New capital requirements and registered office relocation options for Danish companies
September 2013 | EXPERT BRIEFING | CORPORATE LAW
In May this year the Danish Parliament revised the Danish Companies Act which, besides technical amendments and clarifications, included a reduction in the capital requirements for private limited companies, along with a new option to postpone the satisfaction of the capital requirement, and a new possibility of relocating the registered office of Danish companies. These amendments will have material significance, not only for Danish shareholders, but also Danish companies with foreign ownership.
Reduction of the capital requirement for private limited companies
General reduction of capital requirement for private limited companies. The Companies Act of 2009 reduced the capital requirement for private limited companies from DKK 125,000 to DKK 80,000. However, this minimum capital requirement is still higher than in other countries that are comparable to Denmark.
The original reason for maintaining a minimum capital was an attempt to make the corporate form more reliable and to protect employees and creditors. However, it is uncertain whether a capital requirement of DKK 80,000 may be considered as sufficient protection. Management’s responsibility for ensuring adequate financial resources seems to be a better instrument. The amending Act therefore reduces the capital requirements for private limited companies from DKK 80,000 to DKK 50,000. The reduction of the capital requirement is an effort to align with other European countries and minimise the risk of Denmark becoming a country where many companies will be branches of companies established in other EU/EEA member countries with less regulation and lower capital requirements.
Postponed satisfaction of capital requirement through an ‘entrepreneurial company’. While the capital requirements where reduced, but not abolished or lowered to DKK 1, as suggested by some of the leading trade organisations in Denmark, the amending Act makes it possible to form a private limited company with a minimum capital of DKK 1 – a so-called ‘entrepreneurial company’ (Danish abbreviation ‘IVS’). The entrepreneurial company will be turned into a ‘real’ private limited company only when it has capital of at least DKK 50,000. This capital base will be developed by compulsory transfer of 25 percent of the annual profit to a non-distributable reserve. Until the total amount of the reserve together with the share capital is at least DKK 50,000, the entrepreneurial company will not be allowed to pay dividends. When the entrepreneurial company has built capital of DKK 50,000, it may be re-registered as an ordinary private limited company. As a consequence, the entrepreneurial company is not a new corporate form, but a new type of private limited company.
An entrepreneurial company is subject to the same liability rules as other limited liability companies. As a result of the limited share capital in an entrepreneurial company, the management should ensure that all decisions are made on a proper basis to protect the company’s creditors against losses.
Cross-border relocation of registered office
The European Court of Justice has, in recent years, made a number of decisions implying that it is contrary to EU law to deny a company the right to relocate its registered office outside of its country of original registration, unless justified by special circumstances. The amending Act therefore introduces rules that allow cross-border relocation of a company’s registered office. Generally a cross-border relocation of registered office requires that the national legislation of the EU/EEA member state, of which the company wish to relocate to or from, also permits cross-border relocations.
Relocation to Denmark. A cross-border relocation of registered office to Denmark from another EU/EEA member state requires that the competent authority of the country, from which the company wishes to relocate, has issued a certificate stating that all actions and formalities required for the relocation of the registered office have been concluded and the foreign registration authority will register the relocation.
The Danish Business Authority cannot register a relocation of registered office to Denmark until the relocated company complies with the Danish Companies Act’s requirements for the particular corporate form. Consequently, it is not possible to establish a company within an EU/EEA member state with less regulation and lower capital requirements and then relocate the registered office to Denmark without complying with the Danish Companies Act.
Relocation out of Denmark. The requirements for a cross-border relocation of registered office out of Denmark are inspired by the existing requirements for cross-border mergers and de-mergers. As a result, the board of directors or the executive board – depending on the management form selected – must produce a relocation plan and a statement with similar content as seen with cross-border mergers plans and statements.
The decision to relocate the registered office of the company must be approved by the shareholders with a two-thirds majority. If relocation is approved, shareholders opposing the relocation can demand to get their shares redeemed. Further, protection of the Danish employees’ right to participation in decision making, under the laws of the new location, is a condition for relocation of registered office out of Denmark. Cross-border relocation of registered office can be made without prior consent from the company’s creditors, however a statement on the adequate protection of creditors after relocation must be produced by an auditor unless unanimously waived by the shareholders. Creditors can lodge a claim with the company, if the auditor statement is waived or declares that adequate protection is not present.
Tax effects. Relocation of a Danish company’s registered office may trigger Danish exit taxation of the company as if it had been dissolved and disposed of its assets and liabilities, unless such assets and liabilities remain attached to a Danish permanent establishment and the company’s seat of management remains in Denmark for tax purposes.
No changes are currently being proposed to Danish tax law in this respect, however, the European Court of Justice has previously held that exit taxes triggered by a transfer of seat of management within the EU is in breach of EU law (see National Grid Indus, case C‑371/10), and recently found the Danish exit tax rules applying when Danish companies transfer assets to, for example, a permanent establishment in the EU to be in breach of EU law (Commission v. Denmark, case C-261/11).
The Minister of Growth and Business will fix the date of commencement of the amending Act and may decide that the individual parts of the Act should become effective at different times.
Marianne Philip, Christina Bruun Geertsen and Jens Steen Jensen are partners at Kromann Reumert. Ms Philip can be contacted on +45 3877 4444 or by email: email@example.com. Ms Geertsen can be contacted on +45 3877 4326 or by email: firstname.lastname@example.org. Mr Jensen can be contacted on +45 3877 4346 or by email: email@example.com.
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Marianne Philip, Christina Bruun Geertsen and Jens Steen Jensen