Pitfalls in intra-group support statements

The company’s situation

A Danish transport rental company had a German customer who experienced major financial challenges and was unable to pay its leasing services. The Danish company therefore built up a very large receivable from the German customer. On that basis, the Danish parent company chose to provide a support statement, where they promised to cover any of the subsidiary’s financial losses caused by the customer relationship.

A statement of support is a collateral provided by a parent company to cover certain obligations of a subsidiary. These commitments will typically be financial. In this instance, the purpose of the collateral was to avoid the company's auditor having to make auditor reservations in their statement on the company's annual accounts.

A translated excerpt of the statement of support reads:

"[German customer] is a joint customer of [the subsidiary], as well as its [parent company]. [The subsidiary] has significant, partly long-overdue receivables from [the German customer].

On that basis, [the parent company] hereby declares that [the parent company], if necessary, will essentially take over and offset [the subsidiary’s] possible losses arising from the recoverability of receivables from the customer, respectively.”

When the German customer later went bankrupt, the parent company transferred a partial coverage of the loss of DKK 5.7 million. This was stated in the accounts as a tax-free group contribution. The Danish tax authorities disagreed and demanded that tax be paid on the amount. The District Court's decision in the case acquitted the Ministry of Taxation, whereafter the Danish company appealed the District Court’s decision to the Danish Western High Court.

The decision of the Danish High Court

The Danish High Court had to decide whether it was a tax-free contribution from the parent company to the subsidiary according to section 31 D of the Danish Companies Act, or whether the amount was to be included for tax purposes in calculating the capital loss on the Danish company according to section 3 of the Capital Gain Taxation Law. Therefore, the question was whether the subsidiary should be taxed on the amount in the statement of support.

The High Court found - like the District Court - that the statement of support entailed that the parent company would be liable for covering the subsidiary's losses in regard to the particular customer, and that the statement was similar to bail. The Danish High Court therefore upheld the District Court's decision which meant that the Danish company had to pay taxes and expenses corresponding to around DKK 2 million, including an additional tax of around DKK 1.4 million.

IUNO’s opinion

The case shows that the use of standard formulations should be carefully considered when submitting statements of support, as it can otherwise lead to significant unforeseen expenses. IUNO therefore recommends that parent companies pay careful attention to reviewing existing and future statements of support to ensure that they do not have unintended legal or tax consequences.

[Judgment of the Danish High Court in case BS-25527/2019 of 17 December 2020]