Business taxation scheme in Denmark
In Denmark, owners of a sole proprietorship, thanks to a special tax scheme (called VSO - the corporate tax system), are entitled to defer or reduce their income tax, as it allows a 22% corporate tax rate to be applied on that portion of the profit from the sole proprietorship that has not been withdrawn from the company into the entrepreneur's private bank account. That is an income tax paid temporarily on retained profit of the entrepreneur in their business, and when it is withdrawn in subsequent years they are required to make payment of the difference of already paid 22% income tax in the corporate income tax system to the actual percent of personal income tax for the year in which they withdrew the profit. The scheme first and foremost allows the business owner to defer personal income tax, but sometimes it also allows the maximum 15% tax to be eliminated once income exceeds the highest tax threshold set in Denmark for the year. In addition, the scheme allows for an increase in the value of the tax deduction associated with interest on loans.
The owner of a sole proprietorship in Denmark should consider taking advantage of the tax scheme both when they are charged interest on company loans and when they have to pay the maximum tax. That is because of the high personal income they have earned, while keeping money in the company from profit. An entrepreneur can avoid paying the maximum tax for a year in which they earned a high profit by equalizing income between a low profit year and a high profit year. In Denmark, the maximum tax is 15% in addition to the regular tax on all income earned above the maximum tax threshold.
Denmark's maximum tax bracket is shown below:
- 15% maximum tax applies when total annual gross income, before deducting the 8% AM contribution, exceeds DKK 45,400 (2021); 44,250 (2020).
- 15% maximum tax applies when total annual gross income, before deducting the 8% AM contribution, exceeds DKK 49,348 (2021); DKK 48,098 (2020).
- 15% maximum tax applies when total annual gross income, before deduction of the 8% AM contribution, exceeds DKK 544,800 (2021); DKK 531,000 (2020).
- 15% maximum tax applies when total annual gross income, before deduction of 8% AM contribution, exceeds DKK 592,174 (2021); DKK 577,174 (2020).
In Denmark, the owner of a sole proprietorship can take advantage of the tax scheme - calculating in advance what amount of their income can be taxed under the scheme - by selecting box 184, when updating the preliminary income estimate. In order for an entrepreneur to take advantage of this scheme, they should separate private and business accounts and have a separate bank account assigned to their business CVR number. After the end of the year, the entrepreneur can also take advantage of the scheme by selecting field 147 on the annual tax return.
It is not advisable to use the tax scheme for companies in Denmark if the entrepreneur has no interest-bearing loans and does not pay the maximum tax. However, an entrepreneur can use the scheme if they do not pay the maximum tax, but has interest-bearing loans. On the other hand, in the case where they neither have interest-bearing loans nor pays the maximum tax, they can use the scheme to defer paying the tax, which can have consequences if they want to close his sole proprietorship, because they will then be obliged to pay the whole tax that was deferred in the tax scheme right away, that is, both the 15% tax on the portion of the money held in the business and the 15% additional tax they would not be forced to pay if they had withdrawn the money on an ongoing basis.
In order for an entrepreneur to take advantage of the tax scheme, they don't have to keep the profit only in the form of cash - the profit can also be kept as other assets (such as equipment or stock products), but the money must remain in the company. However, when it comes to stocks, using the tax scheme, one can only invest in them indirectly through investeringsforeninger, or special investment products.
The Danish corporate tax scheme is not an easy one, so it is advisable to enlist the help of a certified accountant to make all the necessary calculations.