which are not always suitable depending on the nature of the business.

Furthermore, the estate and gift tax rate is expected to be reduced from 15% to 10% for transfers of businesses within close family. This reduction applies to transfers of businesses that meet the conditions for succession.

The reduced tax rate is applicable only if the transferor has owned the business for at least one year prior to the transfer and the recipient retain ownership for a minimum of three years.

Thirdly, the possibility of succession is extended to include active real estate rental businesses. Under the current rules, much to the frustration of the real estate sector, real estate has always been classified as a passive business activity, thereby precluding the use of succession rules for such businesses.

The new definition of active real estate rental businesses refers to rental or lease operations where the owner holds more than a 50% of the real estate. Furthermore, it is a condition that the owner actively participates in the operation of the business, meaning that contracts of significant economic importance for the business's operation may not be entrusted to an independent physical or legal entity. Finally, succession is contingent upon the property being owned for at least one year before the transfer and having been actively rented out during this entire period.

This is very good news for the real estate sector as this will ease the possibility to transfer real estate businesses to the next generation. 

The expected legislative proposal also seeks to expand the definition of "close relatives" in the context of gift taxation, by including siblings. It is expected that the proposal stipulates that gifts between siblings, as of 1 January 2027, will be subject to a 15% gift tax instead of income tax. This change aligns with the legislative amendment passed in May, which included siblings as close relatives for inheritance tax purposes, reducing the inheritance tax from 36.25% to 15%. This amendment regarding inheritance tax should also take effect on 1 January 2027.