Trusts

Trusts are a widely used estate planning and asset protection tool, particularly in countries and jurisdictions whose legal systems are based on the (original) British Common Law tradition, including the United Kingdom, the United States, Australia and a number of other jurisdictions. Trusts are also frequently used in international structures as a framework for holding and managing personal or family wealth.

The concept of a trust is, however, generally unknown or only rarely used in jurisdictions based on Civil Law, including most of continent Europe and Denmark.

Trusts are not recognised as a legal concept under Danish legislation. There is no specific Danish trust statute, and the primary guidance available is found in the Danish Tax Agency’s Legal Guidance, which summarises principles derived from a substantial body of administrative decisions and case law.

As a result, the Danish tax treatment of a trust, its assets and its income is determined through an individual legal and tax analysis. The assessment focuses on identifying the Danish legal concept to which the trust most closely corresponds. In the absence of specific legislation, this qualification is based on precedent established by the Danish courts, the Danish National Tax Tribunal and, most importantly, decisions issued by the Danish Tax Council.

In addition to Danish domestic law, Denmark has entered into a number of double taxation treaties, including treaties with the United States, the United Kingdom and many other countries. These treaties allocate taxing rights between the relevant jurisdictions in respect of individuals, legal entities, assets and income with cross-border connections.

However, double taxation treaties generally do not contain specific provisions governing trusts.

Consequently, the classification of a trust for Danish tax purposes is determined solely under Danish law and therefore requires an individual assessment based on Danish tax practice and case law.

Transparent or Independent Trust

A fundamental issue in the Danish tax analysis of a trust is whether the trust is regarded as transparent or as an independent legal and tax entity.

Where a trust is considered transparent, the trust assets will generally be regarded as part of the settlor’s personal wealth and later be regarded as belonging directly to the beneficiaries.

An independent trust, by contrast, is treated as a separate entity distinct from both the settlor and the beneficiaries.

This distinction can have significant tax consequences for beneficiaries receiving funds from a trust. Depending on the classification, a distribution may be treated as a gift, an inheritance distribution, a tax free transfer of the beneficiary’s own assets – or as taxable income with up to 57% Danish taxation.

The classification is also important for the trust itself. In certain circumstances, a trust may become subject to Danish taxation if the persons exercising effective control over the trust are resident in Denmark.

How We Can Assist

At PrivatRevision, we have extensive experience advising on trust-related matters in an international context.

We regularly assist clients in connection with:

• Immigration to Denmark involving existing trust structures;
• Emigration from Denmark where trust interests form part of the individual’s wealth;
• Danish tax treatment of foreign trusts;
• Trustee and beneficiary taxation;
• Classification of trusts as transparent or independent entities;
• Trust distributions, gifts and inheritance issues;
• Applications for binding rulings from the Danish Tax Agency; and
• Cross-border trust structures involving Denmark, the United States, the United Kingdom, Australia and other jurisdictions.

Whether you are a settlor, trustee or beneficiary, we can help clarify the Danish tax consequences and ensure that your trust structure is managed in a tax-efficient and compliant manner.