Transfers of Assets Between Related Parties

There is no single definition of related parties that applies across all Danish tax rules. It depends on the rule being applied.

For family transfers of real property and gift tax, the relationship between transferor and transferee determines whether the rules of the Danish Inheritance and Gift Tax Act may be used. Children, grandchildren, parents and grandparents are typical examples of persons within the gift tax group.

Under other tax provisions, an association of interests may also arise between an individual and a company, or between companies within the same group.

It is therefore necessary first to establish the relationship between the parties and then to assess which valuation and taxation rules apply.

Transfers between related parties arise in many different situations: a parent transferring a property to a child, a generational transfer within a family-owned business, or a controlling shareholder acquiring an asset from their own company.

Cars, art, securities and other assets may equally be transferred between family members.

What these situations have in common is that the parties do not necessarily have opposing economic interests in the way two independent parties would. Valuation therefore takes on particular importance.

The starting point for transfers between associated parties is that the asset must be valued on the basis prescribed by the tax rules. For many assets, fair market value is central.

Fair market value is essentially the price at which the asset could be sold between independent parties. It is therefore not necessarily sufficient that the parties themselves agree on a price.

If an asset is transferred at a price below the value that must be applied for tax purposes, the difference may in the circumstances be treated as a gift, a distribution or another taxable economic benefit.

Family transfers of real property differ in several respects from other transfers.

For transfers within the group of persons covered by the rules, the public property assessment may in certain cases be used as the basis for the valuation. The parties therefore need not always obtain an ordinary market valuation of the property.

The range that may be applied depends, however, on which assessment system the property falls under.

The long-established rule allows, as a starting point, a value within plus or minus 15% of the relevant public property assessment.

Where the property has received a new assessment under the new property assessment system, a range of plus or minus 20% may be relevant. It is therefore no longer accurate to describe the rules generally as only the 15% rule.

Before a family transfer is carried out, it should be established which assessment applies to that particular property and which valuation range may be used.

Even where a property is transferred within the relevant range around the public assessment, it does not necessarily follow that the Danish Tax Agency must accept the value. The rules may be set aside where special circumstances exist.

That may be relevant where the property was traded shortly before or after the family transfer at a materially different price.

Other objective information about the value of the property, showing that the public assessment does not provide a reliable basis for the transfer, may also carry weight.

It is therefore not enough to check whether the agreed price falls arithmetically within the relevant range. The full history surrounding the property should be assessed.

Special circumstances is a concept applied on a case-by-case basis. In practice, the question is whether specific information exists that makes the public assessment an unsuitable basis for the transfer.

A recent purchase or sale at a materially different price may be relevant, as may the financing of the property or other objective information about its actual value.

The timing of the transfer and the steps taken before and after the transaction are therefore often important.

Particular tax requirements also apply where an asset is transferred between a company and its controlling shareholder, whether the asset is a property, a car, a boat or something else.

The company and the shareholder must, as a starting point, deal on terms corresponding to those independent parties would have applied.

If the shareholder acquires an asset from the company at an undervalue, the difference may in the circumstances be taxed as a constructive dividend. A transaction at an inflated price may equally have tax consequences.

Both the value of the asset itself and the specific economic benefit must therefore be examined.

In a business succession, the valuation of the business or the company is often one of the most difficult questions, particularly for unlisted companies where no readily available market price exists.

Earnings, assets, goodwill, liabilities and future earning capacity may all be relevant.

Specific rules may, in certain family transfers of commercial businesses, allow a statutory valuation method to be applied where the conditions are met. Those rules must be applied to the facts and do not apply generally to every transfer of wealth.

In a business succession it should therefore be examined which valuation method can and should be applied in the specific situation.

Family transfers are not limited to property and businesses. They may concern cars, boats, art, jewellery, securities or other assets.

For such assets, the fair market value is often central, and the value may be documented through invoices, actual transaction prices or an external valuation.

The more individual or difficult to trade the asset is, the more weight the documentation of the valuation may carry.

If an asset is transferred to a family member for less than the value that must be applied for tax purposes, the difference may constitute a gift.

That does not necessarily prevent the transfer from being carried out, but the gift element must be handled correctly, and gift tax may be payable.

The value of the gift will generally depend on the difference between the value to be applied for tax purposes and the amount the recipient actually pays. For real property, the special valuation rules described above apply.

A valuation dispute often only arises after the transaction has been completed, when it can be harder to reconstruct why the parties chose the price they did.

It is therefore an advantage if the valuation and its basis can be documented at the time of the transfer, for instance through valuations, calculations, information on comparable transactions, financing and the surrounding correspondence.

In some situations it may also be appropriate to request a binding tax ruling from the Danish Tax Agency before the transfer is carried out.

Where there is real uncertainty about the valuation or the tax consequences before the transfer, obtaining the agency's position in advance can be worth considering.

If the agency does not accept the value applied, it may correct the tax treatment of the transfer. The consequences depend on who acted and which asset is involved.

This may give rise to questions of gift tax, constructive dividends, capital gains taxation or other income taxation.

In a specific case one should therefore not only examine whether the agency's valuation is correct. It must also be assessed whether the agency had any basis for setting aside the value the parties applied in the first place.