The benefits of being in business with property have now become even greater following the decision of the National Tax Court, which overturns the Tax Agency’s long-standing practice.
Those covered by the rule can value and transfer real estate between close relatives at a price +/- 15% of the public property valuation. The rule allows parents to pass on property to their children at 15% below the property valuation without having to pay gift tax on the amount. The 15% rule is found in the 1982 Valuation Circular.
In September 2021, a new Valuation Circular was issued which changes the 15% rule to a 20% rule. The new circular entered into force on 15 October 2021 and is effective for transfers where the transferor has, at the time of the transfer of the property, received an assessment of the property under the “new” Property Valuation Act.
According to the Tax Agency’s previous practice, commercial property has been exempt from the application of the 1982 Valuation Circular. The concept of commercial property means that a taxpayer is engaged in the business of buying and selling real estate as his or her full or partial livelihood.
In a new decision, the National Tax Tribunal has extended this rule to include transfers of commercial property, which, according to the Tax Agency’s previous practice, had been contested.
The National Tax Tribunal states the following in its reasoning for the decision:
“..
the Valuation Circular, with certain amendments, builds on the administrative guidelines on the valuation of immovable property from previous decades, and neither Notices from the Ministry of Taxation No 36 of April 1976 nor previous notices have provided that certain types of property were not covered by the guidelines.
The conversion rule referred to in paragraphs 5 and 6 is considered to be of a purely technical nature in order to establish a basis of comparison between the actual transfer value and the public property value. Similarly, the National Tax Tribunal finds no evidence to suggest that point 10 of the Valuation Circular should in itself limit the scope of application of the Valuation Circular.”
Thus, in its practice, the Danish Tax Agency has interpreted the scope of application of the Valuation Circular too restrictively, and there has therefore been no legal basis for exempting commercial property.
The decision may be of significant importance to persons who are engaged in business with real estate and are facing a potential generational change, as commercial real estate may, according to the new decision, be transferred at a value according to the 15% rule, and it is also possible to transfer such properties with tax succession. The decision gives owners of commercial property reason to consider whether a generational change should be accelerated if the property is to be kept within the family.
In our experience, a generational transfer should be initiated as early as possible, as it will often be possible to save considerable amounts in gift tax and the tax on large property gains can be deferred.
Bachmann/Partners Law Firm advises on generational succession and provides solutions where succession is part of the generational succession.
For further information, please contact Christian Bachmann on tel. +45 30 30 45 21 / chb@bachmann-partners.dk, Ann Rask Vang on tel. +45 20 94 78 21 / ava@bachmann-partners.dk or Peter Hansen on tel. +45 40 32 35 35 35 / pha@bachmann-partners.dk.