A business succession (generationsskifte) is among the most complex corporate-law and tax processes a business owner can face. It is not a single transaction — it is an arrangement that takes three to five years to prepare responsibly and involves choices that are hard to undo later. Even so, our experience is that the majority of owners we meet start the process too late and underestimate its complexity.
The most important parameter is time. The earlier the process starts, the more structural options remain open. It is about access to the tax-succession rules, the ability to transfer in stages and — not least — preparing the next generation or the management for ownership, both legally and commercially.
What is a business succession?
"Business succession" describes the transfer of ownership of a company — typically from a founder or owner to the next generation, to senior management (an MBO) or to an external buyer. In a legal and tax sense, the term is used primarily for transfers to close relatives and management, where specific succession rules apply. A sale to an external buyer is closer to an M&A transaction, although elements of the planning overlap.
The asset-holding company rule — a critical pitfall
The tax-succession rules in sections 26 A–B of the Danish Withholding Tax Act and section 34 of the Danish Capital Gains Tax Act allow a transfer of shares in an operating company to take place with tax succession: the recipient steps into the transferor's tax position and thereby defers taxation until a future disposal.
But access to succession requires that the company is not what is called a "pengetankselskab" — an asset-holding company. The asset-holding company rule (pengetankreglen) provides that a company cannot be transferred with succession if 50% or more of its assets are passive capital investments — including rental property, securities and liquid funds that are not operationally related.
The asset-holding company rule is not static. It is measured at the time of transfer based on a three-year average of the balance sheet and assets across the most recent financial years. An owner who starts planning early has the opportunity to reduce the share of passive assets and thereby preserve access to succession.
The 50% threshold is sharp. Exceed it by even one percentage point and succession is excluded — and the transferor is taxed on a capital gain that typically triggers up to 42% in effective tax. That is a consequence which timely planning can avoid, but which is impossible to reverse at the moment of transfer.
Three models for transfer
1. Gift with succession
Shares can be transferred as a gift to close relatives — typically children — with tax succession. The recipient takes over the transferor's acquisition cost and defers the tax. In return, gift tax (gaveafgift) is triggered on the fair market value at the time of transfer. The standard gift tax is 15% on transfers to direct descendants. For business assets that meet the conditions for tax succession, a reduced gift tax of 8.9% applies (Boafgiftsloven § 22a).
The advantage of the gift model is that it is simple and does not require the next generation to raise financing. The downside is the gift tax itself, calculated on the full fair market value — and for companies of significant value the tax alone can run into the millions.
2. Transfer with succession and partial financing
A common model is a combination of gift and seller's note or family loan. Shares are transferred partly as a gift and partly on credit. This reduces the gift-tax base and allows the receiving generation to finance part of the purchase out of the company's future operations. The model requires accurate pricing — a transfer below fair market value is treated for tax purposes as a gift, even where it is formally labelled a sale.
3. MBO — transfer to management
Many owners want to transfer the business to a senior manager who knows it and can carry forward its culture and business model. A management buy-out (MBO) is typically structured through a holding company set up by the incoming owner and financed by a combination of equity, bank debt and a seller's note.
The succession rules do not apply directly to an MBO to a non-relative. Here the tax planning is different and focuses on the company's structure heading into the transfer — including distribution of excess liquidity before sale and possible separation of operations and property.
Holding structure and preparation
Many owners today run their business through a holding structure: a holding company owns the shares in the operating company. The holding structure allows profits to be moved up to the holding company tax-free as dividends (provided the holding company owns at least 10% of the operating company) and reinvested from there.
For succession purposes the holding structure matters for several reasons. The shares in the operating company are owned by the holding company — and on transfer, it is usually the shares in the holding company that change hands. That allows succession to be carried out on the holding-company shares using the underlying activity of the operating company as the basis. It is the holding company's overall asset composition that is tested against the asset-holding company rule.
Where no holding structure exists and the founder owns the shares in the operating company directly, setting up a holding structure should be considered as the first step in preparation. Such a conversion can typically be carried out tax-free under the tax-free share-exchange rules in the Capital Gains Tax Act, but requires a sufficient time horizon and proper execution.
The A/B share-class model: splitting into share classes
A specific model for staged transfer is the A/B share-class model (A/B-aktiemodellen). The company is divided into two share classes: A shares with full voting rights and a high nominal share of the historic value, and B shares with a lower nominal share, attached primarily to future appreciation in value.
The model allows the next generation to take over the B shares — i.e. the right to future value creation — at a low price, because that value has not yet been generated. The current owner keeps the A shares and control until the B shares have fully matured. It is a model that requires careful tax advice, as the Danish Tax Agency imposes strict requirements on pricing and class division.
Inheritance and estate taxation
If the owner dies before the succession has been completed, the shares pass to the heirs. The succession rules in principle also apply on inheritance — in many cases the heirs can step into the deceased's tax position. But the estate must handle the transfer, and estate taxation can in some cases trigger liquidity demands that push the heirs into selling a company they would otherwise have kept.
That is a scenario that underlines the importance of beginning the planning in good time — and ensuring that the will and estate plan are coordinated with the corporate and tax structure.