Board members can deduct damages
The principal question of the case
Two board members had incurred liability for damages in connection with the bankruptcy of a company.
The principal question was whether the board members could deduct the damages from other current and future income, or whether such deduction was limited to income earned as board members.
Background of the case
In 2020, the Danish National Tax Board confirmed in two binding rulings that the damages paid by the board members were deductible, as the damages were considered a normal operational risk associated with their directorships. However, it was stated that the deduction should be calculated according to a net principle. Therefore, the damages could only be deducted against income earned as board members. The Danish National Tax Board reasoned that a directorship does not qualify as a business activity, and that, according to established practice, losses from non-business activities cannot be deducted against other income. The Danish National Tax Tribunal reached the same conclusion.
As each board member had limited income from directorships, this interpretation effectively denied them any appreciable tax deduction.
The case was brought before the courts by Plesner and referred to the Eastern High Court as the court of first instance, as it constituted a landmark case.
The Eastern High Court’s judgment
The Eastern High Court ruled in favour of Plesner, finding that neither the wording nor the preparatory works for the rule on the deduction of operating losses (section 6(1)(a) of the State Tax Act) provided any basis for limiting the board members' right to deduction, and that the administrative practice relied on by the Danish Ministry of Taxation did not provide any legal basis for such a limitation either.
Accordingly, the Eastern High Court ruled that the board members were entitled to deduct the damages paid without limitation under section 6(1)(a) of the State Tax Act.
The Danish Ministry of Taxation has not appealed the judgement to the Supreme Court.
This is the first judgment considering a fundamental question of loss utilisation under the provisions of the State Tax Act from 1922.
Søren Lehmann Nielsen argued the case before the Eastern High Court, assisted by a team consisting of Jef Nymand Hounsgaard, Svend Erik Holm, and Sigurd Daugaard Christensen.