Section 7: Shareholders
7.2. Tax and share investments
7.1. Shareholders
Shareholders own a part of a limited company. As a rule this ownership entails a share of the company’s profit and influence on making decision affecting the company. Shareholders are allowed access to general meetings and have the right to vote.
Shareholders are only liable for the amount they have invested in the company. It is not possible to lose more than the investment sum. This also applies to shares in small private companies (ApS). As a rule, co-owners in a small private company are treated as shareholders for tax purposes.
7.2. Tax and share investments
Investment in shares through pension savings
Most people own shares through their pension savings. Taxation on income from shares owned via a pension savings scheme are typically lower than taxation of shares bought privately.
This applies mainly because the returns on share investments in pension schemes are only taxed at 15%. The returns are stated at the market value on the balance sheet, which means that exchange fluctuations are taken into consideration regardless of whether or not the shares have been sold.
However, if shares are bought privately - i.e. not through pension savings - the returns are taxed by up to 28% or up to 43% if the share income is sufficiently large. However, any gains are not taxed until the shares are sold.
| Marginal tax rates for allocated share income1) | |
| In pension savings | 36.3 |
| Not in pension savings (dividends and realized profits) | 46.0/57.3/58.8 |
1) States the composite tax rate, including 25% corporation tax.
By purchasing shares through pension savings, a person can continue to look after his or her share portfolio, for example by exchanging one type of share for another. But the pension funds spent on the shares are generally tied until retirement. A tax privileged pension savings scheme can be terminated prematurely but this incurs a relatively high tax of 60% on the amount paid out.
Share investments bought with free funds
Many people also choose to invest in shares bought privately. Over 1 million people own shares listed on the stock exchange that have been bought privately.
Effective Jan. 1, 2006, the tax rules for gains and losses on shares have been simplified. All gains on shares are generally taxed as share income regardless of how long they have been owned.
The only exception is that quoted shares can be sold tax free, if they at the end of 2006 were part of a portfolio of quoted shares whose value was less than DKK 136,000 (DKK 273,100 for married couples), and if the share holder had owned them for more than three years when they are sold.
Accordingly, losses can be deducted. Losses on quoted shares can be offset in share income from quoted shares (both dividends and gains) with the right to carry forward any excessive loss to later years with no time limit. Losses on unquoted shares can be offset in other income after special rules.
| All common shares (regardless of time of ownership) (Tax free rule for quoted shares in small portfolios owned Dec. 31, 2005) |
Gains | Gains are taxed as share income |
| Losses | Losses on quoted shares (Losses offset in dividends and gains from quoted shares. Excess amount can be carried forward with no time limit). Losses on unquoted shares (special access for offsetting losses in other income |
7.3. Owning shares
As a shareholder you will typically receive a dividend from the company at least once a year. The share dividend is generated by the company allocating a part of the year's profits. The company's profits are taxed at 25 % corporation tax level before they are allocated to the shareholders.
The dividend is taxable and is included in the share income with share profits.
Share income is taxed progressively at two different rates. Share income under DKK 46,700 (2008). Share income from DKK 46,700 up to DKK 102,600 (2008) is taxed at 43 %, while any share income DKK 102,600 is taxed at 45 %. For married couples, the progression limit for taxing share income is double this amount, i.e. DKK 93,400 and DKK 205,200 (2008). These amounts are regulated annually.
Taxation at the highest rate will however not take place until the shareholder has used his or her “transition balance”. Transition balance is a special transitional provision. The balance is compiled on the basis of a shareholders portfolio of quoted and unquoted shares as of January 1st, 2007. Thereafter the balance is regulated concurrently as the shareholder is paid dividends and realises share gains and losses,
When a company or an investment trust allocates dividends to share holders, it must withhold dividend tax of 28% of the total dividends.
Tax on share income exceeding DKK 46,700 is included in the final tax at the same time as the tax authorities offset the dividend tax that the company has already withheld of the part of the dividend exceeding DKK 46,700. An unutilised basic allowance can be transferred to one’s spouse.
The majority of Danish shareholders do not have a share income of more than DKK 46,700. Therefore taxation is simple for most shareholders. The withheld dividend tax of 28 % is the final tax on the share income and the shareholder does not need to file the dividend on his or her tax return.
7.4. Selling shares
Effective Jan. 1, 2006, the tax rules for gains and losses on shares have been simplified, so that gains in general are taxed and losses are deductible.
Two transitional provisions are implanted in connection with the new rules.
The first transitional provision assures, that shares bought before 2006 can be sold tax free, if they are part of a portfolio that at the end of 2005 was less than then DKK 100,000-limit, i.e. DKK 136,600 for single taxpayers and DKK 273,100 for married couples. It is a further condition for being tax free that the shares have been owned for more than 3 years, when they are sold.
The second transitional provision applies to shares that are acquired before Jan. 1, 2006, and have been owned less than 3 years, when they are sold.
Since the gain is taxable, losses can also be deducted. If one suffers a loss from selling quoted shares the loss can be offset in dividends from quoted shares or from selling other quoted shares. If the loss can not be offset in the sale’s year, it can be carried forward to offset dividends and gains from quoted shares in future years. In this way it is the net gain from the total sale of quoted shares that is taxed with 28, 43 and 45 % respectively.
For shares acquired before the 19th May 1993, the value of shares on the 19th May 1993 can be used to calculate profit or loss instead of the actual price. In this way it is only the part of the profit created after the 18th May 1993 that is taxed. Accordingly, only the part of the loss made after the 18th May 1993 can be offset against the profit made from the sale of other listed shares that have also been owned for at least 3 years.
If one suffers a loss on the sale of unquoted shares, the loss can be offset after a special scheme. The loss is offset in share income. If share income becomes negative, i.e. there is a net loss, a "negative tax sum" is calculated that is offset in tax of other income. If the negative sum is larger than the other tax, the excessive amount can be carried forward and be offset in tax for the coming years.
Special sales situations
If a shareholder moves abroad, he or she must be aware that the move will cause any share profits to be taxed, even though the shares have not been sold on moving. However, it is possible to be allowed to postpone the payment. In certain circumstances the person must provide security for the tax payment.
At the time of the move, the shareholder's portfolio is assessed and the unrealised profits are taxed. This means that the person is taxed as if the shares had been sold at the time of moving. A loss can only be offset against any profits arising from settling the person's tax affairs in connection with moving.
An investment trust is an association of investors
There are various types of investment trusts. The different types of investment trusts vary in the tax paid on the profits and the option of a loss allowance.
Different types of investment trusts
There are three types of investment trusts
- Investment trusts taxed as "investment companies”
- Investment trusts taxed as if they paid dividends
- Account holding investment trusts
All types of investment trusts are tax exempt.
Members of an "investment company" are taxed on the dividends earned after the inventory principle.
The aim is that the tax on dividends from dividend paying and account holding investment trusts is the same as if the member had invested in the shares of his or her own accord. This taxation principle is known as the transparency principle. This means that members are treated as if they had owned the shares themselves and not bought them through the investment trust. But members of dividend paying investment trusts are not taxed on gains made by the trust on shares that have been owned for more than 3 years.
If a dividend paying investment trust does nothing more than invest in shares, the members are taxed on the gains from the sale of their membership certificates just like gains on noted shares.
If a dividend paying investment trust makes other investment, the gains from the sale of a membership certificate as capital income.
Account holding investment trusts play no role for common investors.
7.6. Employee share options
Special tax rules can apply for shares that have been received or bought by company employees. There are three sets of rules for employee shares.
The most widespread arrangement is the so-called free shares, where the employee is not taxed on the value of the shares when they are received, but only on any subsequent increase in value. The amount received may not exceed maximum DKK 22,900 in 2009 and the shares must be tied up for 7 years. As regards employee bonds, the employee can recieve up to 10 % of the wages. The company must pay a tax on 45 % of allocations to the employee, exceeding DKK 5.200 in 2009. The bonds must be deposited for 5 years.
There are also special rules for options and warrants, where taxation can be postponed in certain circumstances until the time when the shares are sold, if the share allocation is within certain limits. Tax is the same as for share income, i.e. 28/43/45 % although the expense is not tax deductible for the employer.
Finally, there are rules that allocated options and options that do not meet the requirements of the above agreements are taxed at the time when they are sold.
The Danish Ministry of Taxation’s website has a more detailed explanation of the rules - in danish: