Venture company was denied deduction for management fee paid to management company

Date 11 mar. 2010

A venture company, which had the purpose of investing in other companies, and which had no employees, and, thus, was governed by a Board of Directors alone, could not deduct expenses paid to a management company.


The Case in Brief

The venture company entered into an agreement with the management company, pursuant to which the management company was to invest on behalf of the venture company. Additionally, the management company was to provide secretarial duties for the venture company and be responsible for the venture company´s bookkeeping, including the making of financial reports to the venture company´s board and shareholders.


As consideration for performing these duties, the venture company paid the management company a management fee, which was calculated as a percentage of the capital each shareholder had obligated him or herself to contribute to the venture company. As a result of negotiations with the venture company, the Danish Tax and Customs Administration (“SKAT”) initially opined that only part of the fee was deductible as a regular business expense. The remaining balance had to be added to the basis or acquisition price of the capital shares acquired by the venture company as a result of the management company´s efforts. Subsequently, SKAT changed its stance, arguing that 75% of the fee in question did not constitute ordinary business expenses, but rather expenses that should have been paid by the individual investment company.


The venture company initially agreed with SKAT that only part of the fee was a deductible business expense, adding the remaining balance to the acquisition price of the shares. Similar to SKAT, however, the venture company also subsequently changed its stance, arguing that the entire fee was an ordinary deductible business expense. The venture company explained that the fee was paid by similar situated companies, and the amount was determined in accordance with arm-length principles.


The National Tax Tribunal partially sided with the venture company, whereupon the issue was presented before the Eastern High Court.


The Legal Basis

Pursuant to the Danish State Tax Act Section 6(1)(a), expenses incurred to acquire, secure and maintain income are deductible. It is assumed, however, that only expenses incurred with the intent to acquire taxable income are deductible.


The Court´s Verdict

In the court´s opinion, it was of the utmost importance what type of income the expenses related to. Thus, the court concluded that the management fee had been incurred in order to acquire income that would be tax free.  


In its decision, the court explained that the venture company´s sale of portfolio stock generally would be tax free, in as much as the period of ownership would not exceed three years. To support this conclusion, the court emphasised that the postponed tax regarding the venture company´s investments were only mentioned in the notes of the company´s annual report. This was so, because it was expected that the period of ownership of the shares would exceed three years, after which time, any gain would be tax free. The court also emphasised the fact that according to the 2002 annual report, market conditions had led to a change in exit strategy for each investment, that would require more time. Moreover, a former manager of the venture company had explained, that the development and exit from the investments in question would take many years.


Since the expenses where, thus, incurred with the intent to acquire tax free income, the court concluded that the venture company could not deduct the management fee.



The case illustrates, how case law requires that in order to deduct a business expense, the expense must have been incurred with the intent of acquiring taxable income.


By siding with SKAT, the court has indicated that the company´s intent at the time of acquisition and the nature of the investment  is of utmost importance in making the deductibility determination. Thus, according to the verdict, it is of no relevance that the period of ownership is less than three years, if the intent at the time of acquisition was to hold on to the shares for a period exceeding three years. In connection herewith, it should be noted that the law regarding taxation of companies´ purchase and sale of shares has subsequently been amended.


In order to maintain the highest tax value of potential deductions, it is therefore important for holding companies that their bookkeeping clearly reflects and distinguishes between ordinary deductible business expense on the one hand and expenses related to tax free investments on the other.



If you have questions regarding the above or require additional information about the case, please contact attorney Dan Moalem ( or, senior associate Henning Hedegaard Thomsen (


The above does not constitute legal counselling and Moalem Weitemeyer Bendtsen does not warrant the accuracy of the information. With the above text, Moalem Weitemeyer Bendtsen has not assumed responsibility of any kind as a consequence of a reader’s use of the above as a basis of decisions of considerations.