Denmark TrollsFor Foreign Holding Cos. –

Denmark and Delaware have more in common than meets the eye-in addition to being small, flat and topographically unimposing, both want to be places where businesses come to incorporate.

In particular, Danish legislators have created new tax laws, which came into effect at the beginning of this year, that they hope will attract foreign holding companies. With private equity shops heading to Europe in increasing numbers, the new tax regime may be of interest to general partners looking for ways to bring profits back to the U.S. with as light a tax burden as possible. For these types of international transactions, Danish officials want U.S. businessmen to consider Denmark the Delaware of Europe.

Speaking to a group of tax professionals at the New York Yacht Club earlier this month, Mou Jakobsen, a partner from the Copenhagen offices of KPMG, said Denmark hoped to lure away some of the thousands of intermediary holding companies who regularly set up shop in Holland and the U.K.

The tax benefits for holding companies in Denmark are two-fold, Mr. Jakobsen said-there is no tax on incoming dividends or capital gains from a foreign subsidiary, and no withholding tax on dividends repatriated to the ultimate parent company. Of particular interest to buyout firms, management fees also are exempt from the withholding tax.

However, as one would expect in a world where death and taxes are inevitable, there are a maze of exceptions and caveats to the new tax laws. The Danish holding company may not deduct losses accrued at a foreign subsidiary. And in order to enjoy the tax-free structure described above, the foreign subsidiary must not be a “financial company,” defined as a company with over 33.33% passive, financial assets. The subsidiary also must not be located in a “low tax” country-meaning a country that charges a corporate tax of less than 24%. (This would be unlikely if the subsidiary is located anywhere in Europe). The Danish holding company must own at least 25% of the subsidiary, and the parent company must own at least 25% of the Danish holding company.

Where these exceptions apply, all income taken in by the holding company would be taxed at the standard 32% Danish corporate rate.

Doubts May Dampen Denmark’s Hopes

Angus McDowell, an international tax consultant with McDowel CPA PC, who attended the presentation, said that for him, the exceptions having to do with financial companies and low-tax countries sounded too much like U.S. Controlled Foreign Corporation (CFC) laws, which were enacted to prevent U.S. companies from hoarding money in off-shore tax havens. Mr. McDowell said that while he did not understand all the fine points of the new Danish laws, he is worried that ill-defined CFC-type provisions might negate any tax advantages afforded by the laws. “From what I heard, I wouldn’t touch Denmark with a barge pole,” he said.

Charles Kope, a principal with KPMG’s international tax practice, said standard operating companies need not fear any CFC-type laws. He added one aspect of the Danish tax code should be of special interest to buyout firms-a provision which favors companies that have a debt-to-equity ratio of as much as four-to-one. Mr. Kope said the Danish corporate tax on such a company could effectively be lowered to as little as 16%.

Steven Tadler, a partner at Advent International Corp.’s London offices, said that while taxes are an issue that his firm considers while structuring an investment in Europe, the top priority is the basic profitability of the portfolio company, regardless of how income is repatriated to the home office. “In the scheme of things, it’s just one piece of the puzzle,” he said.