Contents
The section covers
- Rule
- Definition of dividend-paying investment fund
- Definition of accumulation investment fund
- Specifically about shares in account-holding investment funds (Section 13 of PAL)
Rule
Gains and losses on investment certificates in investment funds are determined according to the inventory principle, i.e. both realised and unrealised gains and losses. See Section 15(3) of PAL. See also section C.2.2, Determining the basis of taxation according to the inventory principle.
All types of asset yields must be included in the basis of taxation. See Sections 3, 6 and 7 of PAL. These include:
- dividend tax from abroad, the Faroe Islands or Greenland refunded directly to the members,
- dividend and
- gains or losses on investment certificates in investment funds issuing negotiable investment certificates for the contributions made by the members.
Classification of investment funds
►A distinction is made between investment funds issuing certificates and account-holding investment funds. ◄
►Investment funds issuing investment certificates issue negotiable investment certificates for contributions made by members. The certificates must be separate documents with a specific nominal value. The owner of the certificate is entitled to a share of the profit and assets of the investment fund in proportion to the nominal value of the certificate. ◄
►Investment funds issuing investment certificates are either dividend-paying or accumulation investment funds.◄
►Only investment funds determining a minimum dividend in accordance with the applicable rules and which are registered as dividend-paying investment funds or a division of such funds are granted dividend-paying status. All other investment funds (issuing investment certificates) are regarded as accumulation investment funds, and this is the case irrespective of whether the investment fund otherwise pays dividends on an ongoing basis. ◄
►
◄
Accumulation investment funds are divided into two categories: the so-called investment companies and (accumulation) investment funds liable to corporation tax.
►If no investment certificates are issued, the investment fund is account-holding.◄
Definition of dividend-paying investment fund
A dividend-paying investment fund is an investment fund
- which issues negotiable investment certificates for the contributions made by its members and
- which determines a minimum dividend that is taxed subject to the decision made by the investment fund that the income of the investment fund should be taxable for its members in accordance with the rules governing dividend-paying investment funds.
For details on minimum dividend, see section S.A.1.8.1.1. in Assessment Guide (Ligningsvejledning) 2008 and Section 16 C(1) of the Danish Tax Assessment Act (Ligningsloven (LL)).
►Yields from dividend-paying investment funds are taxed in accordance with a transparency principle, i.e. the investor is taxed as if the investor had personally invested in the investment fund's underlying assets. ◄
►The tax liability for each division of an investment fund is treated separately provided that the assets of the divisions are not mixed together. For tax purposes, a dividend-paying investment fund or a division of such fund will always be classified as a share funds, bond funds or funds with a mixed portfolio. The above classification has, however, no real effect on the determination of PAL tax as the taxable yield is determined under the same rules.◄
Requirement for effective disbursement of the minimum dividend?
►It is not a requirement that the minimum dividend is effectively disbursed to the investor. ◄
►The investment fund may choose to disburse the full dividend, a share thereof or nothing at all. Irrespective of the choice made by the investment fund, the investors are, however, in all cases taxed on the minimum dividend determined. ◄
►To prevent that the non-distributed sum is taxed twice, Section 27 of the Danish Capital Gains Act (Aktieavancebeskatningsloven (ABL)) is also used when determining the basis of taxation. See Section 15(3), fifth sentence of the Danish Pension Investment Return Tax Act (Pensionsafkastbeskatningsloven (PAL)). This means that, in instances where the determined minimum dividend is not distributed but taxed as dividend, the acquisition sum is increased by the sum not distributed.◄
►A pension fund, for example, will then normally be able to revalue the acquisition sum of the investment certificates, corresponding to the non-disbursed sum.◄
Determining the taxable yield
►The taxable yield comprises partly any distribution of dividend made during the year, and partly the change in the value of the certificates during the year.◄
►It has no effect on the taxation which type of dividend-paying investment fund the dividends concern. This also applies even if the investment fund distributes amounts exceeding the minimum dividend. ◄
►In the situations where the investment fund decides not to make an effective distribution of the minimum dividend, the person liable to PAL taxation must include the minimum dividend determined in his or her tax statement. As opposed to this, the person liable to PAL taxation, can, as mentioned above, revalue the certificates. ◄
Definition of accumulation investment fund
►Accumulation investment funds are investment funds which do not fulfil the conditions for qualifying as dividend-paying investment funds.◄
►Accumulation investment funds comprise investment funds covered by Section 20 of the Danish Capital Gains Tax Act. Such investment funds are liable to corporation tax (provided the investment fund is domiciled in Denmark) and the shares in the investment fund are generally treated as ordinary shares.◄
►In addition, accumulation investment funds comprise the so-called investment companies, i.e. investment funds, companies etc. that fulfil the conditions set out in Section 19 of ABL.◄
►Under Section 19 of ABL, an investment company is defined as:◄
1. ► An investment fund under Council Directive 85/611/EEC (the UCITS Directive). ◄
2. ► A company etc. the object of which is to invest in securities etc. and where the shares of such company must be re-purchased at the request of the holders out of those companies' assets at a market value which is not significantly lower than the equity value. A re-purchase is treated in the same way as when a third party announces to the company that either the third party in question or another physical or legal person on request intends to purchase any share at a market value which is not significantly lower than the equity value. The equity value is determined without taking into account goodwill, know-how and similar intellectual property rights. The requirement for re-purchase on request is fulfilled even if the requirement can only be fulfilled within a certain time limit. ◄
►Investment companies are typically organised as funds, e.g. hedge funds, but all legal entities, Danish as well as foreign, may qualify as investment companies for tax purposes. The decisive factor is that the above conditions are fulfilled. ◄
►The following companies, funds etc., however, are not regarded as investment companies:◄
►Holding companies, i.e. companies which mainly invest their assets in assets other than securities etc. through subsidiaries. A subsidiary is defined as a company in which the parent company during the year either directly or indirectly owns more than 50 per cent of the share capital or 50 per cent of the votes).◄
►Dividend-paying investment funds and account-holding investment funds cannot obtain status as investment company either. ◄
Determining the taxable yield
►The taxable yield comprises partly any distribution of dividend made during the year, and partly the change in the value of the certificates during the year.◄
Specifically about shares in account-holding investment funds (Section 13 of PAL)
►Account-holding investment funds are investment funds covered by Section 1(1), Item 6 of the Danish Corporation Tax Act (Selskabsskatteloven) whose members cannot sell their share in the investment fund to parties other than the investment fund, see the Danish Act on taxation of members of account-holding investment funds (Lov om beskatning af medlemmer af kontoførende investeringsforeninger). ◄
For savings in a plan liable to taxation placed in a share in an investment fund or a division of an investment fund, a taxable part of the dividend from the share must be determined if
- no negotiable investment certificates are issued for the contributions made by the members and
- the member's share of the profit for the year and the assets accrues to him or her regularly, determined separately for the assets of the investment fund.
The taxable share is defined in the Danish Act on taxation of members of account-holding investment funds (Danish Consolidation Act no. 471 of 23 May 2006). ►See Section 13 of PAL which stipulates that the above act shall also apply. ◄
Members of an account-holding investment fund are taxed on the share of the income and expenditure of the investment fund which corresponds to the ownership share attached to the contribution.
The individual member is taxed under the rules applying to the member's taxable income under PAL.
A taxable part of the yield from the share must be included in the basis of taxation. This means that interest income and gains or losses from the share that relate to taxable asset yields must be included.
The taxable portion of the yield from the share must be determined according to the rules on the determination of the basis for taxation in Section 15(3) of PAL.