The Danish rules about taxation of unit linked contracts and investment funds
Unit linked contracts
Income taxation of insurance companies: Premiums or return on assets in investment funds (investeringsfonde) connected to unit linked contracts is not taxable income for the insurance company. Payments from savings in investment funds connected to unit linked contracts are not deductible.
Return on assets in investment funds connected to unit linked contracts transferred to the insurance company to cover the company’s administration cost is taxable income for the insurance company.
Taxation under the Pension Investment Return Act: Returns on tax-privileged pension contributions are not classified as taxable income for the owner of the pension scheme, but under the Pension Investment Return Act. The tax liability is imposed on the insurance or pension company or pension fund.
With a few exemptions pension investment returns are taxable at 15 pct. Returns on assets in investment funds connected to unit linked contracts are taxed at 15 pct.
Income taxation of the owner of the pension scheme: Returns on non-tax-privileged pension contributions are classified as taxable income for the owner of the pension scheme.
Investment funds (investeringsforeninger)
An “investeringsforening” is a body of persons who wants to invest together. It isn’t a limited liability company and it isn’t a “fund”, although the official translation is “investment fund”.
An “investeringsforening” may issue units to be sold to the investing customers (issuing funds).
Some issuing funds distribute dividends corresponding to that part of the income, which would be taxable, if it was income acquired directly by a physical person and not acquired through an investment fund. Such funds are called “distributing” funds.
Issuing funds, which don’t distribute in accordance with the rules for distributing funds, are called “accumulating” funds.
Some “investeringsforeninger” don’t issue units (non-issuing funds).
There are four ways of taxing investment funds and their investors:
1) Accumulating funds, which only address to insurance companies or physical persons investing tax-privileged pension contributions and taxed under the Taxation of Pension Investment Return Act:
The fund: Returns on the funds investments are not classified as taxable income for the fund.
The investor: Returns on tax-privileged pension contributions are not classified as taxable income for the owner of the pension scheme, but under the Taxation of Pension Investment Return Act. As for pension schemes in a life insurance or pension company or a pension fund the tax liability is imposed on the company/fund. As for pension schemes in a bank the tax liability is imposed on the physical person who owns the pension scheme.
Returns on units in investment funds (dividends and development in value of the units (inventory principle)) are taxed at 15 pct.
Life insurance or pension companies liable to corporation tax are subject to a special relief rule, the aim of which is to ensure that returns of pension fund assets are taxed under the Taxation of Pension Investment Returns Act, whereas the remaining returns are taxed under the Corporation Tax Act at 30 pct.
2) Other accumulating funds:
The fund: Returns on the funds investments are classified as taxable income for the fund and taxed under the Corporation Tax Act at 30 pct.
The investor: Returns on units are taxed as returns on equities.
As for investors taxed under the Taxation of Pension Investment Returns Act., see above at 1).
As for other investors returns on the units are classified as taxable income. For physical persons capital gains from equities sold within three year after purchase are taxed according to a progressive rate (up to 59 pct.). Dividends and capital gains from equities sold after three years are taxed according to another progressive rate (28 pct. for the first 41.100 kr. (2003) and 43 pct. of the exceeding amount). For companies etc. taxed under the Corporation Tax Act dividends and capital gains from equities sold within three year after purchase are taxed at 30 pct. Capital gains from equities sold after three years are not taxed.
3) Distributing funds:
The fund: Returns on the funds investments are not classified as taxable income for the fund.
The investor:
As for investors taxed under the Taxation of Pension Investment Returns Act, see above at 1).
As for other investors the returns are classified as taxable income.
Dividends are taxed according to a principle of transparency i.e. that the funds returns of its investments (interests, dividends, and capital gains) are taxed at the investor (on the whole) as if the investor had acquired the return directly and not through an investment fund.
Some distributing funds are based on equities. Equities in companies registered in “tax heavens” are not allowed. Assets auxiliary to the equities (cash and cash equivalents, options and other derivatives) are accepted to a certain extent. Capital gains from units in such distributing funds are treated as capital gains from equities. See above at 2).
For physical persons capital gains from units in other distributing funds are taxed according to a progressive rate (up to 59 pct.). For companies etc. taxed under the Corporation Tax Act such capital gains are taxed at 30 pct.
4) Non-issuing funds:
The fund: Return on the funds investments is not classified as taxable income for the fund.
The investor: The general rule is, that the individual member of the fund is taxed as if the fund didn’t exist and the member himself was the direct owner of his share.