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Supreme Court of Denmark

Capital gains taxation 

Case no. 78/2016

Judgment delivered on 11 November 2019

The Danish Ministry of Taxation

Limited partner’s share of capital gain on a foreign currency loan was taxable

The case concerned the issue of whether A as a co-investor in a limited partnership had made a taxable capital gain on a foreign currency non-recourse loan.

In 1997, A subscribed for 10% of the shares of a Danish limited partnership established for the purpose of acquiring and letting a property in Great Britain. The property was let to a hotel business. The purchase price for the property was approx. GBP 5.9 million, which was financed by taking out a first-priority mortgage loan of GBP 4.5 million from Canada Life’s British branch.

The tenant went bankrupt, and the limited partnership took over the hotel in an attempt to keep it afloat, but was forced to give up. In the beginning of 2010, A and the other limited partners sold their shares at a price of DKK 0, and declared that they had no debts to the limited partnership or any third parties. In 2010, Canada Life arranged for the sale of the hotel property at a price corresponding to approx. DKK 22.3 million. Canada Life did not demand payment of the outstanding debt (less the proceeds from the sale of the property) from neither the limited partnership nor the limited partners, as the loan agreement contained a so-called non-recourse clause stipulating that the limited partnership was only liable up to the security furnished.

The Supreme Court held that the difference between the outstanding debt at the time when Canada Life took over the property and the sales proceeds constituted a taxable capital gain, cf. Section 23 of the Danish Capital Gains Tax Act. The parties agreed that A’s share of this capital gain amounted to DKK 1,254,255. The Supreme Court also ruled that, according to the provisions of the Capital Gains Tax Act, A’s taxable income for 2010 should be increased by this amount.

The Supreme Court stated that the EU rules on the free movement of capital did not preclude the taxation of A’s share of the capital gain.

The High Court had reached the same conclusion.

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