The Danish Supreme Court disregards the “15%-rule” when investment properties are valued at fair value in the financial statement

The rule has been widely used for many years, but in recent years, its application has been tightened, whereby excluding cases where “special circumstances” pertain the property being transferred. Special circumstances require that there are specific, concrete circumstances relating to the property in question. Multiple rulings have established what special circumstances may include. Typically, this include instances where the property was purchased from a third party at a significantly higher price within three years prior to the family transfer. Other examples include taking out substantial mortgage loans on the property shortly after the transfer, selling the property to a third party at a significantly higher price shortly after the transfer, or if siblings to the recipient of the property receive large gifts at the same time as the transfer.

On 23 September 2024, the Danish Supreme Court came with a verdict which further elaborates on such special circumstances.

In the relevant case before the Supreme Court, a parent transferred his limited partnership shares in two limited partnerships to his daughters by deed of gift. The limited partnerships owned investment properties in the form of rental properties. At the transfer of the gift, the parties estimated the value of the investment properties at a total of DKK 104,108,000, corresponding to the public valuation of DKK 122,480,000 deducted by 15%. The investment properties were recognized in the limited partnerships' financial statements at fair value (Da. dagsværdi), which in the most recent financial statements prior to the gift transfer was estimated at a total of DKK 169,750,000.

The main question was whether the fact that the investment properties were valued at fair value in an annual report was seen as a special circumstance so that the 15%-rule would not apply.

The Supreme Court stated that the Danish tax authorities must accept a transfer according to the 15%-rule unless there are special circumstances. It was furthermore specified that financial statements must give a true and fair view of the company's assets and liabilities, and when applying the fair value principle in the financial statement this must reflect the current market value of the property.

The Supreme Court furthermore stated that an investment property at fair value in the financial statements prepared in accordance with the rules of the Danish Financial Statements Act may justify deviation from the 15%-rule. Whether the 15%-rule should be deviated from depends on a specific assessment of the difference between the fair value in the financial statement and the public property valuation.

On these grounds the Supreme Court ruled that the fair value of the investment properties significantly exceeded the public valuation, which constituted special circumstances. The Danish tax authorities, when calculating gift tax, should therefore not accept that the limited partnership shares were transferred based on a valuation according to the 15%-rule.

The ruling of the Supreme Court affirms the ruling of the Western High Court. The whole verdict is available here (in Danish),

On a sidenote it should be mentioned that the ruling of the Western High Court in November 2023 where the court found that property held by professionals which falls under the special Danish Tax rules for "næringsejendomme" is covered by the 15%-rule has been overturned. Unfortunately, in June 2024 the Supreme Court came to the opposite conclusion and found the 15%-rule does not apply for property which are considered "næringsejendomme".