Tax cases, private transfers
Family Loans, Gifts and Cash Deposits
Money in a bank account is not income in itself. But once the Danish Tax Agency asks, the explanation and the documentation become decisive.
If the Danish Tax Agency has identified transfers or cash deposits in your bank account, you may be asked to document where the money came from. If the agency does not find the explanation and the documentation sufficient, the amounts may be taxed as additional income.
We see this in cases where the money came from loans between family members, gifts, savings, repayment of an earlier loan or transfers from abroad.
At HAY LAW we act in cases where the Danish Tax Agency has questioned deposits and transfers in private bank accounts. We review the money flows, the explanation behind each amount and the documentation that can support where the money actually came from.
When the Danish Tax Agency asks about your bank account
As part of a review, the Danish Tax Agency may examine the movements in your bank accounts. If amounts have been deposited that cannot readily be explained by your reported income, the agency will often ask you to account for them.
This may concern larger bank transfers, recurring transfers from family members, money from abroad or cash paid into the account.
The fact that money has entered a bank account does not in itself mean that it is taxable income. But once the agency questions the amounts, it becomes important to explain and document where the money came from.
Family loans
It is common for family members to lend each other money. Parents may help their children finance a home, a business or other significant expenses. Children may lend money to their parents, and loans may be made between other family members.
A family loan may in principle be interest free. What matters is that the arrangement genuinely is a loan and not a gift or another type of transfer. If the Danish Tax Agency later questions the amount, the documentation can therefore be of considerable importance.
A written loan document is not a condition for a loan to exist in every situation, but it can be significant in showing that the parties already regarded the amount as a loan at the time of the transfer. Bank transfers, correspondence between the parties, subsequent repayments and the parties' wider financial circumstances may also matter.
Family loans of DKK 2.85 million recognised. In a case concerning the financing of a property within a family, the Danish Tax Agency had treated transfers of approximately DKK 2.85 million as taxable personal income. It was documented during the case that the amounts were private loans provided as part of the financing of the property. The client succeeded in full and the adjustment was reduced from approximately DKK 2,850,000 to DKK 0.
When a family loan is not documented in writing
Many family loans are made informally. The money is transferred because a family member needs help, without the parties drawing up a loan document. That does not necessarily mean that the loan should be disregarded for tax purposes.
But if the Danish Tax Agency asks several years later why, for example, DKK 500,000 or DKK 1 million was transferred to a bank account, the question of documentation becomes more difficult.
In such cases it is necessary to consider all the information that can support the existence of a loan. That may include earlier correspondence, account statements, withdrawals made by the lender, subsequent instalments and information about the background to the loan. It is the documentation as a whole that must be assessed.
The importance of the documentation as a whole is illustrated by our case on the financing of a property within a family, where an adjustment of approximately DKK 2.85 million was reduced to DKK 0.
Gifts between family members
Transfers between family members may also be gifts. How a gift is taxed depends among other things on the relationship between the donor and the recipient.
Within the group of persons covered by the gift duty rules, gifts may be made each year up to the applicable duty free threshold. If the gift exceeds the threshold, gift duty is generally payable on the excess. The thresholds are adjusted over time.
Gifts between spouses are generally exempt from duty. If the recipient does not belong to the group covered by the gift duty rules, the tax treatment may be different. It is therefore important to clarify both the relationship between the parties and the background to the transfer.
Loan or gift?
In practice, disputes often arise as to whether a transfer really was a loan or a gift. If the parties agreed that the money was to be repaid, that naturally supports the existence of a loan.
If there never was a genuine repayment obligation, the tax treatment may be different.
The label the parties use afterwards is not decisive on its own. What matters is what was actually agreed at the time of the transfer, and whether the parties' subsequent conduct is consistent with the explanation.
Cash deposits
Cash deposits often prompt questions from the Danish Tax Agency. The money may be savings built up over a long period, proceeds from the sale of private assets, repayment of a private loan or funds coming from family.
If the agency cannot see an immediate connection between the deposit and the taxpayer's known finances, it may ask for an explanation.
It can be difficult to document the origin of cash several years after it was deposited. Both the explanation and the surrounding circumstances therefore become important. If the money came from earlier withdrawals, the sale of an asset or cash savings, the available documentation should be examined.
Transfers from abroad
Transfers from foreign bank accounts or from family members abroad may also lead to questions from the Danish Tax Agency. The fact that the money comes from abroad does not in itself make it taxable in Denmark.
What matters is what the money relates to. It may be a family loan, a gift, the taxpayer's own funds held in a foreign account, repayment of a loan or proceeds from an asset.
The documentation may be more extensive here, because it can be necessary to trace the money from the sender abroad to the recipient's account in Denmark.
Where a transfer from abroad represents salary, investment income, pension income, property income or other foreign income, separate questions may arise concerning Danish taxation and relief for foreign tax.
Discretionary increases of income
If the Danish Tax Agency considers that a taxpayer has had private spending or received amounts that cannot be explained by the reported income, the agency may in certain circumstances make a discretionary increase.
In such cases it is not enough simply to establish that payments appear in the bank account. The individual entries must be examined and assessed to determine whether the amounts actually represent taxable income.
One transfer may be a loan. Another may be a gift. A third may be a transfer between the taxpayer's own accounts. The bank entries should therefore be reviewed one by one and compared with the available documentation.
Documentation can be decisive
Cases on family loans, gifts and cash deposits are largely questions of evidence. The Danish Tax Agency looks at the money flows, but the money flows do not always show what a payment relates to.
It is therefore important to gather the documentation that can explain the context.
At HAY LAW we work systematically through bank accounts, transfers, correspondence, loan documents and other relevant information to establish what each amount actually concerns. If the matter develops into a criminal case, we can carry it forward in the same track.
Selected case on family loans
The case shows what a complete review of money flows and documentation can mean in a matter concerning private transfers.
DKK 2.85 million → DKK 0
Full success in a family loan and property financing case
The case concerned the financing of a property where our client had received substantial amounts from family members. The Danish Tax Agency treated the transfers as taxable personal income and increased our client's taxable income by approximately DKK 2.85 million. During the proceedings, it was documented that the amounts constituted private family loans provided as part of the financing of the property and were not taxable income. Our client succeeded in full and the tax adjustment was reduced to DKK 0.
The matter was conducted by attorney Hussain Ali Alhaidary. Hussain Ali Alhaidary
Full victory in a tax case. DKK 2,850,000 reassessment reduced to DKK 0The result is a specific example from an earlier case. The outcome of a tax case always depends on its particular circumstances and documentation.
This page provides general information and is not a substitute for specific legal advice. Outcomes in previous cases do not guarantee the outcome of a new case.
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Has the Danish Tax Agency increased your income?
If the Danish Tax Agency considers transfers or cash deposits in your account to be taxable income, both the individual amounts and the basis for the agency's assessment should be reviewed carefully. That is particularly true where the money came from family loans, gifts, private funds or other arrangements that are not taxable income. At HAY LAW we assist from the first dialogue with the agency through an appeal to the Tax Appeals Agency, the tax appeals board or the Danish National Tax Tribunal, and any subsequent court proceedings.