Kapitalejerlån LL § 16 E

Charlotte Schubert Frandsen & Mia Wauder Eriksen

Student thesis: Master thesis

Abstract

In this Thesis we assess the impact of LL § 16 E (the Danish Tax Assessment Act) on the shareholders and their auditors. Moreover, we have discussed the objective of the implementation hereof, the individuals and entities subject to the Act and the consequences for the involved individuals and entities. We have examined where conflicts arise in relation to company law which has resulted in huge challenges on the part of the auditors with respect to managing the relevant situations.
The purpose of the Act was to eliminate situations where shareholders exploited the possibilities of tax-free withdrawal of funds from the company, which happened despite the fact that already existing company law provisions prohibited such loans.
According to LL § 16 E, all loans, granted after 14 August 2012, by capital companies to natural persons having a controlling interest and their related parties will be taxed as withdrawals without an obligation to repay. This will also apply to loans to tax transparent companies if the participants have a controlling interest in the lender company.
Direct and indirect loans as well as securities are subject to the provision, only except for ordinary loans to banks, loans for the purpose of self-financing, and loans in the course of ordinary business transactions. In particular the latter exception has resulted in huge challenges in relation to the interpretation of what this means, and practice has shown a very narrow interpretation by SKAT of the transactions that may be affected.
When a transaction is subject to the above provision the consequence is that it will be considered a withdrawal that is not subject to a repayment obligation, and it will therefore be subject to tax on the part of the shareholder as salary or dividend. If the withdrawal is taxed as salary, it will be deductible by the company. Like for ordinary payments of salaries and dividend, the company must settle tax at source, and the recourse claim that will arise against the shareholder is to be repaid before expiry of the tax return deadline for the year in which the loan was raised to avoid that it is regarded as a new loan.
There is a challenge in that the loan according to company law will continue to exist as a loan that is to be repaid although it for tax law purposes is a withdrawal. If repayment has not taken place, the company may therefore decide to distribute the claim as dividend or pay it as salary to eliminate the loan. In the case of repayment, it will result in double taxation for the shareholder.
New company law provisions were implemented from 2017, which in certain circumstances allow the companies to make loans to shareholders legal. However, this did not change the tax consequences and has therefore resulted in an increased conflict between the tax law and company law set of rules relating to managing of shareholder loans.
The differences between company law rules and tax law rules and interpretations in the area have in particular resulted in huge challenges on the part of the shareholders and the advisors, and there are therefore many binding rulings that were subsequently decided by the National Tax Board, and in some cases the National Income Tax Tribunal and/or the City Court. These are discussed in our Thesis under the relevant areas. They show, however, a continued uncertainty as regards what is subject to the exemption of ordinary business transactions and what can be defined as errors and therefore is not subject to the exemption.
Generally, the provision has also resulted in taxation of many shareholders who also unintentionally have raised loans that have become subject to the provision and in several cases, where the shareholders in good faith have tried to redress the issue by repaying the loans, this has resulted in double taxation.
In the perspective paragraph of this Thesis, we assess whether the consequences are in agreement with the legislators’ intentions of the provisions and we assess whether, as a result of the relief of the statutory audit, a higher number of shareholder loans are not detected. Finally, we have considered the matter that the taxation in certain cases is rather of the nature of a fine and whether legislator has the authority to determine this penalty.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2018
Number of pages133
SupervisorsJane Bolander