Investment Funds 2020

Last Updated January 14, 2020

Denmark

Law and Practice

Author



Horten is a full-service firm with around 250 fee earners. For a long time, the firm has been active in the fund management field with a particular focus on servicing foreign fund managers servicing the Danish pension fund industry (around EUR500 billion worth of assets under management) as well as the Danish pension fund managers contracting with foreign fund managers and establishing structures to accommodate such fund management. The firm's fund management group is well-versed in all types of investment management agreements and the regulatory landscape surrounding them, in particular the AIFMD, and nature a close working relationship with the Danish FSA, securing a smooth and efficient registration process, when required. The fund management practice is complemented by substantial debt and fintech practices within the banking and finance area, as well as M&A, real estate and tax practices for support.

In the Danish market the low or negative interest rates combined with well-performing stock markets have resulted in a substantial influx into retail funds. In that space the tighter fee rules in the revised Markets in Financial Instruments Directive (MiFID II) have resulted in a number of retail structures being recast, which largely explains the growth in alternative investment capital funds, if combined with the fact that the professional investors in the market, overwhelmingly pension funds, often structure their investments through such capital funds, simply for accounting and control purposes.

The Danish retail market is very much dominated by retail bank-owned fund managers that use their parent bank as a distribution channel, the flip side of which being that since almost all banks in Denmark have such an affiliation, independent funds face challenges securing sufficient distribution power. That applies even more so to foreign funds, which generally find penetrating the Danish retail market very difficult and, accordingly, often end up focusing on the pension funds market.

Danish Undertakings for the Collective Investment in Transferable Securities (UCITS) funds have an asset value of DKK1,076,477 million, whereof DKK1,042,291 million is in investment associations and DKK34,186 million is in securities funds. Danish alternative investment funds (AIFs) have an asset value of DKK1,286,589 million, whereof DKK1,281,503 million is in capital associations and DKK5,356 million is in other alternative investment funds. Of the total asset value of DKK2,363,336 million, retail funds account for 45.5%, whereas institutional funds account for 51.5%, with foreign funds accounting for the remaining 3%. The total asset value rose from DKK2,041,937 million in 2018. However, as the total asset value in 2017 was DKK2,235,840 million, the substantial rise in asset value may be due to the general performance of the market as opposed to an increase in investments. The above figures do not reflect the substantial Danish investments in foreign funds, notably by Danish pension funds.

The principal legal structures available for AIFs are limited liability companies (public: A/S or private: ApS), limited partnerships (K/S), limited partnership companies (P/S), capital funds, AIF-SIKAVs and AIF-securities funds. Whereas limited liability companies are legal entities both for civil and tax purposes, K/S and P/S entities are tax transparent, meaning that taxation takes place with each investor, based on each investor's ownership share such that a tax loss/deduction is set off in the investor's personal income. K/S and P/S entities are, however, still regarded as legal entities for civil purposes. Unlike a K/S, a P/S is subject to the procedures and requirements under the Danish Companies Act (DCA). Both K/S and P/S entities have a fully liable participant, which, however, often will be a limited liability company. Consequently, in practice, limited liability for investors is available regardless of the legal structure. Currently, the predominant legal structure for AIFs is A/S, accounting for approximately 50% of the registered AIFs in Denmark, with the K/S structure following at 29%.

Capital funds, AIF-SIKAVs and AIF-securities funds may be split up into sub-funds with different share classes, where the funds of each sub-fund are segregated from the rest of the fund's funds. Such segregation of funds allows for different risk profiles across sub-funds, whilst preventing the risk that one sub-fund's non-performance on its liabilities becomes a liability for the other sub-funds. AIF-SIKAVs and AIF-securities funds, however, only account for approximately 15% of the AIFs registered in Denmark, which may be largely due to the fact that such fund structures have only been available in Denmark since 2018.

Investment managers primarily use limited liability companies (ie, A/S and ApS), although the P/S structure is also widespread.

Most of the structures require that the fund company is registered with the Danish Business Authority and, in all cases, subsequently with the Danish Financial Supervisory Authority (the "Danish FSA") in order to operate as a fund. Formation of the fund company requires articles of incorporation and articles of association, as well as payment of the required share capital (if any).

Registration of the company usually takes place immediately after the filing to the Danish Business Authority, although registration may take up to a week in some cases. The registration costs approximately EUR100. The main cash expense in the process is therefore payment of the required share capital, which is a minimum of DKK400,000 for A/S and a minimum of DKK40,000 for ApS. The remaining legal structures do not have a share capital requirement. In order to receive permission as an alternative investment fund manager (AIFM) or a self-managing alternative investment fund, however, there is an additional initial capital requirement of EUR125,000 and EUR300,000, respectively, and in certain instances an additional EUR730,000. Furthermore, the AIFM must increase its capital with 0.02% of the amount by which the value of the portfolios of AIFs managed by the AIFM exceeds EUR250 million. The total capital requirement is capped at EUR10 million and should in all cases be at least equivalent to a quarter of the previous year's overhead costs.

In all of the above-mentioned legal structures, investors' liability is limited to their investment(s). In certain companies – such as an ApS, A/S, K/S and P/S – the capital contribution need not be paid in full. In these instances, investors may be required, per request of the company, to pay the residual capital (the callable capital) if required to ensure the continuing operation of the company. In the case of active investors, however, investors may potentially become liable to the company or its creditors according to the general principles of tort law, therefore expanding their liability beyond their contribution(s). Furthermore, the limitation of the investors' liability may be affected by way of agreements; eg, by guaranteeing for the company.

The Danish Alternative Investment Fund Managers Act (AIFMA) requires Danish AIFMs and AIFs that are self-managing to report information on the AIFM's most important markets and instruments used in portfolio management, as well as information on substantial risk exposures and concentrations for each AIF managed, to the Danish FSA on a regular basis. Per request of the Danish FSA, the AIFM shall provide a list of AIFs under management.

Further, for all EU-AIFs individually, the AIFM must submit information covering, inter alia, the current risk profile, including market risk, liquidity risk and counterparty risk controlling systems; specifications on the AIF's important asset categories to which the AIF is exposed; appropriate stress test results; all new arrangements for controlling the liquidity; and the percentage share of illiquid assets.

AIFMs must also inform AIF investors and other relevant parties of potential conflicts of interest. Any supervisory reactions or statements issued by the Danish FSA to the AIFM must be published on the AIFM's website.

The AIFMA requires that an annual report of self-managing AIFs and AIFMs is made available no later than six months following the end of the financial year. The annual reports must be audited by an authorised auditor and prepared in accordance with the general accounting rules and standards in the home state of the AIF.

Lastly, the AIFM must notify the Danish FSA if its ownership in a non-listed company exceeds a certain threshold (10, 20, 30, 50 or 75%) or if it acquires control of such a company. The same requirement applies to AIFs that use substantial leverage.

The main investors in the Danish market are pension funds, which manage approximately DKK3,700 billion. In light of interest levels, their interest in AIFs both in Denmark and abroad has doubled and in some instances tripled in recent years. As mentioned, this interest is partly driven by setting up administrative vehicles for their listed investments but still their total commitment to unlisted alternative investments now exceeds DKK400 billion. Investments are primarily in private equity, real estate, alternative energy and business debt. Private investors committing more than EUR100,000 have also become more prevalent, although, relatively, their share of the market is still very limited.

Danish AIFMs with authorisation from the Danish FSA must be structured as legal persons under Danish law.

AIFMs established in an EU/EEA member state (EU-AIFMs) may manage AIFs directly or through a branch in Denmark. If the AIFM wishes to establish a branch in Denmark, the provisions in the DCA will apply, and registration with the Danish Business Authority is generally required. If an EU-AIFM wishes to manage AIFs in Denmark using its passport, the Alternative Investment Fund Managers Directive (AIFMD) (Directive 2011/61/EU, as amended) simply requires that the AIFM is a legal person.

AIFMs established in a third country (TC-AIFMs), which will have Denmark as their member state of reference under the TC-AIFM passporting regime, must have a legal structure equivalent to a limited liability company.

All types of investors may invest in AIFs; however, certain marketing restrictions do apply; see 2.3.5 Rules Concerning Marketing of Alternative Funds.

The principal legislation governing AIFs in Denmark is the AIFMA, which primarily governs AIFMs; however, its provisions are also applicable to self-managing AIFs. Regarding the marketing of AIFs, the AIFMA differentiates between AIFs established in an EU/EEA country (EU-AIFs) and AIFs established in a third country (TC-AIFs). Moreover, the AIFMA provides provisions governing the structure, establishment and operation of capital funds (typical Danish open-end AIFs), AIF-SIKAVs and AIF-securities funds. Closed-end AIFs structured as limited liability companies are also subject to the DCA and must consequently adhere to the rules therein.

A Danish AIFM may in principle choose between authorisation from the Danish FSA or registration with the Danish FSA. Both regimes allow for AIFs to be marketed towards professional investors, whereas registered AIFMs are not allowed to market AIFs towards retail investors. An AIFM is, however, always required to apply for a full authorisation if it manages portfolios of AIFs whose assets under management exceed a threshold of:

  • EUR100 million; or
  • EUR500 million, when the portfolios of AIFs under management consist of AIFs that are unleveraged and have no redemption rights exercisable during a period of five years following the date of initial investment in each AIF.

An AIFM incorporated under the laws of Denmark that does not meet the above thresholds may instead choose to register as an AIFM with the Danish FSA. When registering, the AIFM is required to notify the Danish FSA of the AIFs under management, which will subsequently be registered with the Danish FSA. An AIFM may, however, also choose to apply for the full authorisation if it wishes to do so. AIFMs that voluntarily apply for authorisation will be subject to the same rights and obligations as an AIFM subject to compulsory authorisation.

Non-local service providers will, if the service that they provide falls within the scope of Appendix 1, No 1 and 2 of the AIFMA, be subject to requirements by way of the AIFM's duty to notify the Danish FSA of delegation of services, as the Danish FSA is empowered to intervene if the service provider does not meet the requirements in the AIFMA.

EU-AIFMs licensed to manage AIFs in the EEA under the AIFMD must passport their authorisation into Denmark before initiating marketing activities of Danish AIFs or EU-AIFs towards professional investors in Denmark (see 2.3.5 Rules Concerning Marketing of Alternative Funds). TC-AIFMs must fulfil certain requirements in order to market TC-AIFs or EU-AIFs to investors in Denmark (see 2.3.5 Rules Concerning Marketing of Alternative Funds).

AIFMs seeking to obtain authorisation from the Danish FSA must satisfy certain conditions in the AIFMA, including certain capital requirements (see 2.1.2 Common Process for Setting up Investment Funds), as well as fit-and-proper assessment of the members of the AIFM's management with regard to experience and reputation. Additionally, the AIFM must, generally, have its registered office in Denmark, and shareholders or members of the AIFM with qualified holdings must be capable of ensuring the sound and prudent management of the AIFM. The application must also contain information on the AIFM and the AIFs that the AIFM intends to manage.

Registration as an AIFM with the Danish FSA pursuant to the AIFMA is not subject to the same requirements as those applicable to AIFMs seeking authorisation (see 2.3.1 Regulatory Regime). Conversely, registered AIFMs do not have the same rights – eg, as regards marketing – as AIFMs with authorisation (see 2.3.5 Rules Concerning Marketing of Alternative Funds).

Generally, the Danish FSA will notify, in writing, an AIFM applying for authorisation as to whether authorisation has been granted within three months of the submission of the complete application. The Danish FSA may, however, extend the time limit if it deems an extension necessary due to the specific circumstances of the case. An AIFM may not initiate management of the AIF(s) until authorisation has been granted or registration with the Danish FSA has occurred.

In addition to the AIFMA, investor protection provisions in the Executive Order on Form and Content of Documents Containing Key Investor Information of AIFs (KIIDO), the Executive Order on Authorisation for AFIMs to Market AIFs Established in a Third Country in Denmark (TCMO), the Danish Capital Markets Act (DCMA) and the Danish Marketing Act (DMA) regulate the marketing and offering of units or shares in AIFs to investors in Denmark.

Unless specific exemptions apply, public offering of units or shares in AIFs in Denmark may be subject to prospectus requirements in accordance with the Prospectus Regulation and any relevant Danish legislation on prospectus requirements, form and content.

EU-AIFMs, which are authorised to manage AIFs in accordance with the AIFMD, are holders of an EU marketing passport. Such AIFMs are required to passport their authorisation into Denmark before initiating the marketing of EU-AIFs (including Danish AIFs) towards professional investors in Denmark. In practice, the passporting of the authorisation requires that the AIFMs have notified the competent authorities in their home state, and subsequently received a notice declaring that a notification letter and a statement have been submitted from the competent authority to the Danish FSA. EU-AIFMs can be authorised by the Danish FSA to market EU feeder funds with third-country master funds towards professional investors in Denmark provided that certain requirements are satisfied. A top-up authorisation is required if the AIFM intends to market AIFs towards Danish retail investors (see 2.3.6 Marketing of Alternative Funds).

EU-AIFMs that are only registered with, and thus not authorised by, their competent authorities, and hence are not authorised to manage AIFs in accordance with the AIFMD, are not holders of an EU marketing passport. Accordingly, registered AIFMs may not market units or shares of AIFs in Denmark, whether towards professional or retail investors, unless the AIFM is granted specific authorisation by the Danish FSA. The Danish FSA is yet to lay down the specific rules and provisions governing the marketing of AIFs in Denmark by registered EU-AIFMs.

TC-AIFMs may obtain a special marketing authorisation with the Danish FSA to market units or shares in TC-AIFs or EU-AIFs under its management towards professional investors in Denmark. Such authorisation requires TC-AIFMs to meet several conditions, including submission of annual reports, a reciprocity statement confirming that the competent authorities in the TC-AIFM's home country are prepared to grant similar funds access to market themselves in the relevant country, investor information, disclosures to the Danish FSA and co-ordination agreements between the Danish FSA and the competent authorities in the AIFM's home state. In addition, TC-AIFMs may apply for a top-up authorisation with the Danish FSA in order for the TC-AIFM to be entitled to market AIFs towards retail investors in Denmark. Such a top-up authorisation requires, inter alia, that the TC-AIFM is authorised with respect to retail marketing in the AIFM's home country as well as in the country in which the AIF is established.

If a TC-AIFM marketing passport regime comes into force, the TC-AIFMs, which are authorised in another EU member state as managers of the types of AIFs that the AIFMs intend to market in Denmark, may initiate marketing as soon as the AIFMs have been notified by the competent authorities in the member state of reference of the fact that a complete application and a statement have been submitted to the Danish FSA. As regards marketing of TC-AIFs, some more stringent requirements must be met; eg, appropriate co-operation agreements must exist between the Danish FSA and the competent authorities in the TC-AIF’s home state.

In principle, AIFMs may only market AIFs towards professional investors. AIFMs authorised in accordance with the AIFMD may, however, apply for authorisation from the Danish FSA to market one or more AIFs towards retail investors in Denmark according to rules implementing the AIFMD. It is not possible for Danish or EU-AIFMs that are only registered to obtain such a licence.

In the Executive Order on Authorisation for AIFMs to Market to Retail Investors in Denmark (“Retail Executive Order”), the Danish FSA issued rules regarding marketing procedures and content requirements for the marketing of AIFs towards retail investors. The definition of retail investors is equivalent to the term applicable under the MiFID II regime.

According to the Retail Executive Order, a simplified authorisation process applies if the AIFM markets the AIF only to managers, management executives and other employees involved in the management of the AIF. In order to benefit from the simplified authorisation procedure, the AIFM must provide the Danish FSA with a declaration confirming that the AIFM has informed such limited group of retail investors in question about the risks related to the marketed product. The AIFM must also provide the Danish FSA with a declaration in which these retail investors clearly state that they are familiar with and informed of the risks related to the AIF being marketed.

Pension funds' inclusion of units in AIFs in unit-linked schemes is not deemed to constitute indirect marketing to retail investors by the Danish FSA. It is important to note that this is a limited, special, indirect marketing exemption.

Marketing may also be carried out towards investors that (i) undertake to invest at least EUR100,000 and (ii) declare in a written document other than the subscription contract that they are aware of and understand the risks linked to the intended undertaking or investment.

The DMA contains certain investor protection provisions generally applicable to the marketing of shares or units in AIFs. As regards the marketing towards professional clients, however, the provisions are only applicable to a very limited extent.

The Danish FSA is generally approachable and most often the fund and/or counsel will have an ongoing correspondence with it throughout the application process and afterwards, if there are any issues that give rise to questions.

No restrictions apply to activities or investments, unless said activity or investment constitutes a licensable activity or investment – eg, discretionary portfolio management or acquisition of control in a financial business in accordance with the Danish Financial Business Act, in which case the fund would not (legally) be able to perform such activities or investments without receiving prior approval from the Danish FSA.

The AIFM is required to ensure that a depositary is appointed for each of the AIFs under its management. It is not, however, the AIFM that formally appoints the depositary, as this falls under the competence of the board of the AIF. Generally, the depositary must be a credit institution, stockbroker or a company approved to be a depositary under the AIFMD. The AIFM cannot be a depositary.

Danish AIFs or AIFMs are also subject to the Danish Anti-Money Laundering Act, if the AIF or AIFM has customer relations; ie, direct contact with a customer regarding the sale or purchase of units in the AIF. AIFs that market their units or shares themselves towards potential customers and in that context have contact with (potential) customers are also subject to the Anti-Money Laundering Act.

There are some listed security funds but not many are geared in the Danish market and they do not have any issues raising relevant financing, typically from local clearing banks. Property and renewable energy funds are asset financed, using the Danish mortgage system for their Danish assets and international property and project finance for their foreign assets, where in the current market raising financing is not a big issue, provided that the projects are decent. Gearing of debt funds for new lending is less prevalent but gearing of debt funds acquiring existing debt, including non-performing debt, does occur, although in limited numbers.

Outside the UCITS sphere, there are no restrictions on fund borrowings.

Security will be taken in almost all financings. Digitally registering security over real property and renewable energy assets will attract a 1.45% registration duty.

The most common issue in financing is the commercial issue of level of leverage, followed by security structuring, especially where security registration attracts registration duties.

An important distinction in relation to taxation is whether an AIF is structured as an independently taxable entity (eg, A/S, ApS, AIF-SIKAV, AIF-securities funds) or a tax-transparent entity (P/S and K/S).

The taxation of income in and from an AIF depends on the way in which the AIF has been structured. Generally, an AIF will fall within one of the following categories:

  • investment companies;
  • account-holding funds;
  • minimum taxed funds; or
  • accumulative funds.

Investment Companies

Generally, a fund is considered an investment company if it has share classes. However, the fund will not be considered an investment company if the differences between the share classes are such that (i) the administration costs are not divided equally, and/or (ii) different currencies are employed, and/or (iii) there is a difference in the technical way payouts from the different share classes are calculated.

Fund taxation

The fund is generally tax exempt. Dividends, however, are generally taxable at a flat rate of 15% withholding tax if the fund income stems from Danish companies.

Investor taxation

Generally, the fund must withhold a 27% withholding tax on dividends. If the investor is a company, however, the withholding tax can be lowered to 22%. If the investor is another investment company, the tax may be lowered to 15% or zero, provided that certain conditions are met.

Account-Holding Funds

Generally, a fund that does not meet the conditions of an investment company (see above) will be considered an account-holding fund, provided that the fund has not issued transferable securities for the investor's investment.

Fund taxation

The fund is generally tax exempt. Income relating to business activities is, however, taxable. It should be noted that the term "business activities" does not include an account-holding fund's trade with financial instruments.

Investor taxation

As the fund is considered to be tax transparent, the fund will be disregarded for Danish corporate income tax purposes and the investors will, generally, be subject to tax as if they had invested directly in the underlying assets of the fund.

Minimum Taxed Funds

Funds that have issued transferable securities for the investor's investment may choose to be taxed under the minimum taxation rules, given that they meet certain conditions. The fund has to calculate a minimum income for the fund, which is then taxed at investor level.

Fund taxation

Generally, the fund is tax exempt; however, income relating to business activities is taxable. The fund may choose to be taxed on dividends stemming from Danish companies at a flat rate of 15%.

Investor taxation

Investors are taxed on their proportion of the minimum income or the actual amount distributed, if this exceeds (their proportion of) the minimum income. Dividends are, generally, subject to a 27 per cent withholding tax.

Accumulating Funds

A fund that has issued a transferable security for the investor's investment and that is not a minimum taxed fund (see above) is considered an accumulating fund.

Fund taxation

Accumulating funds are considered as a normal company for tax purposes. Consequently, their income is taxed in accordance with the general provisions on corporate taxation in Denmark; ie, currently at a rate of 22%.

Investor taxation

Gains and losses from sale and dividends on shares in accumulative funds are taxed in accordance with the general provisions on share income; ie, for physical persons at 21 and 43%.

Under Danish law, retail funds can be either UCITS or AIFs with marketing permits to retail investors. As the rules governing retail AIFs are the same as per above, this section will focus only on UCITS funds. Moreover, Danish UCITS that are master or feeder UCITS in a master-feeder structure are subject to further detailed regulation, which goes beyond the scope of this article. All Danish UCITS are open-ended as the UCITS are required to redeem units when so requested by investors.

The Danish Investment Association Act (DIAA) provides three alternative legal structures for UCITS:

  • an investment association;
  • a SICAV; and
  • a securities fund.

Investment associations may have a board of directors and a management board. Alternatively, investment associations may choose to delegate the day-to-day affairs to a management company. SICAVs must have a board of directors, which is required to appoint a management company. Securities funds may only be established by a management company.

All Danish management companies registered with the Danish FSA are public limited liability companies (A/S), which is due to the capital requirement of a management company of EUR125,000, or, if the management company participates in clearing or settlements, EUR730,000. An EEA management company may manage a Danish UCITS by way of passporting its authorisation, which requires prior notification to the Danish FSA. Non-EEA management companies cannot manage Danish UCITS.

Investment associations and SICAVs are legal entities, while securities funds and sub-funds are not legal entities but only economic entities. Consequently, the liability of sub-funds is limited to their own liabilities and there is no liability across sub-funds, save for administration costs. UCITS are required to have at least one sub-fund, each to be based on a particular asset class or in accordance with the articles of association of the UCITS. In any case, an investor that owns a unit in the UCITS, or its sub-fund, is regarded as an investor in the UCITS. Generally, investors have equal rights regarding matters that concern all investors in the UCITS, unless the UCITS or its sub-fund have been divided into share classes.

Danish UCITS are required to seek approval from the Danish FSA in order to operate under Danish law. The requirements for the three types of UCITS are generally the same; however, some differences apply due to the differences in fund formation and structure. The differences are referenced below. Approval is generally given if the UCITS fulfils the following requirements:

  • the UCITS is validly established (not applicable for securities funds);
  • the UCITS fulfils the applicable requirements set out in Section 3 of the DIAA;
  • the UCITS board of directors is deemed fit and proper (not applicable for securities funds), and the Danish FSA has approved the choice of management company (if any);
  • the articles of association and choice of depositary are approved by the Danish FSA;
  • the UCITS' (i) plan of activities, (ii) organisation, (iii) risk management, (iv) procedures of business and (v) administrative matters are appropriate (for securities funds, only (i) applies);
  • no close links exist between the UCITS and other natural or legal persons that may prevent the effective exercise of the Danish FSA's supervisory functions;
  • no laws, regulations or administrative provisions of a non-EEA member state, governing one or more natural or legal persons with which the investment company has close links, prevent the effective exercise of the Danish FSA's supervisory functions;
  • the UCITS has its registered office in Denmark (not applicable for securities funds);
  • the application contains all information necessary for the Danish FSA's assessment;
  • the investment association has a minimum capital of EUR300,000 (not including intangible assets), unless the investment association has delegated the day-to-day management to a management company (only applicable to investment associations); and
  • the minimum capital of EUR300,000 is subscribed for on the first general meeting and deposited in an escrow account with the depositary, or a financial institution or insurance company provides an unconditional guarantee of subscription of units in the investment association of at least EUR300,000 (only applicable to investment associations).

Moreover, the UCITS may only offer units to the public if a prospectus is prepared, and a Key Investor Information Document (KIID) is published.

The Danish FSA is obliged to process the application within six months from the application date, or the date from which additional information is sent, and in no case later than 12 months. The fee for registration with the Danish Business Authority is DKK670 for investment associations and DKK92,856 for SIKAVs. Additionally, there is a yearly fee payable by the fund to the Danish FSA.

All UCITS funds in Denmark have limited liability for investors.

In addition to the required prospectus and KIID documentation, the UCITS is obliged to prepare an annual report. Furthermore, the UCITS is required to (i) inform the Danish FSA of any conditions of material importance to the continuing operation of the UCITS, (ii) publish the sale, repurchase and redemption price of its units at least twice a month, and (iii) publish certain additional information within three bank days.

The appetite for retail funds has traditionally been driven by individual investors investing – often with the help of the bank sponsoring the UCITS – their tax-incentivised pension accounts. As the tax incentives have been changed in recent years, new pension funds increasingly go towards pension funds that are structured as life insurance companies and that do not have an appetite for retail funds. Retail funds are also used by retail customers to supplement general savings accounts, and, in light of low or negative interest rates, increasingly so. There are few foreign investors in Danish retail funds, with the exception of some specialist houses, and also relatively few Danish retail investors investing in foreign retail funds.

Please refer to 3.1.1 Fund Structures.

There are no restrictions on the types of investors that can invest in a UCITS under Danish law.

Loans

A UCITS may neither grant loans or guarantees nor raise loans. The Danish FSA may, however, give a UCITS permission to, on behalf of a sub-fund, (i) raise short-term loans not exceeding 10% of the sub-fund's assets, unless the loan has an investment objective; and (ii) raise loans not exceeding 10% of the sub-fund's assets for the acquisition of real property deemed necessary for the activities of the UCITS. If both types of loans are obtained, they may not in aggregate exceed 15% of the sub-fund's assets. Furthermore, UCITS are prohibited from carrying out certain types of uncovered sales of financial instruments.

Investments

A UCITS may only invest in and trade with financial instruments, as goods and real property may only be acquired if they are necessary for the activities of the UCITS. Investment in financial instruments is subject to certain limitations; inter alia, investments in money market instruments not traded on a regulated market, derivatives, and investments in other UCITS.

Diversification

Certain limits of asset concentration apply, where a UCITS may not invest more than a given percentage in a given asset type or gain significant influence in a public limited liability company. Consequently, the exposure of the UCITS against one investment must be limited by way of diversification.

Both non-local and local depositories of a Danish UCITS must receive approval from the Danish FSA before acting as depositary for a UCITS.

The requirements for approval of a depositary are:

  • a valid agreement with the depositary must have been entered into in accordance with the articles of association or the fund rules;
  • the depositary must be a financial institution with its registered office in Denmark, or a branch of a credit institution having its registered office within the EEA;
  • the responsible manager of the depositary must declare that the depositary has sufficient financial and professional guarantees to be able to effectively pursue its business as a depositary and meet the commitments inherent in that function;
  • the depositary's procedures for depositary activities must be satisfactory and in accordance with the Danish Financial Business Act; and
  • the depositary must have entered into an agreement with the UCITS and its management company regarding exchange of information, which is necessary for the depositary to carry out its assignments as set out in the Danish Financial Business Act.

Non-local and local managers of Danish UCITS must receive prior approval from the Danish FSA before activities are delegated to them by a UCITS.

Generally, a management company is granted approval if the following conditions are met:

  • the UCITS' board of directors must have decided to delegate the activities to the management company (not applicable for securities funds);
  • the board of directors must have explained how delegation of activities entails a more efficient administration (only applicable for investment associations);
  • the management company must be authorised to administer UCITS;
  • the management company's board of directors must declare that the company has adequate resources and qualified employees to administer the UCITS;
  • the management company must not itself delegate its functions to the extent that it becomes a letterbox entity; and
  • the management company, depositary and UCITS must have entered into an agreement regarding the exchange of information, which is necessary for the depositary to carry out its tasks as set out in the Danish Financial Business Act.

Please refer to 3.1.2 Common Process for Setting up Investment Funds.

Danish UCITS

Danish UCITS may be marketed in Denmark once the UCITS has received authorisation from the Danish FSA; see 3.1.2 Common Process for Setting up Investment Funds. Marketing of a Danish UCITS in the EEA may require prior notification to the Danish FSA in accordance with the procedure laid out in Regulation (EU) No 584/2010, and the UCITS Directive (Directive 2009/65/EC, as amended).

EEA UCITS

Marketing of an EEA UCITS in Denmark requires notification to the relevant financial supervisory authority, as per above. Additionally, the UCITS must meet the following conditions:

  • the UCITS uses the same name as in its home country;
  • the UCITS has a representative with registered office in Denmark;
  • documents published by the UCITS in its home country must also be published in Denmark in the Danish, Swedish, Norwegian or English language in the same manner as in the home country; and
  • the UCITS must pay a yearly fee to the Danish FSA (which varies depending on the activities of the UCITS).

Non-EEA UCITS

A non-EEA UCITS cannot market its shares or units in Denmark.

Generally, a UCITS may be marketed to all investors. The marketing of a UCITS may, however, constitute securities trading, which triggers provisions regarding investor suitability, often limiting the marketing pool.

Please refer to 3.3.1 Regulatory Regime.

Please refer to 2.3.8 Approach of the Regulator.

The UCITS is required to have a depositary, and UCITS that are SIKAV or securities funds are obliged to have a management company, whereas an investment association may choose to manage the fund itself. For details on requirements for depositories and management companies, see 3.1 Fund Structures.

Danish UCITS and non-local UCITS marketed in Denmark must at all times be operated in accordance with fair practice; ie, the UCITS must act fairly and loyally, not provide misleading information or omit information in its marketing and not use aggressive marketing techniques.

Furthermore, Danish UCITS or the management company of the UCITS are subject to the Danish Anti-Money Laundering Act, if the UCITS or its management company has customer relations; ie, direct contact with a customer regarding the sale or purchase of units in the UCITS. UCITS that market their units or shares themselves towards potential customers and in that context have contact with (potential) customers are also subject to the Danish Anti-Money Laundering Act. The fact that a UCITS operates a webpage is not in itself sufficient for the UCITS to be subject to the Danish Anti-Money Laundering Act.

Please refer to 2.5 Fund Finance.

The tax regime applicable to retail funds is generally the same as that described in 2.6 Tax Regime. UCITS funds that are organised as SICAVs or securities funds, however, can only be organised in a way so that for tax purposes, they are treated as a minimum taxed fund or an investment company.

The only substantial reform expected in the near future is the implementation of Directive 2019/1160/EU on pre-marketing. The new regime on pre-marketing entails that authorised AIFMs may pre-market established or non-established AIFs towards potential professional investors (as under MiFID II), except where the information:

  • is sufficient to allow investors to commit to acquiring units or shares of a particular AIF;
  • amounts to subscription forms or similar documents whether in a draft or a final form; or
  • amounts to constitutional documents, a prospectus or offering documents of a not-yet established AIF in a final form.

Furthermore, where a draft prospectus or offering documents are provided, they shall not contain information sufficient to allow investors to undertake an investment decision and must clearly state that:

  • the relevant documents do not constitute an offer or an invitation to subscribe to units or shares of an AIF; and
  • the information presented therein is incomplete and subject to change.

Under the new pre-marketing regime, the AIFM must informally notify the Danish FSA of any pre-marketing being carried out. The AIFM may delegate the pre-marketing activities to (i) investment firms pursuant to MiFID II, (ii) credit institutions, (iii) management companies for common funds pursuant to Article 5(2) of the UCITS Directive, (iv) other AIFMs, and (v) tied agents pursuant to MiFID II.

It should be highlighted that the AIFM (or the delegate in charge of marketing; see above) must ensure that the investor is unable to commit to the subscription of shares or units in the AIF until the AIF has received a marketing permit. It should also be noted, however, that any commitment made by investors within 18 months from the initiation of the pre-marketing will be seen as a result of marketing, thus triggering the marketing licence requirement. Consequently, investors may not commit to the fund until relevant licences are in place.

Horten Advokatpartnerselskab

Philip Heymans Allé 7
Box 849
2900 Hellerup
Copenhagen
Denmark

+45 33 34 40 00

+45 33 34 40 01

info@horten.dk www.horten.dk
Author Business Card

Law and Practice

Author



Horten is a full-service firm with around 250 fee earners. For a long time, the firm has been active in the fund management field with a particular focus on servicing foreign fund managers servicing the Danish pension fund industry (around EUR500 billion worth of assets under management) as well as the Danish pension fund managers contracting with foreign fund managers and establishing structures to accommodate such fund management. The firm's fund management group is well-versed in all types of investment management agreements and the regulatory landscape surrounding them, in particular the AIFMD, and nature a close working relationship with the Danish FSA, securing a smooth and efficient registration process, when required. The fund management practice is complemented by substantial debt and fintech practices within the banking and finance area, as well as M&A, real estate and tax practices for support.

Compare law and practice by selecting locations and topic(s)

{{searchBoxHeader}}

Select Topic(s)

loading ...
{{topic.title}}

Please select at least one chapter and one topic to use the compare functionality.