Taxation Challenges for Individuals Moving to Denmark with Foreign Mutual Funds Taxed on a Market Growth Principle

Janick Klose

Student thesis: Master thesis

Abstract

This thesis analysis the challenges with taxation of accumulating foreign mutual funds in Denmark from an investors point. The investment in accumulating foreign mutual funds are in Denmark taxed on a market growth principle. Other countries normally tax the gain once realised. This mismatch in timing of taxation can cause a double taxation should the individual move to a country which tax the entire gain when realised. The double taxation occurs as Denmark has taxed the gain according to the market growth principle and when the other countries tax are allowed to tax all of the income according to the OECD’s model tax convention, the other country are therefore not obligated to credit the Danish tax paid. This risk can be mitigated by selling and repurchasing the mutual fund whilst still being tax treaty resident in Denmark.
Furthermore due to foreign accumulating mutual funds being tax as capital income and not as share income the taxable value of the loss relief is diminished. This can have an eroding effect on the accumulation on the investment, especially if one is tax under the Danish expat scheme where an individual is not allowed to carry a loos forward unless it is a business loss. This eroding effect is shown in the thesis where the largest effect can be seen with the analysis of $ 1,000,000 in initial investment where the accumulated investment is $ 1,019,390, when being taxed under the special expat scheme, compared to $ 1,585,885 if there had been no taxation.
After establishing the challenges with the taxation of accumulating foreign mutual funds, the thesis analyses the ways of mitigating these. By using a Danish private business scheme the carry forward limitation for individuals taxed under the Danish expat scheme are avoided and as a result have a higher accumulated investment, however the individual must have some sort of qualifying business income in order to use this scheme. This do no mitigate the double taxation risk, the individual have to sell and buy the investments.
It is further analysed whether it is advantageous to use a Danish or foreign company in order to mitigate the above challenges. The best results are when using a foreign company that are CFC-taxed in Denmark or a Danish based company that keeps it Danish tax status whilst the individual moves to another EU/EEA- country before liquidating the company. This mitigates the double taxation risk and the accumulated value of the investment is $ 1,363,656 compared to $ 1,019,390 when doing nothing.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2017
Number of pages418