New Danish executive order on loans to parent companies as a consequence of Brexit

Definition of a parent company loan and the applicable rules

The definition of a “parent company loan” is a loan or other financial assistance made by a Danish limited company to its parent company. The applicable rules are found in the Danish Companies Act and an Executive Order on Loans etc. to Parent Companies.

The main rule for shareholder loans is that those loans are forbidden, unless certain requirements set out in the Danish Companies Act are met. A legal shareholder loan must for example be held within the company's distributable reserves (amounts stated as retained earnings in the company’s latest adopted financial statements) and reserves that are distributable under statute or the company’s articles of association, less retained losses. Additionally, the loan must be granted on market terms, meaning that the interest, payment plan, security etc. must be on the same terms as if the loan was granted by a bank.

However, article 211 of the Danish Companies Act contains an exception for loans etc. to certain parent companies. According to that rule a company may directly or indirectly advance funds, make loans or provide security for the obligations of Danish or certain foreign parent companies, even if the requirements for a legal shareholder loan are not met. The exemption for example makes it possible for a company to advance funds to its parent company without interest.

It is thus very important that the management of a company is aware  that  regardless of article 211, they are  still obliged to ensure sound management of the company’s finances, that the financial resources of the company are always adequate, and that interests of eventual minority shareholders are not being violated by granting the parent company loan.

Additionally, the prohibition against self-financing – meaning that the company is granting a loan made for the purpose of acquisition of shares in the company – is still binding. This prohibition could for example be relevant in a situation where the parent company has financed its purchase of the shares in the subsidiary with a bank loan and after buying the shares in the subsidiary, the subsidiary grants a loan to the parent company which the parent company uses to repay the bank loan.

What is the purpose of the special rule regarding parent company loans?

The exemption in article 211 of the Danish Companies Act was adopted to ensure that intra-group transactions can be made in an appropriate manner. The rule thus allows subsidiaries to provide group loans on non-market terms or to be part of intra-group cash pool schemes.

Which parent companies are governed by the special rule?

Firstly, it is important to note that loans to parent companies who meet the requirements for ordinary shareholder loans can be made regardless of the corporate form of the parent company and the country in which the parent company is located.

Secondly, it is only possible for the loan etc. to be granted without meeting the requirements of ordinary shareholder loans if the loan is granted to Danish or certain foreign parent companies.  The Danish Executive Order on Loans etc. to Parent Companies sets out which foreign parent companies are governed by article 211 of the Danish Companies Act.

According to the Executive Order two conditions must be met. First the foreign company must have a specific corporate form: i) a public limited company, ii) a private limited company, iii) a limited partnership or iv) or a similar company type. 

Additionally, the foreign parent company must be located in one of the countries listed in the Executive Order. The list is comprehensive and is made based on OCED’s Country Risk Clarification, which categorizes the countries of the world according to, for example, credit risk. 

In connection with the latest amendment to the OECD's Country Risk Classification, the Executive Order on loans etc. to foreign parent companies changed per October 31, 2019, so that Chile and Israel were included in the list, while Hong Kong was removed.

Thus, the foreign parent companies for which loans can be granted as parent company loans covered by article 211, must be domiciled in an EU country, an EEA country, Switzerland, Australia, Canada, Chile, Israel, Japan, South Korea, New Zealand, Singapore, Taiwan or the United States.

Per 1 February 2020, the list as a result of Brexit has been further updated with the UK and Northern Ireland now appearing on the list.

However, parent company loans that have been granted under a previous executive order October 2019 will continue to be valid. E.g. parent company loans to a parent company with a permanent establishment in Hong Kong granted before 31.

What Danish companies are subject to the special rule?

According to the wording of the provision, it only includes loans from Danish subsidiaries to Danish and certain foreign parent companies. However, the Danish Business Authority is of the opinion that the provision also includes loans granted by a Danish parent company's foreign subsidiary. This means a foreign subsidiary to a Danish parent company is also limited by the Danish rules on shareholder loans and parent company loans.

IUNO’s opinion

At IUNO, we believe that, as a Danish company with a foreign parent company or a Danish parent company with foreign subsidiaries in intra-group, transactions one must pay attention to the strict Danish rules on shareholder loans, parent company loans and the general prohibition against self-financing. Also, the management of the company must be aware of its duties regarding the capital of the company and eventual minority shareholders. We can help companies create an overview and keep the papers in order when the company enters into a group internal transaction that entails a parent company loan.