In a new decision, the National Tax Tribunal found that a change in the mode of operation of a company breeding and training trotting horses meant that there was a prospect of a positive result within a short number of years. In the decision, emphasis was placed on the company’s change of strategy, expansion and realistic and realised budgets.
In the start-up phase, Danish companies operating stud farms and racehorse teams may be heavily dependent on whether the Danish Tax Agency qualifies the stud farm as a commercial enterprise or as a hobby enterprise. The start-up phase can be long and involve significant costs. A business tax deduction can therefore be crucial for ever establishing a healthy business.
From a tax point of view, the qualification does not have a major impact on the income side, as all positive income is taxable for both professional and hobby businesses. However, the qualification has a significant impact on the expenditure side, as there is no deduction for losses in hobby businesses.
A hobby business is characterised by the fact that the business is typically an expression of personal interest and that the owner himself participates in the business. The private purpose is thus emphasised more than the financial gain. In our experience, Danish stud farms have long been subject to a biased view from the Danish Tax Agency, where they are generally regarded as a non-commercial activity.
When assessing whether a stud farm is considered to be commercially run, special emphasis is placed on three elements. Firstly, it is important that the business is run in a technically and professionally sound manner. In addition, it is a condition that the number of horses allows for rational operation. Finally, the enterprise must either be profitable or have the possibility of realising a profit within a number of years.
Similarly, a team of racehorses can be considered commercial if the enterprise can be considered professionally run on the basis of a technical/professional assessment and is profitable at the end of the establishment phase or can be expected to become profitable in the longer term.
When assessing whether the business can be considered professional, emphasis is placed on whether the horses are trained by a professional trainer with an A-licence and whether a coachman/jockey with a professional licence is used. In addition, weight is given to the number of starts and the amount of prizes won. The number of horses is not in itself decisive for an enterprise to be considered as commercial, but the number of horses may be indicative of commercial activity if it allows for a more rational operation. Emphasis may also be placed on whether a horse owner keeps his horses in a larger stable where there are also other racehorses.
A new decision from the National Tax Tribunal shows that a change in the type of operation can lead to a stud farm, which was not initially considered a commercial activity, later qualifying as a commercial activity.
The complaint case concerned a company, S, which was established in 2008 for the purpose of, inter alia, running a stud farm and horse breeding. In 2009, S built a horse stable with 16 stalls. In connection with the construction, S acquired three foal mares for breeding purposes. The intention was that the additional horse stalls would be rented out for stabling “foreign” horses. However, due to complaints from neighbours, this did not succeed and until 2016, S was only granted permission for commercial horse keeping with a maximum of three animal units. In 2016, S obtained a licence to have 24 animal units and another stable with 16 horses was built and in 2017 S bought the neighbouring property.
The Tax Agency rejected that S was engaged in a commercial activity and emphasised the negative results that the company had had since its start-up.
The majority of the National Tax Tribunal, on the other hand, concluded that there had been a significant change in the form of operation in the period from 2014-2017 compared to the start-up years. They emphasised the development in that S in the start-up years was limited to very few horses without the possibility – within the existing framework – to increase the income potential. With the addition of a trainer, purchase of the neighbouring property, construction of additional facilities, etc. this income potential increased significantly. The majority thus assessed that the operating method established by the change of strategy had the prospect of producing a result of DKK 0 or more after depreciation but before interest within a short number of years.
The assessment was based on realistic budgets presented, which showed that S would achieve a profit around 2019/2020, the company’s positive development and actual realised results. S was thus ruled in favour of the fact that a commercial activity was conducted in the period 2014-2017, and was able to deduct a total loss of DKK 3,631,137 for the period.
The decision thus shows that even if a company has had a loss for a number of years, it is possible by a strategic intervention to obtain the status of a commercial enterprise and thus obtain the tax benefits that follow from this.
If the stud farm is run as a company, the Danish Tax Agency’s qualification may have the consequence that the loss is considered as a disguised dividend to the main shareholder, as the company has in that case incurred expenses on behalf of the main shareholder. Thus, the aforementioned decision had the consequence that the loss, contrary to the Danish Tax Agency’s opinion, should not be considered a disguised distribution to the main shareholder, as the company is not considered to be run on the basis of a personal interest.
If you are thinking of starting a stud farm, it may be an advantage to make use of legal advice so that you do not end up in a situation that may have serious consequences for both the company’s future operations and the owner’s private finances.
Bachmann/Partners advises in tax cases concerning the issue of whether a company can be considered a commercial enterprise for tax purposes and has extensive experience and success in conducting appeals.
For further information, please contact Christian Bachmann on tel. +45 30 30 45 21 / firstname.lastname@example.org, Ann Rask Vang on tel. +45 20 94 78 21 / email@example.com or Peter Hansen on tel. +45 40 32 35 35 35 / firstname.lastname@example.org.