New legislation on taxation of earn-outs being continuous payments

Furthermore, both the buyer and the seller must each year report to the Danish Tax Agency a balance corresponding to the capitalized amount, which is then reduced annually as payments are made. If the balance becomes negative, the seller is taxed on that negative amount. Conversely, if the earn-out ceases before the balance turns negative, the seller may deduct the remaining negative balance.

Under the previous rules, the seller was deemed to have acquired full value of the earn-out in the year of the agreement, even if a portion of the payments would be received in later income years. As a result, the entire expected purchase price had to be capitalized upfront, and tax was triggered in the year the agreement was entered into, often leading to significant liquidity challenges for the seller.

To mitigate this issue, the new rules allow the seller to defer the tax payment. The deferred tax is paid gradually in proportion to the earn-out actually received. Importantly, the deferral is interest-free. At the same time, the special deferral rules previously applicable to the transfer of goodwill and similar assets are repealed, as such assets are now covered by the new regime.

There have also been adjustments aimed at streamlining the taxation of earn-outs. Under the previous rules, the payer (the buyer) could deduct the earn-out exceeding the capitalized value – even in cases where the transferred asset would be tax-exempt upon a later disposal, for example if the recipient (the seller) was not taxable in Denmark. At the same time, the recipient (seller) was required to include the earn-out in the taxable income to the extent it exceeded the capitalized value, even if the gain on the underlying asset would otherwise have been tax-exempt.

Under the amended rules, the buyer will no longer be entitled to a deduction once the balance becomes negative if the transferred asset is one for which the buyer cannot depreciate, deduct or include the acquisition price in the calculation of the taxable income upon a later disposal. Likewise, the seller will no longer be taxed on earn-outs that exceed the capitalized value if the gain on the transfer of the underlying asset is not subject to taxation for the seller.

Furthermore, it has been implemented that if both parties are companies and the assets are unlisted shares, the sale of shares will maintain to be tax-exempt even though an earn-out is paid and in such a case the payments do not need to be capitalized and there is no obligation to file a balance corresponding to the capitalized amount. This applies even if one of the companies is a non-Danish entity. This change, that was introduced during the second reading of the legislative proposal, means that a company's tax-exempt sale of unlisted shares is now tax-exempt regardless of whether the payments include an earn-out. This is very positive, as under previous rules, companies could be subject to pay tax on part of the payments for otherwise tax-exempt unlisted shares if the consideration was structured as an earn-out. This unreasonable taxation has now been abolished. 

The above changes regarding tax-exemption and no tax deductibility are in force for transfer agreements entered on 19 March 2025 or later. The rules on interest-free deferral will be in force from 1 January 2026.