Waterworks designated as a partnership regarded as an independent legal entity for tax purposes

Date 15 apr. 2010

In a binding answer published on 24 February, the National Tax Board has stated that a waterworks that, according to its by-laws was a partnership, pursuant to the Danish Corporate Tax Act (“DCTA”) was an independent legal entity for tax purposes. Consequently, the waterworks, and not its members, was taxable on the waterworks’ income.


The Case in Brief

A waterworks was designated in its by-laws as a partnership and had approximately 2400 members. Through law no. 496 of 12 June 2009 regarding the water sector’s organization and economic relationship, the DCTA was amended such that the waterworks went from being a tax exempt entity to a taxable entity. Following this change, the issue as to how the waterworks should be taxed arose. The waterworks wanted to be taxed as an entity separate and apart from its members. This would result in the waterworks being taxed on its income, rather than the individual members being taxed on the waterworks’ income, as is the general rule for the taxation of partnerships.


The Legal Basis

Previously, certain waterworks were exempt from taxation. Waterworks that are subject to the new law have since become explicitly taxable.


Regardless of the fact that the waterworks was formally designated as a partnership, the National Tax Board looked at the waterworks’ actual operations, in order to determine how it should be taxed.

Pursuant to administrative decisions and case law, the following factors point to partnership taxation:

  • Each member is personally, joint and severable, liable for the partnership’s obligations
  • Small number of members
  • During the partnership’s existence, the members remain the same
  • All material decisions require an unanimous vote
  • Acceptance of new members is regarded as establishing a new partnership, just as the exit of a member is regarded as dissolving the existing partnership and establishing a new one
  • The exiting member is entitled to a part of the partnerships assets
  • The partnership’s purpose is strictly commercial

Factors that point to the existence of an independent entity are:

  • Limited liability for each member
  • A great number of members
  • Recurrent change of members
  • The entity is controlled by a Board or similar governing body
  • A member’s exit is of no legal consequence to the existence of the entity
  • The purpose of the entity is of an ideal nature. Any commercial aspect of the entity is for the purpose of advancing the ideal purpose.


The National Tax Board’s Decision

The Board began by noting that 2400 members had to be considered a large number. Additionally, according to the waterworks’ by-laws, the waterworks had a recurrent change in members, as a consequence of members selling the properties the waterworks serviced. These transactions did not impact the business or existence of the waterworks.


When exiting, a member is not entitled to any of the waterworks’ assets. The Board noted that according to the case, this factor weighs heavier than others.


The Board further stated that the waterworks has a governing body in the form of a general meeting, which is also in charge of electing members to the Board of Directors.  

Lastly, the National Tax Board explained that the purpose of the waterworks was to deliver water to the properties it services for the lowest possible price. Thus, the waterworks had been established for a non-commercial purpose and this purpose was ideal.


All these factors supported treating the waterworks as a separate legal entity for tax purposes. As such, the National Tax Board concluded that the waterworks should properly be treated as such, and, consequently, that it, rather than its members, were taxable on the waterworks’ income.


Consequences of the Decision

The decision illustrates the applicability of the principles used to distinguish between independent legal entities on the one hand and flow-through or transparent entities on the other, as these principles have developed through administrative rulings and case law. The fact that private parties have used a given designation, e.g. designated a waterworks as partnership, does, therefore, not necessarily mean that it will be treated as such by the tax authorities.



If you have questions regarding the above or require additional information, please contact attorney Dan Moalem (dmo@mwblaw.dk) or senior associate Henning Hedegaard Thomsen (hht@mwblaw.dk).


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 or considerations.