On 12 June 2024, the Government presented its new plan for entrepreneurs which contains numerous substantial improvements for the tax framework for entrepreneurs. The most significant improvement is the abolishment of the so-called "entrepreneur tax" whereby companies' dividends on unlisted shares will be tax-exempt.
The plan for entrepreneurs contains numerous suggestions which, inter alia, are aimed at improving the access to capital and aimed at lowering the tax burden for entrepreneurs.
Companies' dividends on unlisted shares will be tax-exempt
The so-called "entrepreneur tax" is abolished as per 1 January 2025 (expected). Accordingly, companies with an ownership of less than 10% in an unlisted company will be tax-exempt of such dividends. Currently, an effective tax of 15.4 per cent is paid on such dividends whereas gains on such shares are tax-exempt.
This asymmetric taxation of dividends and gains has led to numerous challenging and unfortunate situations for entrepreneurs. This includes a situation where the underlying business is sold in combination with a reinvestment into the new owners' structure where such gain on the sale partly has become subject to dividend taxation.
The assymetic taxation has also made it less attractive for companies to own less than 10 per cent in an unlisted company, including entrepreneurial companies, which - all else being equal - has made the access to risk averse capital more difficult.
With the abolishment of the "entrepreneur tax", this asymmetric taxation is removed.
Eased taxation of earn-outs
Upon the sale of companies where a substantial part of the value is attributed to future expectations, part of the purchase price is often structured as an earn-out. The capitalized value of an earn-out is included in the taxation of the seller. For personal sellers, this can lead to a liquidity shortage as taxes are crystalized on a gain which has not yet been realized.
It is suggested that the payment of taxes on earn-outs is deferred. The tax rules on earn-out appear to not being changed apart from this but the liquidity burden is resolved where an upfront taxation takes place.
Taxation of share income is eased
The threshold for taxation of share income is increased from DKK 61,000 to DKK 80,000. Share income below the threshold is taxed at a tax rate of 27 per cent and share income above the threshold is taxed at a tax rate of 42 per cent.
Lifeline for IPO mark-to-market taxation
An option to elect realization taxation in a period of 5 years following an IPO for companies with below 10 per cent ownership in a newly admitted company is introduced. The purposes hereof is to solve the unfortunate situation where the stock price after an IPO heavily increases and then drops. Annual mark-to-market taxation combined with, inter alia, lock-up provisions for founders, management, etc. has in certain situations occasionally led to a high tax payment followed by a source-specific tax loss which the owner has not been able to utilize.
Other suggestions
The plan for entrepreneurs contains several other suggestions, including that the threshold under the minimum taxation rules is increased from DKK 9.5m to DKK 20m, the tax credit rules are increased from DKK 25m to DKK 35m, the rules on investment in unlisted shares via pension funds are eased, and the taxation of (illegal) shareholder loans is eased.
We will follow the process
The plan for entrepreneurs has been proposed by the government and, accordingly, there is a political majority in favour of the rules. It will be exciting to see the actual bills for the implementation of the plan for entrepreneurs. We will expect at least the key parts hereof to be part of the legislatory work during the fall of 2024 when Parliament is back in session.
We will follow the process closely and get back once the implementation process is more progressed.
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