The Qualification of Additional Tier 1 Capital in Danish Tax Law

Oliver Lundgreen Kollerup & Morten Brun Winkelmann

Student thesis: Master thesis


Pursuant to CRR, banks are allowed to include AT1 Capital in their capital requirements for Tier 1 Capital. AT1 Capital is a hybrid form of capital with debt and equity like characteristics. Due to these properties, there were some uncertainties regarding AT1 Capital’s qualification under Danish tax law. The uncertainty stemmed from the fact that the capital instrument is perpetual and therefore has no fixed due date, which is a common condition for qualifying as debt under Danish tax law. As a result of the uncertainty, Danish tax legislation contained provisions that made sure AT1 Capital was treated as debt. In 2020 the Danish legislators repealed these provisions, once again giving rise to the issue of AT1 Capital’s qualification under Danish tax law. This thesis sheds light on the uncertainty regarding the qualification of AT1 Capital under Danish tax law. In the Danish Tax Agency’s landmark decision from 2020, they concluded that following the repeal of the special provisions, AT1 Capital should no longer be qualified as debt according to Danish tax law. This thesis shows that the Danish Tax Agency’s decision is not an expression of applicable law and that AT1 Capital rightfully should be qualified as debt. The main consequence of this being that financial companies would have the right to deduct payments made on AT1 Capital in their taxable income. This conclusion is reached based on an analysis of AT1 Capital’s qualification under civil law and whether any of the conditions for deviating from this qualification in tax law applies to AT1 capital. Subsequently, this thesis shows the consequences of the Danish Tax Agency’s qualification of AT1 Capital for issuers and investors. Some investment funds that invest in AT1 instruments, will – if AT1 Capital is not qualified as debt – be imposed an additional tax payment when they invest through FoF structures. However, this thesis shows that several FoF structures still holds positions in AT1 instruments, which indicates that it is still advantageous to invest in AT1 instruments despite the extra tax levied. For issuers the primary consequence of the Danish Tax Agency’s decision is that they will no longer be able to deduct payments on their AT1 Capital in their taxable income. This thesis analyses the cost of capital of two major Danish banks and conclude that the lack of tax deduction on AT1 Capital will entail a 2 per cent increase in the cost of capital of those banks.

EducationsMSc in Commercial Law, (Graduate Programme) Final Thesis
Publication date2021
Number of pages143
SupervisorsMichael Tell & David Lando