Tax barriers must come down – Danish fund association

Tax regulation barriers must come down to attract more foreign investors, the head of Denmark’s fund association IFR says.

The total AUM of Danish funds (about DKK1.1trn) is not among the biggest in Europe, but when measured against GDP it puts the country in fourth spot, according to Jens Møller (pictured), chief executive of the Federation of Danish Investment Associations (InvesteringsForeningsRådet).

This domestic success is now viewed as a strong platform on which to build export success in future, as developments in Ucits and other regulations continue to open up the single European market to financial products.

However, a number of barriers need to be dismantled first, particularly in the form of Danish tax rules, which are necessary to put Danish funds on the radar of more foreign investors, Møller says.

The Federation has identified three particular areas of fiscal reform, which it is now championing.

Fiscal reforms

First, there is an issue over taxation of income, especially the way in which dividends are treated for foreign investors. Foreign direct equity investors pay Danish tax on dividends, but other types of income would not be taxed. However, that same investor holding exactly the same underlying securities – equity, fixed income and so on – in a fund would pay tax on all income.

Møller says: “If dividends from such a fund structure come from interest income, Denmark will have tax from that. Realised gains from bonds and equities will have to be paid out to investors, and taxed by Denmark. This is not the case for similar income, if investors invest direct in the fund’s underlying equities and bonds.

“Then we say to legislators, ‘Well, how many foreign investors can we export to if you maintain that rule?’ We have to change it so that Denmark gets only the same tax revenue from investors in funds, as when investors invest direct in securities.”

Second, Møller notes that in certain other jurisdictions investors buy contractual funds. But currently it is not possible to develop contractual funds in Denmark to export to markets where such structures are common, such as in Sweden, because the tax applied in Denmark would be higher.

“We will never sell a single fund share in that situation. The solution is that the fund shares issued by a contractual fund should be recognised as an instrument, so that taxation of ­investors is the same as when they invest in corporate funds and securities,” he says.

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