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The Danish Business Authority (DBA) has commenced consultation on a bill that aims to remove the existing regulations on shareholder loans from the Danish Companies Act (the Act).
Currently, Section 210 of the Act permits Danish companies to grant loans to their shareholders and management, provided certain specific conditions are met. This has commonly been regarded as a general prohibition of shareholder loans outside the ambit of the exceptions. The proposed bill seeks to overturn this prohibition.
Current Exception Rules
In its current form, the Act, permits a company to grant loans to its shareholders and management members, provided they meet the following conditions:
Financial Capacity: The financial assistance must be comfortably accommodated within the company's free reserves.
Market Terms: The financial assistance must be provided on terms that correspond with normal market terms.
Decision-Making: The decision to provide the financial assistance must be made either by the general meeting or by the company's central governing body, with due authorisation from the general meeting.
Timing: The decision to provide financial assistance may only be taken after the company's first annual report has been presentation.
Proposed Changes as of January 2025
If the bill is passed and enacted, it may fundamentally change the legal framework for financial assistance and shareholder loans, permitting companies to lawfully grant loans and other forms of financial assistance to shareholders and management without having to meet the abovementioned conditions. Moreover, the decision to provide such assistance will no longer necessarily require the approval of the company's general meeting. The bill is expected to be presented by November 2024, with a proposed implementation date of 1 January 2025.
Capital Protection Rules
It is important to bear in mind, that the overarching principles of the Act regarding capital protection remain in full force and effect. This implies that company transactions must be prudent, serve the company's best interests, and must not unfairly benefit shareholders or management at the expense of others.
Management Responsibility
The management will continue to bear the responsibility of ensuring the company's financial stability. Consequently, the assessment of whether providing financial assistance can be considered reasonable and in the best interest of the company will remain with the management. It is expected that this assessment, particularly in light of the abovementioned criteria, will gain more prominence in corporate legal practice.
Due Documentation
To ensure that any agreements between a sole shareholder and the limited liability company are valid and upkept if challenged, it remains vitally important to ensure that they are appropriately documented. In order to discharge their legal duties, the parties to financial assistance transaction must focus on due documentation.
Taxation
It should be noted that the current rules on the taxation of shareholder loans are not proposed to be altered. This means that loans to shareholders who are natural persons, may potentially exposing the shareholder to double taxation. As a result, the parties to the transaction must ensure that proper tax advice is sought beforehand.
Potential Benefits for Financial Investors
Shareholder loans usually benefit financial investors in a number of ways, including:
Flexibility: Shareholder loans often offer more flexibility than other forms of financing, such as equity investments. They can be structured with flexible repayment terms and can be repaid or extended as needed.
Increased returns: Shareholder loans can offer investors the potential for higher returns than traditional debt investments, especially if the loan includes a profit participation or equity kicker feature.
Improved liquidity: Shareholder loans can provide investors with access to additional liquidity, which can be applies for other investments, derisking, or deleveraging the financial structure.
Tax advantages: Depending on the jurisdictions involved and the specific circumstances, interest payments on shareholder loans may be tax-deductible for the company, while the interest income is taxable for the investor. This can create opportunities for tax optimisation.
Control and influence: In some cases, shareholder loans may come with certain rights or privileges, such as board representation or voting rights, giving investors greater control and influence over the company's operations.
Overall, the loosening of the restriction on shareholder loans in Denmark can be a valuable tool for financial investors seeking flexible financing options, potential tax benefits, and the possibility of higher returns. However, it is important to carefully consider the terms and conditions of any shareholder loan and seek professional advice to ensure it aligns with investment goals and risk tolerance. It should be noted that this remains a bill in consultation, which is why the bill has not been adopted and may be amended until it is finally adopted and enacted.
Further Information
For more information on banking and financial regulation law for banking or capital markets transactions in Denmark, please contact Michael Carsted Rosenberg or Dr. Andreas Tamasauskas at Carsted Rosenberg.
This briefing is intended to provide general information on corporate finance in Denmark It is not intended to provide definitive legal or tax advice. No legal, tax or business decisions should be based solely on its content. The briefing does not necessarily deal with every important topic and is not designed to provide legal or other advice. It shall not be used as a substitute for legal advice and none may be inferred. It is only intended for general information on matters of interest. While we endeavour to represent the information as accurately and correctly as possible, we cannot accept any responsibility for any errors or omissions.
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