Introduction

Denmark brings something special to the table when it comes to planning for international estates, and it’s especially handy for those with a hefty wallet or family assets. In contrast to places where trusts are the trusted way to go, like in many common law countries, Denmark plays by different rules. Trusts don’t usually get a pass here. Dive into this guide and discover the nuts and bolts of how Denmark does it. You’ll find out about Danish foundations, including those cool enterprise foundations. For anyone looking to sort out international estate planning with a Danish twist, this is just the ticket. Keep reading to dig deeper into the Danish way of doing things and why it could be the ace up your sleeve.

Considering that trust law is not a recognised concept within the Danish legal framework, Danish foundations, particularly enterprise foundations, serve as strong alternatives for wealth planning. Understanding Danish foundation law is therefore important for international planners. This article will explore the specifics of Danish foundations, explaining why foundations may be favoured in Denmark over trusts, and how enterprise foundations play an important role in the Danish business landscape.

Understanding the Danish Approach: Why No Trusts?

The Legal Status of Trusts in Denmark

Common law trusts are not generally recognised as a legal concept in Danish law. Additionally, Denmark has not ratified The Hague Trust Convention of 1 July 1985. Under Danish law, it is possible to arrange for a person (trustee) to hold legal title to property, which is managed for someone else (beneficiary). However, Danish law lacks a comprehensive set of rules for trusts, including:

• Trustee duties
• Beneficiary rights
• Trust modification
• Trustee appointment
• Breaches of trust

Consequently, trust-related legislation does not allow for trusts.

Implications for International Wealth Planning

For international clients considering wealth planning in Denmark, the non-recognition of trusts has significant implications. Traditional trust structures common in many jurisdictions are not directly applicable in Denmark. Specifically:

• Danish law treats contributions to foreign trusts by Danish residents as if the contribution were made to the settlor themselves.
• This rule has been in effect since July 2015 and also covers contributions made within two years before becoming a Danish resident for tax purposes.
• Foreign trusts may be considered transparent for tax, probate, inheritance tax, and forced heirship purposes.

While trusts are not recognised, Danish foundations offer a robust alternative for wealth planning. Danish foundations are recognised legal entities and can be used for purposes similar to trusts in other jurisdictions. Therefore, for international wealth planning involving Denmark, focusing on Danish foundations rather than traditional trusts is often more appropriate.

Danish Foundations: A Robust Alternative

Defining Danish Foundations and Their Legal Basis

A Danish foundation is defined in both the Foundation Act and the Enterprise Foundation Act as a self-governing legal entity with legal personality. This means it can acquire rights and incur liabilities in its own name. Additionally, a Danish foundation must have its own dedicated assets that are irrevocably separated from the founder.

According to foundation law, no physical or legal person outside the foundation can hold property rights to the assets within the foundation. The foundation is established to support one or more specified purposes for a number of years and is governed by its own board, independently of the founder.

Differentiating Enterprise and Non-Enterprise Foundations

Danish law recognises two primary types of foundations: enterprise foundations and non-enterprise foundations. The distinction between these types is crucial, as they operate under different regulatory frameworks. This dual system emerged due to the historical presence of both types of foundations in Denmark, with enterprise foundations often owning large companies. The Enterprise Foundation Act and the Foundation Act provide the legal basis for each type, reflecting their different purposes and operational contexts.

The key differences between enterprise and non-enterprise foundations include:

• Regulatory Framework:
  Enterprise foundations are governed by the Enterprise Foundation Act, while non-enterprise foundations are regulated by the Foundation Act. This difference in legislation underscores the distinct nature and purpose of each type.
• Capital Requirements:
  Enterprise foundations require a minimum asset value of DKK (Danish Krone) 300,000. In contrast, non-enterprise foundations must have a minimum of DKK 1,000,000 in assets. These varying capital thresholds reflect the scale and nature of activities typically undertaken by each foundation type.
• Typical Uses:
  Enterprise foundations are primarily used to own and control commercial companies, ensuring long-term stability and business continuity. On the other hand, non-enterprise foundations can pursue a broader range of purposes, including family, charitable, or public benefit objectives.

Understanding these distinctions is essential for international planners to select the most appropriate Danish foundation structure for their specific wealth planning needs.

The Enterprise Foundation Model in Detail

Core Characteristics of the Enterprise Foundation Model

The Danish enterprise foundation model is designed to ensure a level playing field with other business entities, particularly limited corporations. Enterprise foundations in Denmark are subject to disclosure rules similar to those for Danish limited liability businesses. This includes the public availability of accounts and information on board and management members.

Key characteristics of the enterprise foundation model include:

• Long-term Ownership and Stability: Enterprise foundations offer long-term ownership and stability to companies. This structure is particularly beneficial for ensuring business continuity across generations.
• Dual Purpose: Danish law permits enterprise foundations to have both a business purpose and a public benefit purpose. The business purpose typically involves owning, controlling, and providing a stable base for operating companies. The public benefit purpose often embodies philanthropy.
• Governance and Control: Given that enterprise foundations lack traditional owners to control the board of directors, Danish regulations incorporate additional disclosure requirements. These measures ensure transparency and accountability in the absence of direct owner oversight.
• Share Structure Flexibility: Enterprise foundations can dilute their ownership stake over time by issuing different share classes. They typically retain a majority of votes through A-shares, while outside investors hold B-shares with minority voting rights but equal dividend rights. This share structure is crucial for attracting outside investment while maintaining foundation control.
• Compliance and Governance Recommendations: All Danish enterprise foundations must adhere to or explain their non-compliance with 17 recommendations on good foundation governance annually. These compliance reports are published in annual accounts or on the foundation’s website, promoting transparency and best practices.

Advantages for High-Net-Worth Families and Business Owners

Danish enterprise foundations offer several advantages, especially for high-net-worth families and business owners seeking robust structures for wealth and business management. These advantages include:

• Ensuring Long-Term Business Ownership and Stability: Enterprise foundations are designed to provide long-term ownership and stability for businesses. This is particularly attractive for families wishing to maintain control and ensure the longevity of their business across generations.
• Combining Business and Philanthropy: The enterprise foundation model allows for the integration of business activities with philanthropic endeavours. This dual-purpose structure enables families to pursue commercial success while also contributing to public benefit causes through the same entity.
• Potential for Significant Impact: By linking business profits with a public benefit purpose, enterprise foundations have the potential to make a substantial positive impact. Profits generated by the operating business can be channelled to fulfil the foundation’s philanthropic goals, amplifying the family’s legacy and societal contribution.

Setting Up and Managing a Danish Foundation

Requirements for Establishing a Foundation

Establishing a Danish foundation, whether an enterprise foundation or a non-enterprise foundation, involves specific requirements. A key aspect is the initial capital, which differs based on the foundation type:

• Non-enterprise foundations: Require a minimum asset value of DKK 1,000,000.
• Enterprise foundations: Require a minimum asset value of DKK 300,000.

The registration process also entails formal notification to relevant Danish authorities:

• Non-enterprise foundations: Must notify the Department of Civil Affairs and the tax authorities within three months of establishment, providing the foundation’s statutes.
• Enterprise foundations: Must register with the Danish Business Authority within two weeks of establishment, supplying the necessary registration information.

The foundation charter, or statutes, is a critical document that must include several key details:

• Name and Domicile: The official name of the foundation and its registered location in Denmark.
• Purpose of the Foundation: A clear and specific description of the foundation’s objectives, whether charitable, family, commercial, or a combination.
• Value of Assets: The initial asset contribution to the foundation, meeting the minimum capital requirements.
• Board Structure: Details on the number of board members, which must be at least three, and any special rights of the founder or third parties.
• Accountability and Distribution: Requirements for financial reporting and how the foundation’s returns or operational fulfilment of its purpose will be managed and distributed.

For enterprise foundations, if the initial assets are non-cash contributions, an external auditor’s valuation is required. The Danish Business Authority conducts a thorough review of the submitted documents to ensure compliance with legal requirements.

Ongoing Supervision and Compliance

Danish foundations are subject to state supervision to ensure they operate legally and in accordance with their stated purposes. The supervisory authority varies depending on the type of foundation:

• Enterprise foundations: Overseen by the Danish Business Authority.
• Non-enterprise foundations: Supervised by the Department of Civil Affairs.

These foundation authorities are responsible for ensuring that the board of directors manages the foundation in accordance with its bylaws and Danish law. Their supervision includes the power to intervene if necessary, such as removing board members or addressing excessive remuneration. It is important to note that Danish law does not permit founders or other private parties to exercise supervisory authority; this role is exclusively reserved for the designated state bodies.

Enterprise foundations face additional compliance requirements due to their business nature. They must adhere to disclosure rules similar to those for Danish limited liability businesses, which include:

• Financial Transparency: Making annual accounts and information about board and management members publicly available.
• Governance Reporting: Annually reporting on their compliance with recommendations for good foundation governance.

These measures promote transparency and best practices within the sector, ensuring that enterprise foundations maintain high standards of accountability and governance.

Taxation of Danish Foundations and Foreign Trusts with Danish Settlors

Tax Framework for Danish Foundations

Danish foundations are generally taxed in a manner similar to corporations, meaning they are subject to the same corporate tax rate as companies in Denmark. However, due to their unique nature, there are specific modifications to these general tax rules:

• Charitable Distributions: Danish foundations are permitted to deduct charitable distributions from their taxable income. This provision enhances the tax efficiency of foundations by allowing them to reduce their overall tax liability through charitable activities.
• Cost Deductions and Fund Allocation: Foundations have increased opportunities to deduct operational costs. Additionally, they can allocate funds for future charitable distributions with tax deductibility. These postponed distributions must be used for actual charitable purposes within a maximum of five years, ensuring that the funds are directed towards meaningful and timely charitable initiatives.

Danish Anti-Avoidance Rules and Foreign Trusts

Denmark has established specific tax rules to prevent tax avoidance by Danish settlors of foreign trusts. Key aspects of these rules include:

• Section 16 K of the Danish Tax Assessment Act: This anti-avoidance provision targets Danish individuals who establish or contribute to foreign trusts. Under certain conditions, Danish settlors must include the income of these foreign trusts in their own taxable income, ensuring that income generated through foreign trusts is appropriately taxed.
• Applicable Scenarios:
  • Establishment or Asset Injection by Danish Residents: If a Danish resident establishes or injects assets into a foreign trust, the income generated by the trust must be reported and taxed accordingly.
  • Change in Residency Status: The rule also applies if the settlor was not a Danish resident at the time of establishing the trust but later becomes a Danish tax resident within ten years of the trust’s creation, provided they were previously Danish tax residents.
• Tax Treatment of Distributions: Distributions from foreign trusts are generally treated as ordinary taxable income in Denmark. This ensures that any income distributed from foreign trusts to Danish settlors is subject to the standard tax regulations, preventing the use of foreign trusts as a means of tax avoidance.

These taxation rules are crucial for international clients to understand, as they highlight the potential Danish tax liabilities associated with foreign trusts and underscore the importance of careful tax planning when establishing or contributing to such trusts.

Conclusion

For international estate planners, it is important to recognise that Danish foundations, particularly enterprise foundations, offer a compelling and robust alternative to trusts within Denmark’s legal framework. Given that Danish law does not recognise trust law in a comparative perspective, understanding Danish foundation law is essential when considering wealth planning solutions in Denmark. Foundations may serve purposes similar to trusts in other jurisdictions, and therefore, foundations as well as enterprise foundations in Denmark are good variants of the Danish planning structure.

To navigate the intricacies of establishing and managing Danish foundations, and to ensure alignment with both Danish law and international estate planning objectives, seeking professional legal advice is paramount. Contact our team at PBL Legal today to explore how Danish enterprise foundations can be tailored to meet your specific needs.

Frequently Asked Questions