Acquiring Danish Real Estate

DIRECT PURCHASE OF REAL ESTATE

This paragraph discus the most important tax implications of the direct purchase of real estate. First of all is discussed the impact for resident individuals and non-resident individuals. Thereafter is discussed the impact for resident companies and non-resident companies.

Resident Individuals

Transfer Taxes - Stamp duty
Anyone acquiring Danish real estate who wants to register their ownership, is subjected to stamp duty of 0.6% on the purchase price.

Value added tax

As a general rule, the sale of real estate is exempt from VAT. However, VAT is charged if a newly created building or building plot is sold by a ‘VAT-liable person’ who acts in this capacity. The VAT liability includes the sale of new buildings erected at the seller's own expense. Companies that build buildings on their own account for sale must be aware of the rules on the settlement of the so-called construction VAT (surcharge VAT), which also applies to the construction of buildings for the purpose of sale subject to VAT. This is because the construction VAT is included as part of a possible VAT adjustment obligation on the building. When assessing whether VAT is to be settled on the sale of real estate, a number of factors must be considered. In order for VAT liability to arise, the seller must be a taxable person acting in this capacity. There must also be a sale of a building plot or a new building. In this context, the definition of a new building includes both a newly built and a significantly rebuilt (renovated) building. Finally, depending on the specific circumstances, the sale may be subject to a VAT exemption, or it may be a VAT-free business transfer.

In addition to “ordinary sales” of real estate, the sale of rights and company shares over real estate can also, depending on the circumstances, be regarded as a sale of real estate subject to VAT. When a sale of a real property is subject to VAT, the seller also has the right to deduct VAT on his costs in accordance with the general rules of the VAT Act. When trading in real estate, there are typically very large amounts involved. Lack of focus on the VAT conditions can therefore have a large and in many cases absolutely crucial significance for the profitability of a construction project. An optimal advice early in the process can in many cases help to determine whether there will be any financial gain from a project, just as the advice can otherwise help to optimize the entire process. The VAT liability on the sale of building plots and new buildings only includes commercial sales. This means that only so-called “VAT-liable persons” who trade in this property must settle VAT on the sale of building plots and new buildings. Persons liable for VAT are defined as "legal or natural persons engaged in independent economic activity". As a rule, private individuals do not have to settle VAT on the sale of building plots and new buildings, regardless of the number and scope of sales.

Deductibility of costs
Costs related to the purchase of real estate, must be activated and depreciated along with the purchase price.

Treatment of purchase price – depreciation costs
The purchase price must be capitalised for tax purposes and distributed among different asset groups for commercial buildings and technical facilities. Deductions are achieved through annual depreciation, depending on the depreciation rate of the different asset groups.

The annual tax depreciation is calculated as 4% of the cost price of the building. It is possible to deduct tax depreciations of 4% of properties with, for example, retail stores, warehouses, or industry.

However, it is not possible to make tax depreciations on residential property or office property.

Non-resident individuals

Non-resident individuals are treated in the same manner as resident individuals. Investments in real estate in Denmark will result in a permanent establishment and income from the activity will be taxed in Denmark. Profit from real estate located in Denmark (the permanent establishment) are subject to individual income tax at a rate up to 56,5%.

Resident companies

Transfer Taxes - Stamp duty
Anyone acquiring Danish real estate who wants to register their ownership is subject to stamp duty of 0,6% on the purchase price.

Value added tax
Same rules apply as for individuals.

Deductibility of costs
Costs related to the purchase of real estate, must as a main rule be activated and depreciated along with the purchase price.

Treatment of purchase price – depreciation costs
The purchase price must be capitalised for tax purposes and distributed among different asset groups for commercial buildings and technical facilities. Deductions are achieved through annual depreciation, depending on the depreciation rate of the different asset groups.

The annual tax depreciation is calculated as 4% of the cost price of the building. It is possible to deduct tax depreciations of 4% of properties with, for example, retail stores, warehouses, or industry.

However, it is not possible to make tax depreciations on residential property or office property.

Non-resident companies

Non-resident companies are treated in the same manner as resident companies.

Profit from real estate located in Denmark (the permanent establishment) are subject to the corporate income tax at a tax rate of 22%.

INDIRECT PURCHASE OF REAL ESTATE

This paragraph discus the most important tax implications of the indirect (shares) purchase of real estate. First of all is discussed the impact for resident individuals and non-resident individuals. Thereafter is discussed the impact for resident companies and non-resident companies.

Resident individuals

Treatment of purchase price
The purchase price must be capitalized as taxable acquisition costs for the shares. The acquisition costs can be deducted against the future sales price for the shares. Individuals are taxed of the profit as share income at a tax rate of 27% for share income below DKK 56.500 (2021) and at a tax rate of 42% for share income above DKK 56.500.

The share income must be included in the tax return at the time of the sale.

Transfer taxes - Stamp duty
When purchasing shares, there is no change in ownership to the real estate itself. Therefore, no registration of new ownership is needed, and no stamp duty applies.

Deductibility of costs
Costs related to the purchase of shares, must as a main rule be capitalized as taxable acquisition costs for the shares.  

Dividend withholding tax

Individuals receiving dividends from a Limited liability company in Denmark are taxed at a tax rate of 27% for dividend below DKK 56.500 (2021) and at a tax rate of 42% for dividend above DKK 56.500. Dividend from limited liability companies in Denmark are taxed as Share Income.

Non-resident individuals

Treatment of purchase price
lncome derived from indirect sale of shares is not taxable in Denmark for non-resident individuals. Non-resident individuals will be subjected to tax rules in their jurisdiction.

Transfer taxes - Stamp duty
When purchasing shares, there is no change in ownership to the real estate itself. Therefore, no registration of new ownership is needed, and no stamp duty applies.

Dividend withholding tax

As a general rule, dividends paid to non-resident individual are subjected to Danish withholding tax of 27%. If the dividends paid to an individual in a country covered by a double tax treaty with Denmark the withholding tax in most cases will be reduced to 15% or less.

Resident companies

Treatment of purchase price
The purchase price must be capitalised as taxable acquisition costs for the shares.

Gains from sale of shares is subject to a corporate tax rate of 22%. Capital gains on un-listed portfolio shares is exempted of tax if at least 10% ownership.

Any gains on shares must be included in the tax return at the time of the sale.

Dividend withholding tax

A company receiving dividend from another limited liability company in Denmark are exempted of tax if the company own at least 10% of the shares.

Transfer taxes- Stamp duty
When purchasing shares, there is no change in ownership to the real estate itself. Therefore, no registration of new ownership is needed, and no stamp duty applies.

Non-resident companies

Non-resident companies are taxed according to the rules in the resident country and any double tax treaty between Denmark and resident country.

Dividend withholding tax

As a general rule, dividends paid to non-resident companies are subjected to Danish withholding tax of 22%. If the dividend is paid to a company in a country covered by a double tax treaty with Denmark, the withholding tax in most cases will be reduced to 15% or less. Dividends paid to another EU country or in a tax treaty country may be paid without Danish withholding tax if the foreign company hold at least 10% of the capital in the Danish company.