Masked dividends

What Are Hidden Dividends?

Hidden dividends arise when a majority shareholder or related parties receive financial benefits from the company without going through a formal dividend distribution or without transactions being conducted at arm’s length. In practice, this means that the company transfers value to the owner outside the normal procedures for dividends, and without the benefit being treated correctly for tax purposes.

This makes hidden dividends a high-risk area where both the company and the majority shareholder must pay close attention to how funds and assets are used in order to avoid unintended tax consequences.

When Do Hidden Dividends Occur?

Hidden dividends can take many forms. They often arise when a company pays for expenses that are in fact private, or when company assets are made available to the shareholder without a business purpose.

Examples include:

• The company covering private expenses for the shareholder.

• Assets such as cars, housing, or holiday homes being made available without payment.

• Loans that are never expected to be repaid or are provided at below-market interest rates.

• The shareholder purchasing goods or services from the company at undervalue, or selling private assets to the company at inflated prices.

Even if these transactions appear minor or routine, they have significant tax implications because they effectively transfer company funds to the owner outside of formal rules.

How Does the Danish Tax Agency Assess Hidden Dividends?

When Skattestyrelsen investigates a case involving hidden dividends, the focus is on the substance of the transaction rather than the formal contracts or internal agreements. Simply having an agreement on paper is not enough; the true economic reality determines whether a hidden dividend exists.

Key assessment criteria include:

• Arm’s length principle – Were the terms of the transaction consistent with market conditions? If the shareholder receives goods, services, or loans under conditions that no independent third party would accept, it may indicate hidden dividends.

• Beneficiary of the transaction – Who primarily benefits? If the economic advantage accrues mainly to the shareholder without corresponding value to the company, suspicion increases.

• Documentation and business purpose – Is there sufficient evidence that the transaction had a legitimate business purpose? Lack of documentation or vague justifications may lead to the benefit being reclassified as taxable dividends.

In short, Skattestyrelsen looks beyond formalities to identify who truly benefits financially and whether the transactions reflect ordinary business terms.

Consequences for the Majority Shareholder

If hidden dividends are identified, the shareholder will be taxed as if the benefit were distributed as an ordinary dividend. This often results in a substantial tax bill, as dividends are taxed at rates up to 42%. At the same time, the company loses the right to deduct the expense.

A common example is when a company pays for renovations of a shareholder’s private holiday home. In such a case, the shareholder will be taxed on the amount, and the company cannot deduct the expense. The outcome is a double disadvantage: higher tax for the owner and no tax benefit for the company.

How to Avoid Hidden Dividends

The most effective way to avoid hidden dividends is to maintain a clear separation between company and private finances. This means that all transactions between the company and the shareholder must be conducted at market terms, and it must be possible to document that each transaction has a legitimate business purpose.

Examples include charging market-based rent for company assets made available to the shareholder or ensuring that all goods and services are priced according to market conditions.

It is also crucial to be aware of the rules on the use of company assets such as cars, housing, or holiday homes. Even limited or occasional use can trigger taxation if not properly managed. Careful record-keeping and thorough documentation of business purposes are essential to minimize the risk of reclassification by Skattestyrelsen.

Why Professional Advice Is Essential

The rules on hidden dividends are complex and always depend on a concrete assessment of the actual circumstances. Even small mistakes or insufficient documentation can have major financial consequences.

By seeking professional advice, companies and shareholders can ensure that transactions are correctly structured, well-documented, and compliant with current tax rules. This not only creates peace of mind but can also save both the company and its owners from costly surprises.

FAQ on Hidden Dividends

What does “hidden dividend” mean?

It means that a shareholder receives an economic benefit from the company without it being a formal dividend distribution or based on market terms.

How are hidden dividends taxed?

They are taxed as ordinary dividends in the hands of the shareholder. At the same time, the company cannot deduct the expense as a business cost.

What is the difference between hidden dividends and hidden distributions?

Hidden dividends usually involve ongoing benefits, such as private expenses or use of company assets. Hidden distributions are more often linked to one-off transactions, such as buying or selling assets at incorrect prices.

How can hidden dividends be avoided?

By ensuring that all agreements between the company and the shareholder are made at arm’s length, that private and company finances remain separate, and that all transactions are properly documented. ‍

Who determines whether hidden dividends exist?

Skattestyrelsen makes the initial assessment. They always focus on the actual circumstances rather than what an agreement formally states.

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