Today is: 04 February 2012
Please note that Danish and UK tax law is a complex subject and you should not rely on this article without professional advice on the facts of your case.
Offshore, tax haven based, companies have historically been used to take capital gains in UK real estate outside the UK tax net. Due to UK anti-avoidance legislation the benefits conferred by using these offshore companies have been negated. However, the terms of the UK-Denmark Tax treaty and Danish internal law, make it possible for a UK resident and domiciled tax payer to avoid paying tax on any capital gains made on non - UK real estate.
This advantage can be obtained very simply through the use of a Danish company owned by one or more UK based shareholders.
Position in Denmark
Although Denmark is not renowned for being a tax haven, the internal tax laws make Danish companies particularly advantageous for this type of structure. Danish tax law provides that Danish companies only pay tax on sales of Danish property. Any gains on non-Danish property are outside the scope of Danish tax. There is a Danish requirement that in the tax treaty between Denmark and the country where the property is situated the country where the property is situated is not obliged to waive its right to tax income or capital gains from the land. This means that in most cases there is no Danish tax payable on gains made by Danish companies on property outside Denmark.
Position in UK
The Danish company is neither resident in the UK nor carrying out a trade in the UK through a permanent establishment. It is therefore, on the face of it, outside the scope of UK tax.
There is however UK legislation in place which covers this situation and is aimed at investors who seek to purchase through a non UK company. The main UK anti-avoidance rule is Section 13 Taxation of Chargeable Gains Act 1992 ("TCGA"). Section 13 applies to chargeable gains accruing to a company which is not resident in the United Kingdom and which has a small number of shareholders. The section states that anyone who, at the time when the chargeable gain accrues to the company, is UK resident and is a shareholder in the company, is to be taxed as if a part of the chargeable gain had been made directly by him. This moves the charge to capital gains up to the shareholder level.
UK - Denmark Tax Treaty
There are two articles to consider in the UK - Denmark Treaty namely Article 7 and Article 13. In correspondence the UK Revenue has said they would regard Article 13 as applying in this scenario which is very helpful.
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Article 7.1 "Business Profits" of the UK-Denmark Tax Treaty states that the profits of a Danish company are taxable only in Denmark, unless the Danish company carries on business in the UK through a "permanent establishment" in the UK. Double Tax Treaties take precedence over UK law and Article 7.1 means the UK's section 13 TCGA cannot apply in these circumstances provided the gain is within Article 7. This should mean the net result is no UK tax.
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Article 13.1 "Capital Gains" of the UK-Denmark Tax Treaty states that gains made by a Danish company from the sale of land situated in the UK can also be taxed in the UK. This means UK's section 13 TCGA could apply here which is view UK's Revenue takes. However Article 13.6 clearly states that the sale of non - UK land cannot be taxed in the UK, thereby excluding the UK's section 13 TCGA
Non - UK land - exempt from UK Capital Gains Tax
A Danish company can therefore be used by a UK resident and domiciled individual to purchase non-UK land and section 13 TCGA will not apply. However the tax position of a Danish company selling property in any particular country needs to be considered. There is no point using this structure if the sale of land in the country concerned will trigger a substantial tax liability. In the case of countries which do not levy any capital gains tax on a property sale this should not be a problem.
Tax free countries for Danish companies
The first step is to establish whether the country you are buying the land in charges capital gains tax on non resident investors. If it does not then most of the difficulties will not arise. If it does levy capital gains tax then you need to check what this will be to see whether it is cost effective setting up the Danish company. You must also check the tax treaty does not contain a clause in which the country gives up its right to tax - see comments above regarding Danish taxation.
There will be no problem on either front if the country is a tax haven with no capital gains tax and no tax treaty with Denmark such as Monaco.
We understand the following countries levy tax on sales by Danish companies and are unsuitable for this scheme:-
- France
- Spain