While Hong Kong and Singapore’s open competition to attract family offices has frequented news headlines this year, worldwide jurisdictions follow a similar pattern. Recently, Denmark’s policy shifts reflect a concerted effort to retain its invaluable family-owned enterprises.
Earlier this week, Bloomberg reported a new initiative from the Danish government, valued at 1.8 billion krone ($260 million), aims to ease the tax and regulatory burden on family-owned companies during generational transitions.
The goal is clear: the initiative aims to prevent these companies from being compelled to sell to foreign investors due to stringent taxation and current rules.
The Importance of Family-Owned Businesses
Denmark is home to approximately 60,000 family-owned businesses, collectively employing over 800,000 individuals. These enterprises are not just economic entities but cultural cornerstones, contributing significantly to Denmark’s social fabric - including well-known names such as Lego and Danfoss.
Danish Deputy Prime Minister Troels Lund Poulsen highlighted the significance of this initiative at a recent press briefing. While Poulsen did not indicate any specific threats from these companies to relocate, the government's proactive approach suggests an underlying concern about maintaining these national treasures within Denmark's borders.
In this regard, the Danish government's recognition of their value is evident in the new measures to ensure their longevity and continued contribution to the Danish economy - just as international counterparts in Singapore and beyond have moved to entice family offices to take up residence.
Key Measures in the New Plan
Poulsen outlined several interventions in the new plan - which most notably consisted of:
A Reduction Of Estate and Gift Tax
One of the most notable changes is reducing the estate and gift tax on inherited businesses from 15% to 10%. This substantial cut alleviates the financial burden on successors, making it easier for families to retain ownership across generations.
Eased Valuation Processes
Another critical aspect of the plan is simplifying the valuation process for inherited businesses. This change is intended to reduce the complexities and potential inaccuracies arising during the valuation of family-owned enterprises, thereby facilitating smoother transitions.
Increased Deductions For Research and Innovation
The plan also includes provisions for higher deductions on expenses related to research and innovation. This measure encourages continued investment in these areas, fostering growth and competitiveness among family-owned businesses.
Elimination Of The Phantom Tax
Another significant change is eliminating the so-called “phantom” tax, which taxed shareholders or founders on expected future earnings when a company was sold. By removing this tax, the government aims to create a more favourable environment for entrepreneurs and founders, reducing the financial strain associated with business transitions.
Comparative Insights: Lessons From Norway
Notably, there’s a sharp contrast in Denmark’s approach - and perhaps a lesson learned - when compared with neighbouring Norway
The Norwegian government’s recent decision to increase taxes on the country’s wealthy families has led to a backlash from the entrepreneurial community and an exodus of billionaires. This, in turn, can affect not only job creation but also startup investments, private companies, and philanthropic initiatives.
The comparison highlights the potential risks of imposing heavier tax burdens on high-net-worth individuals and family-owned businesses, especially in an era when new and younger generations of wealth owners are far more mobile and worldwide jurisdictions compete for wealth.
Implications for Family Offices
These developments in Denmark, while they might draw fire from the opposing side of a political fence that wants to increase taxes on wealth, could attract more wealth owners from other countries who want to domicile there.
For family offices in particular, Denmark’s strategic move to cut taxes and ease rules for family-owned companies demonstrates a forward-thinking approach to economic policy. By prioritising the retention and growth of these businesses, the Danish government is safeguarding its economic interests and reinforcing the cultural and social heritage these enterprises represent.
New generations of wealth owners—particularly after a transitional event—are likely to do things differently and do business their way, and jurisdictions that can competitively attract wealth owners to base their capital are likely to reap the benefits of private investment, jobs, and philanthropic initiatives.