Triple taxation of the same income still possible – the Danish National Tax Tribunal upholds decision regarding management services

The main shareholder owned 100% of Company 2, where he served as director. Company 2 established Company 1 in April 2015, where the main shareholder served as unpaid director. From September 2017, Company 2 was the 100% owner of Company 3, where the main shareholder served as director. In 2018-2019, the main shareholder was the only employee in Company 3.

Company 3 invoiced management fees, commissions, etc., including VAT to Company 1 in 2018 and 2019. No management contract had been concluded between Company 3 and Company 1, but only between Company 1 and Company 2.

The question in the case was whether Company 3 could be considered the correct income recipient of invoice payments from Company 1 of 214,164 kr. and 260,000 kr. in the income years 2018 and 2019 respectively, or whether Company 3 had received a taxable contribution.

The Danish Tax Authority was of the conviction that the main shareholder should be considered the correct income recipient of the management fees, etc., that were invoiced from Company 3 to Company 1. In this connection, the Danish Tax Authority emphasized the following circumstances:

1. The work performed for Company 1 could only have been performed by the main shareholder personally, as there had been no other employees in Company 3 in 2018-2019.
    
2. The main shareholder was an unpaid director in Company 1 when he performed the work in Company 3 for Company 1 in 2018-2019.
    
3. The main shareholder's work performed for Company 1 via Company 3 fell within the scope of work that a director in a company such as Company 1 would be expected to perform as part of his employment as director. In this regard, emphasis was placed on the fact that Company 1 had between 0 and 2½ employees with salaries in 2018-2020.
    

On this basis, the Danish Tax Authority found that Company 3 was not the correct income recipient of the invoiced consultancy fees. Instead, the Danish Tax Authority considered the main shareholder as the correct income recipient. As a consequence, Company 3's taxable income was reduced by 214,164 kr. for the income year 2018 and 260,000 kr. for the income year 2019 regarding management fees, consultancy work and commission excluding VAT paid by Company 1.

The Danish Tax Authority subsequently qualified the same income as salary to the main shareholder for his work as director in Company 1. Simultaneously, the amounts, but this time including VAT, were considered a taxable contribution from the main shareholder to Company 3, which resulted in Company 3's taxable income ultimately being increased by 53,541 kr. for 2018 and 65,000 kr. for 2019.

The result was therefore that both Company 3 and the main shareholder were taxed on the same amounts.

The National Tax Tribunal found – in accordance with the Danish Tax Authority – that the main shareholder should be considered the correct income recipient of the income from Company 1, and that the payments from Company 1 to Company 3 must be considered a contribution from the main shareholder to Company 3, which was taxable pursuant to section 4 of the State Tax Act.

The Tribunal emphasised that the main shareholder was director and had controlling influence in both Company 1 and Company 3. In addition, the Tribunal noted that the main shareholder was the only employee in Company 3, wherefore the services must be considered as delivered by the main shareholder personally.

The National Tax Tribunal therefore upheld the Tax Authority's decision, such that Company 3's taxable income was increased by 53,541 kr. and 65,000 kr. in the income years 2018 and 2019, based on the received taxable contribution from the main shareholder.

The decision clarifies the problem that the same income is taxed three times – originally it is taxed with the main shareholder as salary, then with the company as a taxable contribution, and may ultimately even be subject to a third taxation if the amount is later distributed as dividends to the main shareholder.

This inappropriate and long-criticised result has been known for years. The Ministry of Taxation has previously indicated that it is working on a solution regarding the rules on the correct income recipient and the risk of triple taxation. It was originally expected that the Tax Law Council would issue a report with recommendations for possible rule changes in the first half of 2025. However, the message now is that the report is not expected to be published until during this autumn. It will therefore be interesting to see whether this timeline actually holds.