Yesterday, the Danish Government released a new scheme regarding early retirement. The Government expects to fund the new retirement scheme partly through the introduction of a mark-to-market taxation of real estate owned by companies. If adopted by the Parliament, the new rules will be effective from 2023.
Mark-to-market taxation of companies’ real estate generally implies that the companies will be subject to taxation of any unrealised capital gains while losses will be deductible.
At this stage, the Government has released only a general proposal, and as such it is still to be seen what the final bill will look like – and whether it is adopted by the Parliament at all. However, if the proposal ultimately becomes law, it will have significant consequences for many companies and investors in such companies, and consequently– based on the public material available at this stage and our best guess – we have outlined the potential content of the rules below:
- We do not expect mark-to-market taxation to be introduced for all Danish companies and/or real estate. The primary object of the rules seems to be to secure the taxation of capital gains on real estate owned by a Danish company. Today, the shares of such a company may be sold without triggering capital gains taxation, and generally this procedure has been applied by many real estate investors, including non-Danish private equity or real estate funds. However, due to EU legislation, the proposed rules cannot target non-Danish investors only, and we therefore assume that the rules will target real estate companies in general.
- In our view, mark-to-market taxation would primarily be relevant for companies that are buying real estate as an investment. Thus, the rules would probably not apply to regular industrial companies that owns a property, etc.
- The valuation of the real estate will most certainly cause difficulties from a practical point of view. In our view, most likely the companies will be obligated to handle the valuation themselves and pay the costs related to such a valuation. Consequently, the tenants will probably see an increase in rental costs.
- When a company becomes subject to mark-to-market taxation, often the company will pay a deferred tax on the relevant real estate. It is not clear how such a deferred tax should be treated, but it seems a fair guess that the deferred tax as of 31 December 2022 will be booked on a ”deferred tax balance” and then this balance will be released upon a future sale of the real estate (and potentially the balance may be reduced in case the mark-to-market calculation shows a loss).
If the Government’s proposal is ultimately adopted by the Parliament, it may have a substantial impact on the Danish market for acquisition of real estate companies. A buyer must necessarily take the mark-to-market taxation into consideration when performing the valuation and calculating expected future cash flows.
We are currently discussing the consequences of the Government’s suggestion with many of our clients, and we are of course happy to discuss any questions you might have in this respect.