Danish corporate income tax and dividend tax for limited liability companies

CORPORATE INCOME TAX

Limited liability companies, also known in Denmark as Ltd, pay corporate income tax on their profits. Corporate income tax is 22% (2021).

A company's taxable income is calculated by subtracting its expenses from the company's sales. This amount is called the "pre-tax result". This is the same result that you can see in accounting reports - for example, by printing the income statement in e-conomic (or the accounting program you use). When you know the pre-tax result, your accountant/auditor has to make some tax adjustments, and then proceeds to calculate the company's taxable income.

A company's taxable income is always a little different than the pre-tax result you see in the accounting system. The tax adjustments made are mainly for depreciation, as well as for certain types of expenses that are not fully tax-deductible - or where the tax deduction may be higher than what was deducted in your accounting. The company's taxable income is declared annually in the company's tax return. The deadline for declaring the company's taxable income is six months from the end of the tax year.

Corporate income tax is due on March 20 and November 20 each year. We call these „ordinary corporate income tax payments.” These two payments will, of course, be based on estimates, since no one knows the actual profit before the end of the year. In addition to these 2 payments, there is an optional third payment on February 1, in the year following the end of the fiscal year. This allows the company to adjust its corporate income tax payments after the accounting for the completed fiscal year is completed. By paying more income tax, the company can save money on later interest for late payment of company income tax. This third payment is called a „voluntary payment of company income tax.” If you have an LLC in Denmark, when you first receive a letter from the tax office telling you to pay company income tax, it will almost always state that the tax office has estimated that the company should pay DKK 0. That’s because the tax office doesn’t yet know how much the company should pay, so it sends a letter stating that the payments are due in March and November.

TAX RATES AND LIMITS

KEY DATES

If the company's taxable income is DKK 0, no income tax is paid by the company.

The deficit in taxable income might be carried forward to upcoming years, and then it might be offset in taxable income before the company has to pay company income tax.

Example:

If a company has a deficit in taxable income of DKK 100,000 in 2020 and a taxable income of DKK 100,000 in 2021, then the company can offset the deficit it had in 2020 so that the company's taxable income in 2021 is DKK 0 (DKK 100,000 profit in 2021. - DKK 100,000 deficit in 2020. = DKK 0 in taxable income). Then corporate income tax will not be paid in either 2020 or 2021. A deficit register is kept on the SKAT Erhverv tax office website, which shows what kind of deficits have already been compensated in earnings, and what should be compensated in future earnings.

The deficit in taxable income can be carried forward to future years, where it can be offset in taxable income before the company has to pay company income tax.

WHAT IS A DIVIDEND?

By a dividend we mean a portion of the profit transferred to the owners of the company. The company is not obliged to pay dividends to the company's owners if there has been a profit, but if the company has lots of money, it is a good idea. Moreover, if someone is both the owner of the company and is also employed through the company in the position of director with a salary, such a person can thus make a tax profit by paying himself a dividend as well. The company has a possibility to pay reserves to shareholders in the form of dividends. Reserves are basically profit after paying the company's income tax, which is collected by the company. A deficit in taxable income can be carried forward to future years, where it can be offset in taxable income before the company has to pay the company's income tax. When the company has made a profit, then dividends can be paid to shareholders. Dividends always have to be accepted during the general assembly. There are 2 types of general meetings - an ordinary general meeting and an extraordinary general meeting. At an ordinary general meeting, shareholders accept the annual report and also, based on the accepted result, decide that dividends must be paid to shareholders. The annual general meeting takes place once a year. If important decisions are made that cannot wait until the annual general meeting, then it is possible for an extraordinary general meeting to take place during the year. These may include changes in the board of directors, a new auditor, etc. - as well as the payment of dividends for the present year. The decision to pay dividends is recorded in the minutes of the general meeting. The dividends with dividend tax then have to be reported to the Danish tax authority at SKAT Erhverv.

[Infografika] Dividends are not allowed in the first fiscal year.
It can be paid only after the end of the fiscal year and after the approval of the annual report at the general assembly.
The dividend paid and the tax on dividends must be declared to the tax authority.
In the second fiscal year, dividends are also allowed to be paid during the year, as long as the dividends are approved in advance at an extraordinary general meeting.

When dividends are paid to shareholders who are individuals, tax must be withheld from them. The first DKK 56,500 (2021) is taxed at a rate of 27%. If the dividend exceeds DKK 56,500 (2021), then the tax on the dividend is 42% on anything over DKK 56,500 (2021). If the partner is married, the dividend tax limit changes from 27% to 42% and is DKK 113,000 (2021). The company has to suspend 27% dividend tax from dividends paid and finalize the payment of this tax straight to the tax office.

Dividend as well as dividend tax are declared on the SKAT Erhverv website, which is the tax authority's website. Dividend tax is payable by the tenth day of the following month. To pay the dividend tax, payment details for "Skattekontoen" are used. The ID of payment is revealed when filing the dividend and dividend tax return. The remaining tax is paid to the tax office, if the shareholder also has to pay dividend tax of 42% on amounts exceeding DKK 56,500 (2021).

In the case of non-residents in Denmark, the tax on dividends depends on the double taxation agreement between Denmark and the country of residence. If a person isn’t Denmark’s resident, the tax on dividends is usually 15%. Dividend tax of 15% is offset by the company in Denmark when dividends are paid.

Dividend tax must be paid on the 10th of the month following the decision to pay dividends. When you declare dividends and dividend tax in SKAT Erhverv, the dividend tax will appear on "Skattekonto." You pay the dividend tax using the payment ID that appears on the confirmation when you submit the declaration.

Danish holding companies which own 10% and more of an unlisted Danish company are not required to pay tax on dividends if they earn dividends from the unlisted company.

Danish holding companies with less than 10% of a different Danish company have to pay 15.4% dividend tax. This 15.4% tax is calculated to be a 22% tax on 70% of the dividend.

Let's say it’s January and it is sure that this year there will be a profit. Start estimating this profit for the whole year as accurately as possible. Then count 22% of your estimated profit and divide it by two - these will be the 2 regular corporate income tax payments due on March 20 and November 20. The installments of corporate income tax can be always changed on the Tax Authority's "SKAT Erhverv" website. Payment details of your online bank are also to be found there.

Holding companies in Denmark that own 10% or more of an unlisted company in Denmark do not have to pay dividend tax when they receive dividends from an unlisted company.

If the value you end up estimating is not accurate, don't worry, because after the end of the year you still have to do an annual report and file a corrected tax return. Then the next year you have to pay the remaining tax or get a refund, depending on whether your payments were overestimated or underestimated. Annual reports must be filed 5 months after the end of the fiscal year. Company tax returns must be filed 6 months after the end of the fiscal year. You receive your tax return the same year you file your income tax return, but in November. If there is still company income tax to be paid, it must be paid on November 20 of the same year.

Annual reports have to be submitted to the Danish Enterprise Authority at VIRK no later than 5 months after the fiscal year has ended. Tax returns have to be delivered to the Danish Tax Authority at SKAT Erhverv no later than a half year after the tax year ends. Dividend tax has to be declared, then paid when the 10th day of the month that follows the decision to pay dividends comes.The annual tax statement goes to e-Boxes in November after the end of the tax year. Not covered by voluntary and ordinary contributions additional corporate income tax has to be paid in November after the tax year comes to an end.

Limited liability companies are not obliged to follow a calendar year. They can take advantage of a split year. For example, if you set up your company on July 1, 2021, your first year could run from July 1, 2021 to December 31, 2022, or 18 months. Another option is to end your first year on December 31, 2021. This is entirely your decision, but you should not exceed the maximum of 18 months in your first tax year. Subsequent tax years always have 12 months.

If in the first year you opt for 18 months, the tax becomes more complicated. The first year, on November 20th you will get a partial payment, and in the second year, in March and November (all payments belonging to the first tax year). The tax year must end before the tax return is filed, so with the 18-month tax year, in this example. The tax year would start on July 1, 2021 and end on December 31, 2022, after which the tax return would be filed on June 30, 2023. Corporate income taxes have to be declared 6 months after the end of the fiscal year.

In the 18-month tax year example, after filing your tax return on June 30, 2023, the IRS will calculate your actual business income tax, which will amount to 22% of your taxable income (the rate in 2021). This tax will be due as of November 20, 2023, and any taxes you may have already paid - first year in November and second year in March and November will be deducted from the total company income tax due. You will receive an annual income tax statement, which will include information such as your profit from July 1, 2021 to December 31, 2022, as well as 22% corporate tax and additional interest on late payment, which is about 4% (the rate in 2021). You can also get an income tax refund - this is if the amount of income tax you paid turned out to be too high.

A company has a possibility to decide when its fiscal year ends, but few companies choose a year other than the usual calendar year. Many of them choose December 31 because it is easier to compile an annual review if it goes on with the calendar year. A few, on the other hand, prefer to end the year on June 30 or January 31. For these companies that choose to not follow the usual calendar year, income tax can cause more trouble. Suppose, for example, that June 30 falls at the end of the tax year. You may still have 18 months in your first tax year, but if you set up your business on July 1, 2021, and your tax year ends on June 30, 2022, your first tax year will last only 12 months. You will most likely pay nothing in November in the first year of 2021. Then, in 2022, in March you will finalize a partial payment and even though the year ends on June 30, 2022, a partial payment made in November 2022 still counts as your first tax year, even though the payment was paid after the first tax year. One advantage is that it is possible to avoid interest payments because there is more time for calculating the correct value of profit, from which it’s possible to calculate exactly how much additional tax you have to pay for the last installment in November 2022.

If another company owns your company to the extent of over 50%, such as being owned by a holding company, you will have to apply so-called "joint taxation." In the case of joint taxation, it is the owner (who owns over 50%), referred to as the management company, who has to manage income tax payments of the company's to the tax authority in Denmark. The management company has to collect the tax from the company. A joint tax contribution is the company’s income tax that is collected by the management company from the company. The joint tax contribution corresponds directly with the income tax that has to be paid by the company on its taxable income.

If you want to transfer profits from your limited liability company to a holding company, the main issue is how many shares the holding company owns. This is very important because it determines whether or not the holding company will have to pay tax on the dividend. If the holding company owns 10% or more of the company's shares, then the company can pay dividends to the holding company without deducting dividend tax.

By transferring profit to the holding company from the company, in case of any complications creditors will not have access to the transferred money. The reason for that is that the money was paid to the holding company as a dividend. Once you pay the money to the holding company, it is possible to use it for new investments, as well as simply keep it there for security. The IRS can demand the money from the holding company again in certain situations, if, for example, there are arrears of employee taxes (but this requires 50% or more shareholder ownership by the holding company).

The sole shareholder and director also can pay themselves. It’s possible to do in two ways:

Dividends -  they can receive from the company dividends if there is a profit after paying income tax on the company. Dividends up to DKK 56,500 are taxed at 27% (2021). Dividends in excess of DKK 56,500 are taxed at a scale of 42% (2021). If they are married, then a double limit of DKK 113,000 applies (2021).

Salary -  they can be hired as a director in a company and then be paid for the work you do.

For most, it is the best solution to first get a salary up to the maximum tax bracket limit, and then dividends up to the low tax rate limit (DKK 56,500, 27%).

Priority of income:

Salary up to the limit of the maximum tax threshold (2021: Gross salary before deduction of ATP and AM contributions: DKK 593,309).

Dividend up to the low dividend tax rate limit of 27% (2021: DKK 56,500 if unmarried and DKK 113,000 if married).

Remuneration for which the maximum tax applies.

If you are married, special rules apply. The amount you can pay out as dividends with 27% dividend tax is doubled, so that instead of DKK 56,500 you can pay out DKK 113,000 (2021).