The Danish Tax Council allows the application of schematic valuation outside the area of statutory entitlement

The applicants being the holding companies of two children, wished to carry out a capital increase in the company, H1 A/S, which was owned by the father. This should be completed by contribution in kind of the shares in the company, H2 A/S, owned by the two mentioned holding companies, whereby the children's holding companies received shares in H1 A/S as payment for the capital increase. A correct valuation of both H1 A/S and H2 A/S was therefore crucial to avoid an indirect transfer of assets between A and his children.

Prior to the capital increase, it was planned that H1 A/S would implement an amendment to its articles of association introducing two share classes. The A share class would be granted voting rights and a preferential dividend right, while the B share class would not have voting rights, but would only be entitled to dividends on equal terms with the A share class once the preferential dividend right had been distributed to the A shares.

The H2 A/S group consisted of the parent company and two subsidiaries, while the H1 A/S group comprised the parent company and an additional 25 companies. It was stated that all companies involved had been commercially active for more than three years at the time of the capital increase.

According to section 2 of the Danish Tax Assessment Act, transactions between related parties must be carried out on terms corresponding to what independent parties would have agreed. Therefore, the shares must in general be valued at market value.

A new schematic calculation method for valuation has recently been introduced, where private individuals have legal entitlement to use this valuation method when calculating gift tax. However, it appears from the general remarks to Bill L 123 (parliamentary year 2024/25) that it cannot be ruled out that the schematic valuation – following a specific assessment – may be considered to correspond to market value in situations other than gift situations.

In the present case, the transaction was between companies and not a transfer between private individuals covered by section 23a of the Inheritance and Gift Tax Act. The applicants therefore did not have legal entitlement to use the schematic valuation method. The question in the case was therefore whether the schematic method could be used as a reliable expression of market value in connection with the capital increase.

The H2 A/S group

The H2 A/S group consisted of three companies whose sole activity was ownership of investment properties. The properties were recognized in the annual reports at a value corresponding to a fair value (da: "dagsværdi"), and the companies had no other commercial operations.

The Danish Tax Agency assessed that the schematic valuation method could be used, as the properties were included at values corresponding to their actual market value.

The H1 A/S group

The H1 A/S group consisted of a total of 26 companies.

The value of companies with investment properties and securities corresponded to approximately 66 percent of the total assessed value.

The remaining part related to operating companies. H5 A/S was engaged in software development and IT specialists, while three other companies operated in the sales business.

Following an overall assessment, the Danish Tax Agency found that H1 A/S group could also be valued according to the schematic method. The Agency placed particular emphasis on:

• That 66 percent of the group's assets consisted of assets, including investment properties and securities, which were included in the annual report at a value corresponding to market value
   
• That the operations in the four operating companies did not give rise to the schematic valuation method being misleading
   
• That it appears from the preparatory works to Bill L 123 that the schematic method is expected in many cases, following a specific assessment, to be applicable as an expression of market value

Preferential dividend rights were previously used extensively, particularly in family transfers, to be able to transfer shares at a low value, as the new owner had to accept that the original owner would receive a predetermined preferential dividend before the new owner received his share of the dividend. This method was largely later abandoned as the Danish Tax Agency believed that the determined dividend, in addition to an interest, should as a general rule also be determined based on a calculated separate profit opportunity. It is interesting that the Danish Tax Agency in this binding ruling, following a specific assessment, found that a separate profit opportunity should not be calculated for the B shares. This decision was based on the fact, that the preferential dividend right did not constitute the majority of the company's value and the payment of the preferential dividend would take place within a short time horizon.

Following an overall specific assessment of the valuation of both the two groups and the individual companies, the Danish Tax Agency concluded that the proposed capital increase would not have tax consequences for the applicants. 

The Tax Council endorsed the Danish Tax Agency's conclusion and reasoning.

The binding ruling is highly relevant, as it is among the first binding rulings to specifically address the application of the new rules on schematic valuation, which were introduced by Bill L 123 (parliamentary year 2024/25). The binding ruling provides valuable insight into how the Danish Tax Agency and the Tax Council will apply the rules going forward.

The case illustrates in particular that the schematic valuation method is not limited to the legal entitlement area under section 12a of the Inheritance and Gift Tax Act, but following a specific assessment can be used as an expression of market value in transactions between related parties. The binding ruling simultaneously shows that even larger and complex groups with both investment properties, holding companies and operating companies, can be covered by the schematic method when the majority of the value is linked to assets recognized at market value in the annual report.

We have previously published a newsletter on the new rules for succession of businesses and the schematic valuation. Please find the newsletters here:

• Improved conditions for transfers of business within family (English)
• Better conditions for generational change (Danish)