Interpretation and Application of Section 4 of the Danish Tax Assessment Act: Participants' Tax Position in Transparent Companies

Abstract

In the modern business society, the popularity of the tax transparent entities has increased over the last decades and continue to do so. This corporate structure allows the income of the entity to flow through on a pro-rata method to the owners in accordance with their share of ownership and are often used by the liberal professions as it allows for certain tax benefits. Historically it has been possible under Danish case law to qualify as self-employed as an owner of a tax transparent entity, however after a specific ruling in 2015 which allowed for a taxpayer to be considered self-employed, even with a minority share comparing to the other owners in the entity, the Danish tax authorities decided it was time to act, as this in their view was not the intended purpose of the rules for qualifying as self-employed. Consequently, the Danish Minister of tax proposed an amendment of the Danish Tax Assessment Act (Ligningsloven) with the proposal amendment no. 194 on 24 April 2017, with the purpose of changing the preceding case law. The proposed amendment was implemented under law amendment no. 684 on 8 June 2017 and thus implemented the section 4 into the Danish Tax Assessment Act as we know it today. The section states that participation in a tax transparent entity itself does not qualify the participant to be considered self-employed for tax purposes. However, it seems the section fails to elaborate much further, leaving many questions and considerations unanswered to be explored. This master thesis aims to answer these questions and considerations by taking a deep dive into the case law, legislative preparatory works and other relevant legal sources, where we will analyze the subject and deliver an insight into the current case law. The thesis will revolve around the subject of the qualification of being
considered self-employed and clarify whether it is possible to identify precise and concrete thresholds that can be used for this assessment. Concluding on the analysis performed in the thesis, it has become quite clear the matter is highly complex and more so that it is not possible to establish any thresholds which can be indicative of whether the taxpayer can be considered self-employed for tax purposes. Further, it also seems while the intentions of the lawmakers were to limit the possibilities slightly, the current state of the section 4 of the Danish Tax Assessment Act fails to deliver what was intended by the Danish tax authorities.