Permanent Establishment for Investors in Private Equity Funds and the Effect on the Economic Growth

Sine Brandt & Malene Frederiksen

Student thesis: Master thesis

Abstract

The purpose of the thesis is to understand how foreign passive investors, who invest through a Danish private equity fund, avoid having a permanent establishment in Denmark and what impact it will have on the foreign direct investments and the economic growth in Denmark. The thesis will initially describe how a Danish private equity fund is structured and how the market for supply of capital is in Denmark. This is followed by a detailed analysis of the concept of a permanent establishment in Denmark, which is based on the definition of article 5 in OECD Model Tax Convention on Income and on Capital. On May 2nd 2018 a bill (L237) was proposed. If the bill is passed and becomes an act of legislature, the investors will only be exempted from having a permanent establishment if they; 1) are not considered trading, and 2) do not have an affiliated performing economic activity in Denmark comprised as an investment activity. If the investors fall under one of these two anti-avoidance rules, they will only avoid having a permanent establishment in Denmark if the fund is structured in a certain complex way according to the administrative practice. Further, the administrative practice on this matter is somewhat vague, why it is always advisable to ask for an advance tax ruling, which is an administrative hassle and a waste of resources. Subsequently, the advised structure of the fund risk giving the investors a permanent establishment under the new article 5 in OECD Model Tax Convention from 2017. It will, however, not be applicable on the current double taxation agreements. It is taking as a starting point in the analysis that the investors will not invest if they get a permanent establishment. In the short term it is concluded that the real investments have a positive effect on the economic growth in Denmark due to the multiplier. In the long term it is concluded that the real capital also has a positive effect on the economic growth in Denmark due to the production function. To be able to make real investments it is important to raise financial capital, which inter alia comes from foreign direct investments. However, the foreign direct investments in Denmark have been decreasing, even though it is our assessment that there is a good climate for investments. Nevertheless, it is also our assessment that the duty to file tax returns will prevent some investors from investing in Denmark, which only stresses the importance of exempting the foreign passive investors from having a permanent establishment in Denmark when they invest through a Danish private equity fund. It is therefore our recommendation to remove the two anti-avoidance rules from the bill, to make sure Denmark will be an attractive land to invest in for the foreign passive investors.

EducationsMSc in Commercial Law, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2018
Number of pages131