Contents

This section describes how the basis of taxation for various types of bonds should be determined.

 

The section covers

  • Rule
  • Types of bonds
  • Gain or loss
  • Interest income
  • Convertible bonds
  • Index-linked bonds

 

Rule

Persons liable to taxation whose taxable yield is defined in Sections 3, 6 and 7 of PAL are liable to pay tax on all asset yields. Section 15(1) and (3) of PAL defines how interest income and gains and losses from bonds are included in the basis of taxation.

 

Types of bonds

The following types of bonds are covered:

  • Bonds issued by Danish mortgage credit institutes, Danish Ship Finance (Danmarks Skibskreditfond), the state and the Credit Association of Local Authorities in Denmark (Kreditforeningen af Kommuner i Danmark) 
  •  Other bonds, e.g.

o       bonds issued by banks

o       government premium bonds

o       index-linked bonds

 

It is a condition that the bonds are either

  • listed on a stock exchange or
  • traded on another regulated market which is publicly recognised, operating regularly and open to the public.

If the exchange or the market is located in a non-EU member state or in countries with which the Community has an agreement, the exchange or the market must be approved by the Danish Financial Supervisory Authority or stipulated in the deed of trust of the investment fund. See Section 59 of the Danish Investment Associations and Special-Purpose Associations as well as other Collective Investment Schemes etc. Act (Lov om investeringsforeninger og specialforeninger samt andre kollektive investeringsordninger m.v.).

 

If a bond does not meet these conditions, it may instead be classified as ‘other claims'. See section C.2.3.3.3, Other claims.

Gain or loss 

The person liable to taxation must include both realised and unrealised gains or losses on bonds, including gains or losses from both redemption and sale, in the basis of taxation under Sections 3, 6 and 7 of PAL. This also applies to convertible bonds and index-linked bonds. See section C.2.2, Determining the basis of taxation according to the inventory principle, and section C.2.3.6, Trading costs.

 

Government premium bonds do not carry interest, but there are annual prize draws. Prize winnings must be included in the basis of taxation as bonds winnings, see TfS1985.426.

 

Interest income 

Interest on deferred payments paid in connection with the purchase and sale of bonds must be included in the basis of taxation under Sections 3, 6 and 7 of PAL and must be determined under Section 15(1) of PAL. See section C.2.3.1, Interest income.

 

Convertible bonds

Interest income on convertible bonds must be determined under Section 15(1) of PAL.

 

In the Danish system, convertible bonds are bonds issued in pursuance of Section 41 of the Danish Public Companies Act (Aktieselskabsloven) or Section 25 of the Danish Private Companies Act (Anpartsselskabsloven). The provisions also cover foreign convertible bonds issued on similar conditions.

 

A convertible bond is a debt instrument issued by a public or private limited company which gives the lender (bondholder) a real right to convert his or her claim against the company into shares in the company.

 

The owner of a convertible bond can elect to either

  • convert the bond into shares or
  • request redemption by cash payment.

 

Convertible bonds thus contain both

  • a claim against the company corresponding to the nominal value of the bond and
  • a right for the creditor at a specified date to request that the bonds be converted into shares.

The owner has the right of conversion at a specified date or within a fixed limited period of time.

 

If the lender has no real right to convert his or her claim into shares, it is treated as a claim covered by the rules of the Danish Gains on Securities and Foreign Currency Act (Kursgevinstloven).

 

Index-linked bonds

The basic difference between index-linked bonds and ordinary bonds is that the principal amount and the outstanding debt of index-linked bonds are indexed against inflation.

 

The indexing is based on daily index factors from the OMX Nordic Exchange, Copenhagen.

 

Note

Danish Index-linked bonds have previously been exempted from taxation on certain conditions. This exemption was abolished as from the 2008 year of taxation.

 

Section 2(1), Item 3 of the Danish Pension Investment Return Act (Consolidation Act no. 1075 of 5 November 2006) applies to the 2008 year of taxation for those liable to taxation under Section 1(1) and (2) of the Act. This means that index-linked bonds owned by the person liable to pay tax on the yields from his or her pension plan assets at the end of the 2008 year of taxation are treated in the same way as bonds which have been redeemed during the year of taxation as the end-of-year price is applied instead of the redemption price (par value). See Section 39(1) of PAL.

 

This also applies to pooling plans with banks. See Section 39(2) of PAL.