DENMARK: Venture fund prevails in landmark ruling from the Supreme Court with respect to deduction of management fees
On 29 November 2011, the Supreme Court rendered it’s decision in Symbion Capital I A/S vs. the Ministry of Taxation. Reversing the High Court’s judgement, the Supreme Court ruled in favour of Symbion Capital and allowed the full deduction of management fees.
The Ministry of Taxation supported by the High Court claimed that the management fees incurred by a venture fund were not deductible since the income generated presumably and predominantly would be tax exempt capital gains on portfolio shares (at the relevant time capital gains on portfolio shares held for more than three years were exempt).
In 2007, the National Tax Tribunal (an administrative appeal body) ruled in favour of the venture fund. The ruling was appealed by the Ministry of Taxation which came as a surprise, as the ruling was the third made by the Tax Tribunal on the issue.
On 15 January 2010, the Eastern High Court ruled in favour of the Ministry of Taxation. The High Court found that costs incurred for the benefit of obtaining tax exempt income were not deductible, and based on some general remarks in the prospectus and the annual reports regarding the holding period of the portfolio shares, the court additionally found that the Ministry of Taxation had proven that the management fees were incurred with the intent to achieve tax exempt gains. The court consequently did not take into consideration that the venture fund had provided evidence that the fund during the first 7 years had realised tax exempt income of approx. DKK 400,000 and taxable income of approx. DKK 19 million (interest income, dividends and capital gains on shares held for less than three years).
The Supreme Court (Højesteret) confirmed both parties’ view that a deduction of management fees requires that the costs were incurred in order to acquire, secure and maintain taxable income. The court then found that the venture fund intended to realize predominantly tax exempt income items but noted that the actual income realized was predominantly taxable. The court then concluded that a full deduction of the management fees paid constituted deductible costs.
The ruling is a landmark ruling as we expect that the Ministry of Taxation will now give up the attack on venture funds’ deduction for management fees. We believe also that the ruling will have wider repercussions for the business community, including the many industrial companies that are organized with management in a separate holding company that holds the operating subsidiaries.
Hannes Snellman tax and litigation partner Nikolaj Bjørnholm acted for Symbion Capital.
For a Danish summary of the ruling and link to the ruling in its entirety please click here.