DENMARK Law and Practice Contributed by: Simon Milthers, Thomas Bøgedal Kristiansen, Mikkel Friis Rossa and Emil Steenberg, Bech-Bruun
such as enabling venture capital investors to remain shareholders if they believe in the company’s future growth potential. 4.4 Liquidity Event: Certain Transaction Terms Founders and venture capital investors are generally expected to stand behind representations and war- ranties and certain liabilities (eg, tax, employee ben- efits and environmental issues) after closing. This is typically done through indemnification or other mech- anisms. The use of representations and warranties is customary in the Danish market, particularly for both large-cap and mid-market transactions. Holdback and escrow arrangements are not cus- tomary in Denmark but are becoming more common lately. These arrangements are often seen in terms of purchase price adjustments. In some transactions, the management of the target company may provide busi- ness representations and warranties backed by a W&I insurance, while the sellers only provide fundamental warranties. This trend towards W&I insurance-backed management warranties is expected to continue. Spin-offs are not widely used in technology transac- tions. Generally, spin-offs are considered a taxable event, resulting in taxation. However, they can be executed as a tax-free event (such as a tax-exempt demerger), provided certain requirements are met. 5.2 Tax Consequences Spin-offs in Denmark can be structured as a tax-free transaction at both the corporate level and the share- holders’ level, provided certain requirements are met. These tax-free spin-offs are typically executed as tax- exempt demergers. The key requirements for a tax-exempt spin-off in Denmark are as follows. • The remuneration must be in the form of shares in the receiving company, with a possible tax com- pensation amount. 5. Spin-Offs 5.1 Trends: Spin-Offs
• The spin-off date should be set as the first day of the receiving company’s financial year to ensure it has a retrospective effect. However, special rules apply for companies comprised by the mandatory Danish joint taxation and in the case of cross-bor- der demergers. • The assets and liabilities transferred to the new company must constitute a separate business unit if the company subject to the spin-off is to con- tinue to exist for tax and legal purposes. • The company contributing the assets as well as the company receiving the assets must be a Danish A/S or ApS. Alternatively, it must be a “company from a[n EU] member state” as described in Article 3 of Council Directive 90/434/EEC and not be con- sidered transparent for Danish tax purposes. • The spin-off must be registered in the Danish Tax Agency (DTA)’s e-filing system no later than one month after the decision to proceed with the spin- off has been made. As a main rule, the implementation of a tax-exempt demerger is conditioned upon a pre-clearance from the Danish Tax Authorities. However, subject to cer- tain conditions, a tax-exempt demerger may also be implemented without a pre-clearance. Hence, certain- ty of the Danish tax consequences should be avail- able prior to the transaction. The additional specific requirements include the following. • A holding period of three years applies, during which shares in the receiving company cannot be sold following the tax-exempt demerger. This rule applies to companies that own 10% or more of the share capital in one of the participating compa- nies following the demerger and does not apply to shares owned by individuals. • The demerger must be executed at fair market value. • The ratio of debt to assets in the receiving com- pany must match the ratio of debt to assets in the transferring company (“balance adjustment rule”). This often necessitates obtaining a binding ruling on the valuation. In certain cases, a tax-exempt demerger may not be possible without obtaining permission. There are four specific exceptions to this rule, as follows:
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