Taxation of repayment of illegal shareholder loan

Case no. BS-27081/2023-HJR
Judgment delivered on 18 January 2024

A
vs.
The Danish Ministry of Taxation

A was the director and sole shareholder of A ApS. In 2012-2015, A made a number of withdrawals from a suspense account in the form of illegal shareholder loans. The loan was continuously repaid by using net salary and net dividends to reduce the suspense account.

It its judgments of 30 August 2022 (UfR2022.4422) and 8 February 2023 (UfR2023.1955), the Supreme Court held that it is an anticipated and accepted consequence of Section 16E(1) of the Danish Tax Assessment Act that the fact that repayment of withdrawn amounts that have led to taxation does not mean that the person concerned can subsequently withdraw similar amounts without being taxed again. In such a situation, the provision implies that both loan amounts that are later repaid and new withdrawals are taxed.

Before the High Court, A argued, among other things, that the fact that repayment of an illegal shareholder loan should be treated for tax purposes as a grant to the company and not as a receivable resulted in double taxation and that, as a consequence, section 16 E(1) of the Tax Assessment Act became a penal provision in violation of the European Convention on Human Rights (ECHR). To avoid such a conflict, section 16 E(1) of the Tax Assessment Act should instead be interpreted to mean that repayment of an illegal shareholder loan is considered a loan to the company.

The High Court found no basis for assuming that taxation of an illegal shareholder loan pursuant to section 16 E(1) of the Tax Assessment Act constituted a punishment within the meaning of the ECHR. In this connection, the High Court noted that repayment of the illegal shareholder loan did not in itself trigger any taxation of the shareholder.

Nor did the High Court find any basis for upholding A’s claim that his taxable income for the years 2012-2015 should be reduced by net salary and net dividends as claimed.

In addition, the conditions for reversal under Section 29 of the Danish Tax Administration Act of three dividend distributions decided at extraordinary general meetings in A ApS in 2012-2015 were not met. Accordingly, the High Court found in favour of the Ministry of Taxation.

For the reasons stated by the High Court, and since what A had argued before the Supreme Court could not lead to a different result, the Supreme Court upheld the judgment.