Tax advice
Binding Tax Rulings from the Danish Tax Agency
A binding tax ruling can clarify the tax consequences before you carry out a transaction. That can matter when significant values are involved, when practice is uncertain, or when the tax treatment may be decisive for whether the transaction should be carried out at all.
A ruling can also be requested on a transaction that has already been completed. In a binding ruling, the Danish Tax Agency takes a position on the tax consequences of a transaction you are planning or have already carried out.
A binding ruling can provide certainty because the Danish Tax Agency cannot subsequently change the tax consequences covered by the ruling.
This naturally requires the transaction to be carried out on the factual basis and assumptions considered in the ruling, and the binding effect applies for the period prescribed by law or stated in the ruling.
At HAY LAW we assess whether a binding ruling is the right solution and prepare the request itself, including the wording of the questions, the description of the facts, the legal argument and the documentation on which the Danish Tax Agency or the Danish Tax Council must decide.
A binding ruling is only as useful as the basis on which it is given. The way the request is drafted therefore matters a great deal.
What is a binding tax ruling?
A binding tax ruling is a decision on the tax or duty consequences of a specific transaction. It may concern something you or your company are considering, or a transaction that has already been carried out.
The purpose is to obtain the authorities' position on the specific question at a point where it is still possible to act on the answer.
It can be relevant if you want to know how a transfer will be taxed, what value may be applied, or whether a particular transaction triggers tax or duty.
When can a binding tax ruling be useful?
Binding rulings are used across many areas. They can be relevant on transfers of real property between family members, transactions between a company and its controlling shareholder, business succession, restructurings, the valuation of companies or assets, and other transactions where the tax treatment is not sufficiently clear.
They can also be relevant to questions of VAT, duties or the interpretation of tax legislation in connection with a planned transaction.
What these situations have in common is that knowing the tax treatment before the transaction is carried out may be of real commercial importance.
The question must be formulated precisely
A request should not simply describe a problem and ask the Danish Tax Agency to take a view. It must put a specific question that the authority can answer on the basis of clearly described facts.
The question may be whether a particular transaction triggers taxation, whether a specific value may be applied on a transfer, or whether a particular tax rule applies.
The way the question is framed determines what the agency actually decides. Both the question and the tax consequences of each possible answer should therefore be considered before the request is submitted.
The facts must be described correctly
A binding ruling is given on the basis of the information presented in the request. If the facts later turn out to differ from the description, that may affect whether the ruling can still be relied on.
The facts should therefore be described precisely and completely. That applies in particular where several agreements, companies or family members are involved, or where the tax consequences depend on the specific economic context.
It can be tempting to describe the matter as simply as possible. But relevant circumstances should not be left out merely because they make the question more complicated.
Documentation matters
The Danish Tax Agency may request further information if the matter is insufficiently substantiated. If the necessary information is not provided, the question may be rejected, or the answer limited to the points the authority considers sufficiently documented.
It is therefore an advantage to have the central documentation in place when the request is submitted.
That may include agreements, valuations, accounts, calculations, structure charts or other material supporting the transaction the question concerns.
Binding rulings on valuation
Binding rulings are frequently used in valuation matters, for instance on transfers of real property, shares, businesses or other assets between related parties.
The financial exposure can be considerable if the agency later concludes that the value applied was incorrect. In the right situation, a binding ruling can be used to have the valuation determined before the parties complete the transfer.
A binding valuation ruling may have a shorter binding period than an ordinary binding ruling. That should be factored into the timing of both the request and the transaction.
Family transfers and binding rulings
On family transfers of real property, questions often arise as to which value may be applied and whether special circumstances mean that the public property assessment cannot be relied on as expected.
Where significant values are involved, a binding ruling may be worth considering before the property is transferred.
That is particularly so where there is information on the market value, the financing or earlier transactions that may create uncertainty about the valuation.
If you are considering a family transfer, you can read more about valuation, the 15 and 20 per cent ranges and special circumstances on our page on transfers of assets between related parties.
Transactions between a company and its controlling shareholder
Binding rulings can also be relevant to transactions between a company and its controlling shareholder. Where an asset is sold from the company to the shareholder or the other way round, the valuation may directly determine the tax treatment.
If the agency considers that the shareholder received an economic benefit as a result of the price applied, the case may raise a question of constructive dividend.
On larger or more uncertain transactions it can therefore be sensible to have the tax treatment clarified before the transaction is completed.
Where the question concerns a transaction between the company and its controlling shareholder, you can also read more about the tax consequences on our page on controlling shareholders and constructive dividends.
How long is a binding ruling binding?
As a starting point, a binding ruling is binding on the tax authorities for five years.
A shorter binding period may apply to rulings on the value of an asset, and special rules may apply to certain valuations in connection with family transfers and transfers of a business.
The authority may in some cases also set a shorter binding period. It is therefore important to read the individual ruling rather than assume that every decision is automatically binding for five years.
A binding ruling only applies to the stated assumptions
The binding effect has limits. If the factual assumptions that were decisive for the ruling change, that may affect the binding effect.
The same may apply if the legislation on which the ruling was based is subsequently amended.
A binding ruling should therefore not be understood as a general tax approval of a transaction regardless of how it is later carried out. The transaction must be carried out on the basis the authority considered.
The Danish Tax Agency or the Danish Tax Council?
Most requests are decided by the Danish Tax Agency. Certain matters must, however, be decided by the Danish Tax Council.
That includes matters of principle and other questions that under the rules must be referred to the Council.
In such matters, both the legal argument and the precise description of the issue often carry particular weight.
How long does a binding ruling take?
Processing time depends on the nature and complexity of the question. Straightforward questions can be decided more quickly than complex matters or matters of principle.
Matters that must be referred to the Danish Tax Council may also take longer.
If a transaction is to be carried out at a particular time, the request should therefore be planned well in advance.
What does it cost to request a binding ruling?
A fee is payable to the Danish Tax Agency for submitting a request. The fee is adjusted over time, and the current amount is stated in the agency's guidance.
That fee is the authority's own charge and is separate from any costs of legal advice and preparation of the request.
When the answer is not the one you wanted
Requesting a binding ruling also gives the authorities the opportunity to take a position on the transaction.
Before the request is submitted, it is therefore worth considering how the matter stands legally and what the consequence will be if the agency does not share the desired assessment.
A binding ruling should not be used as a trial balloon without first assessing the tax risks. That is particularly important on larger transactions, business succession and dealings between related parties.
This page is general information and does not replace specific advice. The rules on binding rulings, binding periods, fees and processing can change, and the precise terms follow from the individual ruling.
Contact
Are you considering requesting a binding tax ruling?
A binding ruling can be an effective tool if you want clarity on the tax treatment before making a commercial decision. But the question, the facts and the documentation must be thought through from the outset. At HAY LAW we assess whether a request is the right solution in the specific situation. We prepare the request, formulate the questions, describe the relevant facts and the legal argument, and handle the subsequent dialogue with the Danish Tax Agency or the Danish Tax Council.