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Article:

Pension reform proposed financed by mark-to-market tax on real property

30 October 2020

Arne Riis, Partner, Tax |

The Danish Government has reached a political agreement on a new pension reform, which is to be partly financed through an annual mark-to-market capital gains tax on certain real property assets.

The Government has not yet presented a preliminary bill for the pension reform (and the financing hereof), until then it is not clear how the capital gains tax on certain real property will play out in detail. 

The following is thus based on the current official statements from the Danish Ministry of Taxation.

 

The new regulations: DKK 100 million threshold

Based on the political agreement, the new mark-to-market tax on real property will only include rental properties owned by companies, funds or associations. Properties used for the company’s own business operations, however, are exempted. 

This exemption applies, for example, to properties used by the company itself or a group company for administration, storage, production or agriculture. 

Moreover, the published agreement states that the new mark-to-market real property tax will not apply to personally held real property.

Further, the new tax regime will only include the more dominant property owners in the Danish market, as the new rules would only apply to portfolios in excess of a value of DKK 100 million as determined on a group level.

It is estimated that up to 75 per cent of real estate companies will therefore be exempted due to this threshold.

The taxation of real properties will come into force from the income year of 2023 and apply to value increases from 2023. 

Properties acquired before this date, will until the end of 2022 only be taxed in the income year in which the property is sold.

 

Accounting valuation form the basis of the taxation

The taxation will – according to the current official statements – be based on accounting values. 

This should make the taxable income statement less complicated for companies that state their rental properties at fair value.

If a rental property owned by a company decreases in value from one year to another, the impairment should be deductible in other taxable income, and it will therefore not be considered a ring-fenced loss, unlike the current rules where such losses are indeed ring-fenced.

It is still unknown just how many properties will be subject to the new tax regime. However, the Government estimates that the regime will apply to properties of a total value of approx. DKK 350 billion. 

An annual taxable value increase assumption of 2.2% would therefore trigger DKK 7.7 billion of taxable value increase which (taking into account deductible losses) should lead to a tax revenue of DKK 1.15 billion, i.e. an effective tax rate of 14.7%.

The above article is taken from tax:watch, our electronic English newsletter on Danish Tax and VAT matters. tax:watch is issued on the last Friday of each month and is free of charge. Please sign up here.