New legislative proposal to minimize risk of permanent establishment for investors in private equity and venture funds

In Denmark, private equity and venture funds are typically established as limited partnerships. This is desirable due to the tax transparency and limited liability that such structures offer to investors. Historically, there has been a risk of investors in Danish private equity and venture funds being held to have a permanent establishment in Denmark through their pas-sive investments in such funds, if their investments are made either:

i. through a fixed place of business in Denmark

ii. through a dependent agent in Denmark.

Previously, these risks have been mitigated by structuring the investments in such a way that they did not constitute a fixed place of business, and by not having persons concluding contracts on behalf of the investors. However, the risks were not eliminated completely, as rulings from the Danish tax authorities and the Danish Tax Tribunal have been incon-sistent in their interpretation of the Danish permanent establishment rules.

The purpose of the new legislative proposal

The recent changes to the OECD Model Tax Convention and the concept of permanent establishment regarding depend-ent agents, so as to include not only include persons who concludes contracts, but also persons who play a principal role leading up to the conclusion of a contract, may further increase the risk of a permanent establishment for investors in private equity and venture funds.

To ensure that Denmark remains an attractive country for foreign investors and that said private equity and venture funds do not become taxable to Denmark without so intending, the Danish Ministry of Taxation has proposed new legislation. The new proposed legislation entails that passive investments (i.e. income from passives investments in shares, bonds, etc.) will not become taxable to Denmark, as income of this nature is now considered out of scope for the Danish defini-tion of permanent establishment, unless the investor in a Danish private equity or venture fund is deemed as conducting business activity (in Danish "næringsdrivende") by investing in Denmark.

The consequence of the new legislative proposal

The new legislative proposal should mitigate the risk of foreign passive investors becoming taxable to Denmark through investments in private equity and venture funds and ensure a more consistent interpretation of the rules by the Danish tax authorities. However, it should be noted that the new legislative proposal only in part solves the uncertainties for foreign investors in Danish private equity and venture funds, as the Danish tax authorities may still deem certain investments as business activities and thus in scope for the Danish permanent establishment rules.

It is our view that, should the new legislative proposal be passed in its current form, Danish private equity and venture funds will remain attractive investment vehicles for foreign investors. Kromann Reumert will follow the progress of this legislation carefully.

If the new proposed legislation is passed without changes, it will take effect on 1 July 2018.

The article can also be read in our Investor Update 2018 Q1.