Taxes in Denmark
Taxes in Denmark are very high, but at the same time progressive, i.e. the amount of the tax threshold depends on the income of legal and natural entities. Among other things, pension and insurance contributions, alimony, food costs and transport from home to work can be deducted from Danish taxes, and the Danish Tax Authority (SKAT) has seven years to audit whether the expenses in question are correct.
What do you need to know about taxes in Denmark?
- The income tax percentage rates for 2019 are:
- 8% for income below DKK 50 217,
- 39.2% for income between DKK 50,217 and DKK 558,043,
- 56.5% for income higher than DKK 558,043.
- The laws relating to Danish income tax are:
- Personskatteloven, or the Personal Income Tax Act,
- Skattekontrolloven, or the Tax Control Act,
- Kildeskatteloven, or the Withholding Tax Act,
- Ligningsloven, or the Tax Assessment Act.
- Danish income tax consists of state tax, city tax, health insurance contributions (sundhedsbidrag) and contributions to the labour market (arbejdmarkedsbidrag, or AM-bidrag).
- Denmark has a voluntary church tax of 0.92% on average.
- The mobile municipality tax in Denmark is paid to the regional government and averages 24.92%.
- Registration has to be made with the regional Customs and Taxation Office through the Enterprise and Trade Agency.
- Tax on income from shares is 27% (DKK 0 to 54,000) or 42% (over DKK 54,000).
- There is a 22 per cent corporation tax – CIT – on setting up and operating a company in Denmark, but when the company’s 12-month turnover exceeds DKK 50,000, it becomes liable for 25 per cent VAT.
- Exported goods and services have a VAT rate of 0 per cent, i.e. no VAT is charged on their sale, but the recipient can deduct VAT on their purchase.
- The tax year in Denmark is the calendar year, i.e. income for the previous calendar year (or any other year, but always 12 months) is taxed.
- Employees of Danish companies are subject to full or limited tax liability (begrænset skattepligt), the latter applying to those who have a fixed-term contract and Danish employees who live outside Denmark.
- There is a three-year time limit for compulsory settlement with the Danish tax authority, SKAT.
- In Denmark in 2019, the tax-free amount was DKK 46,630 (persons whose annual Danish income was lower than this amount are exempt from paying income tax).
- In Denmark, the tax return must be submitted via the website up to six months after the end of the tax year (calendar year or other, but 12 months). If the tax year ends between 1 February and 31 March, the tax return should be submitted by 1 August and tax paid on 20 March and 20 November.
The Danish tax system consists of direct taxes:
- church tax(kirkeskat);
- city tax (kommuneskat);
- pension contributions (ATM);
- employee contributions;
- health insurance contributions (sundhedsbidrag);
- land tax (real estate tax). Ejendomsværdiskat is a Danish state tax on the value of real estate, covering real estate regardless of where it is located. All residents of Denmark are obliged to pay this tax. Poles who are Danish residents must also pay this tax on their real estate that is located in Poland (rate of 1% per year – real estate worth less than DKK 3.04 million; rate of 3% per year – real estate worth more than DKK 3.04 million;
- tax on the value of real estate that has been assessed during the public valuation;
- tax on the hiring of foreign labour to work in Denmark (according to Act No. 921 of 19 September 2012, now Act No. 117 of 29 January 2016, a Danish company employing foreign labour is obliged to pay a 38 per cent tax to the Danish Tax Administration – net 35.6 per cent, including an 8 per cent contribution to the Danish Employment Fund and a 30 per cent tax on the hiring of labour);
- tax, which is deducted from the source of income in individuals and corporations;
- tax that is not deducted from the source of income;
and indirect taxes:
- customs duties;
- environmental taxes;
- excise duties (punktafgift);
- VAT (moms).
The Danish tax system is quite complex, so before you set up your own business in Denmark or employ a Danish company, it is worthwhile to familiarize yourself with the regulations, rates, documents and deadlines for all taxes applicable in the Kingdom of Denmark.
Taxes from the company side
Danish taxes apply to everyone who lives and earns in Denmark, whether unemployed people receiving benefits from a-kasse (arbejdsløshedskasse), pensioners, students receiving state grants, people who work outside Denmark or have foreign income, or entrepreneurs who run their own companies (sole proprietorship – Enkeltmandsvirksmhed, Aktieselskab – A/S, Interesselskab – I/S, Anpartsselskab – ApS, Kommanditselskab – K/S, a branch of a foreign company Filial af udenlandsk selskab, a representative office of a foreign company Salgskontor or cooperative associations Andelsforening/Brugsforening).
SKAT, the Danish tax authority, recognizes self-employment income as income for the business owner. For this reason, self-employment tax is declared on a single tax return, and the business owner, who pays taxes and contributions, is entitled to pension and health benefits as for those employed in Denmark.
If you set up and run a company in Denmark, there is a corporate tax – 22 per cent CIT. If a Danish company’s annual turnover exceeds DKK 50,000, it becomes subject to 25 per cent VAT.
All Danish companies – from associations and cooperative unions to limited liability companies, joint-stock companies and branches of foreign companies that are based in the Kingdom of Denmark – are required to settle income tax on their total income (including income from property and capital) up to six months after the end of the tax year.
What is worth knowing about the Danish corporate tax system?
- Corporate income tax is 22%.
- Non-resident companies only account for the 22 per cent tax on Danish profits.
- Capital gains that are included in the Danish company’s income are also taxed at 22 per cent.
- If a Danish shareholder sells company shares, group shares, unlisted portfolio shares or shares in subsidiaries, the capital gain from such a sale is not taxed.
- The entire capital gain from listed portfolio shares is taxed at 22 per cent.
- If a foreign shareholder sells its Danish shares, the capital gain from such a sale is not subject to Danish taxation.
- All Danish companies are required to pay environmental taxes to companies that provide energy, and these companies settle with the Danish Tax Authority.
- Income from the Danish head office is settled together with income from foreign subsidiaries (however, income from a foreign subsidiary of a Danish company may be exempted from paying taxes in Denmark).
The Danish value added tax VAT (MOMS) is uniform at 25%. It applies to all goods and services except those that are exempt from paying this tax, such as:
- travel agency services,
- funeral services,
- social benefits,
- medical care,
- financial operations,
- arts and culture,
- charitable activities,
- real estate,
- passenger transport,
- postal charges.
What else should you know about VAT?
- All Danish companies with an annual turnover of more than DKK 50,000 are subject to VAT.
- The VAT rate is 25%.
- The Danish VAT rate of 25% applies to agricultural products, industrial products and almost all services.
- The tax rate for services such as the sale or rental of real estate (with energy, water and gas supply), medical care, education, banking, insurance transactions and cultural activities is 0%.
- Foreign employees who are employed in Denmark for a period of between three months and three years and have minimum earnings of DKK 47,500 are subject to a 25 per cent flat tax, which is increased by a 9 per cent contribution to the Danish labour market.
- A uniform 25 per cent VAT is paid by any company selling services or goods in Denmark. This is a value-added tax, which is added to the price of services and goods that are sold by the company.
- The owner of a business in Denmark has eight days to register the business as a VAT payer (before starting to supply goods and services).
- A Danish business can be declared as a VAT payer through the website of the Register of Foreign Suppliers (RUT, virk.dk).
- The reverse-charge procedure is that foreign companies that wish to sell goods and services to Danish businesses do not have to charge Danish VAT. In that case, no tax is charged on the invoice, only the net value of the goods or services is entered, and a ready-made formula is used, e.g. reversed charge, which means that the buyer should charge and pay VAT on the service, and enter the CVR or SE-nummer (the buyer’s registration number).
Services that are subject to the reverse-charge procedure:
maintenance work and any repairs,
- The SE-number (given by SKAT)is given by a Polish company that is registered for VAT in Denmark (if it is not registered, it only gives the TIN).
- If the owner of a Danish company is at the same time an employer and thus has employees, he/she is obliged to register in Denmark as an employer.
- Foreign employees (both permanent and seasonal), whom the owner of a Danish company intends to employ, are subject to various tax rules, which are related to their origin and how long they have lived in the Kingdom of Denmark.
- Polish companies, even if they are not VAT payers in Denmark, are entitled to reimbursement of VAT on taxable Danish costs.
- A recipient of services in Denmark is obliged to register as a VAT payer and pay this tax, even if it provides services to companies not registered for VAT.
Danish direct CIT is approximately 8% of all taxes in Denmark and is based on the income of Danish companies, together with income from capital.
What else you need to know about CIT:
Corporate income tax is 22%;
CIT tax is levied on legal persons, i.e. limited liability companies or joint stock companies, and in the case of partnerships, only the partners of the partnerships are subject to taxation;
in Denmark, companies are taxed on a consolidated basis, i.e. the parent Danish company, its branches and subsidiaries are taxed.]
Danish excise tax (punktafgift) is levied on goods in accordance with European Union directives (Denmark has also introduced many of its own excise taxes) and covers, among others:
- cigars, cigarillos and Hawaiian cigars,
- chewing tobacco, cigarettes, snuff and pipe tobacco,
- cigarette papers,
- liquefied gas,
- car tyres,
- natural gas,
- wines, including fruit wines,
The Europe Agreement of 16 December 1991 standardizes trade between the European Union and Poland, thanks to this agreement a free trade zone was created for industrial goods (since 1999), i.e. there are preferential customs rates, the same for all EU countries, which are usually 0% (except for agricultural, processed agricultural, and food goods), in order to apply the preferential rate it is necessary to present form „EUR1” (certificates of origin of products) to Danish customs officers.
The differentiated excise duties include:
- ice cream,
- video cassettes,
- tobacco products,
- chocolate products,
- light bulbs,
- disposable packaging.
In Denmark, the tax-free amount in 2019 was DKK 46,630. Individuals whose annual Danish income for 2019 was less than this amount were exempt from paying income tax.
Danish tax thresholds
There are 3 tax thresholds within the Kingdom of Denmark:
1.8% for income below DKK 50,217;
39.2% for income between DKK 50 217 and DKK 558 043;
56.5% for income higher than DKK 558 043 (one of the highest in Europe).]
Double taxation treaty
A double taxation treaty protects citizens from double taxation. Thanks to bilateral tax treaties between Denmark and other countries, taxes paid in the country of employment will be deducted from taxes to be paid in the country of residence or registration. Income that is earned in the country of employment will be taxed only once (in the country where the income comes from) and exempt from tax in the country of residence or registration (citizens are required to pay tax from the country where the tax rate is higher).
European Union citizen working in Denmark
A consultant Peter from Germany finds an interesting position with a Danish end client through Right People Group and applies to take part in a project. He gets the job and a 6-month project, requiring full-time work in Denmark. It has been agreed that consultant Peter will be paid on an hourly / daily basis and his qualifications have been confirmed by the end client. Consultant Peter will work according to the terms and conditions agreed with Right People Group and the end client on site in Denmark.
German consultant Peter must now pay Danish taxes from his first day of work – in accordance with International Employment of Workers. If he keeps all his interests in his home country (such as place of residence, family, economic interests, etc.) and only works in Denmark, he will only be subject to limited tax liability in Denmark.
Taxes from the employee side
Within the Kingdom of Denmark, there is an income tax consisting of 3 thresholds (basic, middle and highest). Individuals pay a flat income tax (to the municipality), which is 32.6%, and a progressive tax, which is 5.64% (income greater than DKK 42,000 plus income from capital) and 15% (income greater than DKK 42,100 plus income from capital), paid to the treasury. Progressive taxation is applied to labour income and capital income, but the burden on an individual’s income cannot exceed 59%.
In Denmark, individuals who are 15 years of age or older (and younger with income) must file, at the end of each tax year, a tax return – by 1 July at the latest, unless the taxpayer requests an extension of the relevant deadline. If individuals have no income or have income from gainful activity only in Denmark, they should submit, at the end of the tax year, a tax return, in simplified form – by 1 May at the latest. Married persons are required to settle income tax separately.
In 2019, the Danish income tax percentage rates are:
- 8% for incomes below DKK 50 217.
- 39.2% for income between DKK 50,217 and DKK 558,043.
- 56.5% for income higher than DKK 558,043.
Denmark also has a church tax, which is voluntary and averages 0.92% (the rates of this kirkestat can vary from 1% to 2%, depending on the municipality) and a mobile municipality tax (kommuneskat, averaging 24.84%), which is paid to regional governments.
The tax-free amount is set in Denmark every year (in 2019 it was 10.10% on gross salary).
The Danish taxpayer is required to register with the regional Customs and Taxation Office through the Danish Commerce and Companies Agency.
What can you deduct from your Danish income tax?
If you work for a Danish company, you are entitled to a number of tax reliefs that you can take advantage of during your annual tax return with the Danish Tax Authority.
Below is a list of Danish tax reliefs and the documents needed to obtain the relief in question:
- accommodation tax relief (determined annually by SKAT, in 2018 it was DKK 214 per day), which can be used by temporary employees of Danish companies upon presentation of the rental agreement for the premises and accommodation receipts or bank statements confirming utility and rent payments. If the employer has deducted a percentage of the costs from the employee’s pay cheque, payslips for the period in question must also be presented;
- the commuting tax credit (related to the distance travelled and the number of commutes and determined annually by SKAT), which can be used by all employees of Danish companies whose round trip from their place of residence to their place of work is more than 24 km (even the commute from Poland to work in Denmark), regardless of the mode of transport. In order to benefit from this relief, fuel receipts, Danish public transport tickets, air tickets, coach tickets, motorway gate tickets or ferry tickets must be presented, depending on the mode of transport. In 2018, the allowance was DKK 1.94 per km for distances between 25 km and 120 km round trip, and DKK 0.97 per km for distances above 120 km round trip;
- bridge crossing tax relief available to all employees of Danish companies who have to cross a toll bridge to reach their place of work (depending on the bridge and mode of transport);
- tax relief for meals (determined annually by SKAT, in 2018 it was DKK 498 per day), which can be used by all temporary employees of Danish companies;
- the tax relief for interest expenses on consumer loans and mortgages, is intended for employees of Danish companies with the loan in question and whose minimum 75% of annual income is from Denmark (married persons are also required to include their spouse’s income). In order to benefit from this relief, you must present in your annual return, translated by a sworn translator into Danish or English, a certificate (containing the details of the borrower, the amount of interest paid, the type of loan and the name of the bank) from the bank showing the amount of interest paid during the tax year. In the case of a mortgage loan, you must also deduct 1% of the value of the property, which is not necessarily paid by you;
- the cross border tax credit is for employees of Danish companies with a minimum of 75% of their annual income from Denmark. If you are married, you must include your spouse’s income in your joint annual tax return (however, your spouse’s domestic income cannot be more than DKK 42,000). In order to take advantage of this tax relief, you must present a marriage certificate translated into Danish or English by a sworn translator (this can be a marriage certificate on an EU form) and a certificate from the Polish tax office stating your and your spouse’s income, which must also be translated into Danish or English by a sworn translator;
- the dual household tax credit is available to all employees of Danish companies who can certify that they also run a household in their place of residence. In order to take advantage of this relief, you must present a marriage certificate translated into Danish or English by a sworn translator (it can be a marriage certificate on an EU form) and a certificate from the Municipality of the same place of residence with your spouse, which must also be translated into Danish or English by a sworn translator.
Denmark – tax return
In Denmark, all the most important matters concerning both employees of Danish companies and owners of Danish companies, related to tax returns, documents and deadlines, are best dealt with online, through the website of the Danish Tax Office (SKAT, www.skat.dk).
Folkeregistret, the Danish Citizen Service Office (or the Foreigners Service Offices located in Odessa, Copenhagen, Aarhus and Aalborg), is responsible for issuing Danish employees or entrepreneurs with a tax identification number, the Central Person Register (CPR), which entitles us to a health insurance card that guarantees us free medical care. In order to obtain a CPR, you will need proof of identity, a tenancy agreement and an employment contract.
Documents and deadlines
Danish tax-related documents are:
which is a document issued and sent out after 2 July by SKAT that contains the tax decision (the amount of the refund or surcharge).
which is a document (equivalent to a PIT-11) that summarizes an employee’s earnings. Every Danish employer is obliged to issue such a document to its employees upon termination of employment.
which is a tax return form that is issued by the Danish tax office (SKAT) and sent to the taxpayer’s address (Danish or Polish) provided at registration.
i.e. weekly or monthly payslips.]
History of taxation in Denmark
Over the centuries, the levels and types of taxation that have been introduced in Denmark have changed considerably. The earliest references to this date back to the 16th century. Back then, the main source of income for the Danish state was the collection of excise taxes from the feudal lands of Demesne. In addition to this, sound charges were also introduced, which were levied on foreign ships in exchange for allowing access to pass through the Øresund Strait. Later, as a result of the Great Northern War, Denmark ceded a very large portion of its territory. This resulted not only in huge monetary losses, but also in a subsequent increase in tax rates. It also initiated the introduction of income tax. Thanks to rapid population growth, agriculture developed significantly, and higher taxes were introduced for duties on wheat exports and sales. Until 1897, the income tax rate was unchanged at 15%. Denmark surpassed all European countries in terms of income tax. Its economy was significantly affected by World War II. Denmark introduced social assistance for the unemployed and sick. The aid programs, along with the rapid development of the public sector, especially schools, made income tax the basis of tax revenue. Most changes in income tax have been made over the last hundred years. Starting in 1903, income tax levies were applied on „assessed” income. This meant that personal taxes that were borne by citizens for other areas were not taken into account. This state of affairs continued until 1966, when the income tax was changed to taxable income, taking into account personal taxes to other areas as well, even income that was earned from interest and stocks. In 2001, the then-reigning liberal-conservative government decided to implement a „tax freeze,” which stopped the increase in tax rates. According to the findings, it was possible to waive the tax freeze, however, only for special situations and times of crisis. A tax increase was only possible on the condition that it was at the expense of another form of taxation. The Danish tax reform introduced in 2010 resulted in a gradual reduction of taxes. This was motivated by an increase in labor supply, especially when viewed from a long-term perspective. This change was also expected to contribute to mitigating the globally severe effects of the economic crisis. The tax cut resulted in as much as 30 billion less in tax revenues between 2010 and 2019. Despite this reform and its effects, income taxes have stabilized at around 50%.
Denmark’s tax structure compared to other countries
There are significant differences between the tax structure (the relative weight of different taxes) that exists in Denmark and the OECD average. As estimated in 2016, the Danish tax system recorded much higher revenues from contributions made by individuals. Interestingly, no revenue was derived from social security contributions. Part of Denmark’s revenue is also drawn, of course, from taxes paid by legal entities, payroll taxes, VAT, property taxes and other taxes on services and goods. According to Professor Henrik Kleven, who teaches Economics at Princeton University, three policy principles of Scandinavian countries (including Denmark) can be distinguished, based on which it can be concluded that the establishment of high tax contributions counterintuitively results in only minor distortions in the country’s economy. He considers these three principles to be broad tax bases, ensuring low levels of tax evasion and heavily subsidizing goods complementary to labor.
Individuals whose source of income is in Denmark are required to apply for a tax card. The Danish tax card is the official document by means of which individuals receiving a salary from work in Denmark can declare their income, and in this way the amount of tax needed to be paid is calculated. To apply for a tax card it is necessary to go to the local tax office. At the office, you will in turn need to fill out an application specifically designed for this purpose, namely „Application for Tax Credit for Foreign Students or Business Interns in Denmark (04.062).” After completing the form, it should be delivered to the tax office, preferably electronically. After receiving it and verifying the correctness of the information provided, the Danish Tax and Customs Administration will make a decision regarding the issuance of the tax card. In addition to this, it is also necessary to contact SKAT and provide additional information on what our expected income is for the calendar year. Once the tax card is issued by the Danish Tax and Customs Administration, the employer will receive it digitally, so there is no need to deliver it to him personally. Danish income tax will from then on be automatically deducted by the employer before the employee is even paid.
Danish Tax Agency
The Danish Tax Agency is an institution subordinate to the Ministry of Taxation. In Denmark, the tax system and all related administrations play a key role, while the public sector is supported by funds raised from taxes and duties. It is very important to ensure a steady flow of income but also to establish the most favorable tax laws – the combination of the two provides support for Denmark’s public service, keeping the whole country running. It is the tax system and matters related to its proper administration that are the key so that all public sector responsibilities can be taken care of. The main task of the Ministry of Taxes, therefore, is to make sure that the state has enough financial resources to be able to continue to keep the public sector at the same high level. The Tax Ministry is divided into one department and nine smaller, specialized agencies. Each agency is responsible for a different range of tasks. In total, there are 26 agency offices throughout Denmark, one of which is the Danish Tax Agency, or Skattestyrelsen. The average amount the Danish Tax Agency collects each year is about DKK 1,100 billion. The operation of Skattestyrelsen requires not only the application of very specific tax laws and practices, but also the use of expertise, as this agency is responsible for numerous complex areas that have a major impact on the Danish economy. The Danish Tax Agency has a number of financial, legal and IT specialists who are constantly working to ensure that the organization is operating properly and improving its operations. Skattestyrelsen is an institution that has a duty to ensure that both companies and individuals pay their taxes correctly and on time. In addition, they also deal with combating fraud, facilitating and securing payments, and introducing integrated control mechanisms. The Danish Tax Agency continues to work on completely automating the reported data. This will enable Danish tax residents to quickly and easily handle all tax matters, without having to physically appear at the organization’s headquarters. If you have any doubts about Danish taxation, Skattestyrelsen is the institution that will clear up any doubts.
Filing a tax return in Denmark
Denmark is pushing very hard to automate official matters, so if we want to get information about taxation or the country’s tax procedures, we can use the very intuitive, self-service E-tax system (TastSelv). The introduction of this tool has proven to be a huge convenience for the majority of Danish society, as it relieves a significant portion of taxpayers from having to file an annual tax return. This is made possible by the fact that the TastSelv system already contains all the necessary information needed to prepare it. This information is usually reported to the system by employers, unions or banks. The tax authorities have access to the system and can retrieve the relevant data from it.
At the beginning of the tax return filing process, a preliminary income assessment is conducted. This exercise is intended to let the tax authorities know, indicatively, what income the taxpayer expects to earn in the current year. Tax credits, deductions and tax rates that are applied by the employer for tax withholding are also taken into account. A preliminary assessment of income is made every November. Based on it, the tax authorities determine the amount of taxes that the taxpayer must pay the following year. Of course, there may be a situation in which the taxpayer’s actual tax situation differs from the anticipated income assessment. In the event of such a difference, it is necessary to change the preliminary income assessment. This will allow you to redefine the amount of tax to be paid. It is worth remembering that when any changes and corrections are made to the preliminary income assessment, changes are also made to the taxpayer’s tax card at the same time. The tax card, on the other hand, is automatically forwarded to institutions such as the employer or university that pay the salary, pension or student stipend. The amount of the preliminary income assessment can affect these benefits. In order to have a view and/or change the preliminary income assessment, one must log into the E-tax system. It is also possible to check where our actual earnings, tax credits, tax amounts and deductions stand. To do this, pay attention to the tax return notice. Every Danish taxpayer receives a tax assessment notice. This notice is a kind of summary of the taxes paid by a person in the last calendar year. It illustrates the income earned in the previous year, tax credits, deductions and indicates the total amount of taxes paid. In addition to this, it also contains very important information on whether a given taxpayer is entitled to a refund of overpaid tax, or whether the tax paid was too low and it will be necessary to settle the arrears. If too much tax was paid, the excess will be automatically transferred to the bank account indicated by the taxpayer.
Individuals who do not reside permanently in Denmark but only perform work for a company that is registered in the country are very often required to pay the appropriate tax to Denmark. In order to settle according to Danish regulations and pay income tax, it is necessary to have a Danish tax card and a personal tax number. The obligation to pay Danish income tax is completely independent of whether and how long the employee stays in Denmark – only the fact that he works for a Danish company is taken into account. A posted employee must pay an 8% contribution and 30% tax. They do not have to do this personally, as the Danish company will take care of all the formalities on their behalf. However, for this to be possible, the person must first have all the required documents. Danish tax is paid by the employer even before the employee is given their salary. Employees who decide to live and work in Denmark for more than 3 months must, in accordance with Danish law, apply for a CPR number. This type of number is issued by the Danish national registry Folkeregisteret. Keep in mind that if a person stays in Denmark for more than 6 months, they are considered fully taxable under the law from day one.
Foreign investors are very welcome in Denmark, which is why every effort is being made to create the best possible conditions for them and encourage them to open and develop their business here. The priority is first of all to build an attractive tax climate. This is currently being done through, among other things, very favorable tax laws for expatriates, an extensive network of tax treaties and a corporate tax rate of 22%. In addition to this, expatriate entrepreneurs can take advantage in Denmark of opportunities such as full deduction of patents and expertise in the year of acquisition. The ability to deduct research and development expenses in the period they were incurred is also very encouraging. Denmark also seeks to recognize foreign entrepreneurs who contribute significantly to the development of the country, recognizing their contribution and commitment by offering a special tax system. Through this system, an expatriate can pay a reduced income tax rate of 27% for a period of seven years. In addition to this, companies whose R&D costs have incurred large losses have the opportunity to receive a cash refund from the state. Such a refund usually amounts to about 22% of the losses that were incurred by the company. The maximum tax value of the cash credit is DKK 25 million.
Unlimited and limited tax liability
Unlimited tax liability
A company is considered a resident of Denmark for tax purposes under Danish law when it has a Danish registered office in which it conducts business and is registered with the Danish Business Authority. If the company’s head office is also located in Denmark, the foreign company is also considered a resident of the country in this case. Only the actual place of the board of directors is considered, i.e. the place where management decisions affecting the day-to-day operations of the company are actually made.
Limited tax liability
If foreign companies have a permanent establishment or branch in Denmark or practice withholding tax on certain types of source income from Denmark, they may be subject to limited tax liability. Nevertheless, they are still subject to corporate tax at a rate of 22%. The tax rate is independent of the form of business chosen – it is the same for establishments as well as joint stock companies or limited liability companies. When dividends are paid to a parent company that is located in another EU member state or in a country that has a double tax treaty with Denmark, such transactions are exempt from withholding tax provided the shares are classified as subsidiary shares. The same rule applies to dividends paid from a group share. At the same time, they cannot be subsidiary shares, that is, shares below 10% and, in addition, the receiving company must be an EU/EEA resident. The situation is slightly different for portfolio shares paid to a foreign shareholder, which requires the payment of source tax at a rate of 27%. In general, it can be assumed that interest is not subject to taxation at source. The exception is when the interest is paid to a foreign company that is a tax resident of a non-EU country that additionally has no tax treaty with Denmark. If this situation arises, a tax of 22% must be paid under Danish law. The same rate applies to royalties, for which withholding tax absolutely must be paid. Works of art, on the other hand, are exempt from VAT. The payer may exercise the option to reduce the total amount of its withholding, in accordance with the tax treaty that applies to the relevant payee. According to the current EU directive treating interest and royalties, withholding tax exemption can be claimed as long as the payee is a sister company, direct parent or subsidiary, being a resident of the European Union.
Under Danish law, there is no limit to how many times and for how long tax losses can be carried forward. In fact, they can be transferred countless times, almost indefinitely. The exception is when more than 50% of the voting rights or more than 50% of the share capital is held by shareholders, taking into account the status at the end of a given fiscal year. Of course, this is with reference to the state at the beginning of the fiscal year in question, and refers to situations where there are 50% more in relation to those who previously exercised control. A tax loss is also necessary in this case. This is when regulations come into effect that somewhat restrict tax portability rights. It is also possible to cancel tax losses, however, again, this only applies in a specific situation. This option can be used by companies that are the subject of a comparable transaction or companies originating from Denmark that have received official debt forgiveness from state authorities. Such a situation is very rare, nevertheless, and there are numerous exceptions to it, such as intra-group transactions.
Major changes to the tax system in Denmark
In 2000, Denmark’s previous low tax bracket rate was lowered from 7% to 5.5%. This remained the case for two years, until 2002. Calculating Denmark’s low tax bracket requires taking into account both positive net capital income and total personal income. In 2001, Denmark held a general election that established a conservative-liberal government. This resulted in the adoption of a policy of frozen taxes. In practice, this meant that during the tenure of the current government, there was no possibility of raising existing tax rates, either in relative or nominal terms. This incurred long-term consequences, as taxes were not increased between 2002 and 2005, as previously agreed, in accordance with the change. The next parliamentary elections took place in February 2005. At that time, the conservative-liberal government was again successful, continuing its policy of freezing taxes. Between 2004 and 2010, it was decided to lower the lower tax threshold by 0.36%, in the name of respecting the tax-freeze policy and to compensate for the introduced increases in local income taxes which were raised from 33.31% to 33.66%. The government, in cooperation with one of the opposition parties, decided in the spring of 2003 to introduce a new tax package. This package was intended, among other things, to lower the level of labor taxation in Denmark. It was expected that such a change would result in an improved incentive to work and reduce the amount of distortion in the labor market. The new tax package consisted of two main elements, namely the introduction of a tax credit and an increase in the threshold for the middle tax bracket. The tax credit being introduced allowed Danish taxpayers to deduct 2.5% of earned income when determining taxable income. However, the deduction could not be higher than the maximum amount of DKK 7,500. The threshold for the middle tax bracket, on the other hand, was increased by as much as DKK 50,000. Even before 2004, a mandatory contribution of 1% was paid on employees’ gross earnings. This contribution was earmarked for an additional individual labor market pension program that was set up to meet the needs of employees. Officially, the contribution paid was not a contribution to social security or any other state benefit. It was treated more as savings that a given employee makes over the years. After 2004, there were changes as a result of which this contribution was suspended and abolished. In September 2007, it was decided to continue the tax benefits from the package that was introduced in 2003. Instead, the decision was made to introduce changes to the middle tax bracket threshold, which was planned to be increased by DKK 57,900 in 2009, in order to reach the highest tax bracket threshold. The deductible tax credit was also subject to increase, as in 2008 it was already 4.0% on earned income, while in 2009 it was raised again to 4.25%. At the same time, the maximum was likewise raised in 2008 and 2009, to DKK 12,3000 and DKK 13,600, respectively. At that time, the effective value of the credit plus the personal income supplement was equal to the rate of church tax, local income tax and health care tax, which were multiplied by the value of the deduction. In early 2007, the structure of labor taxation was changed with the Local Government Reform introduced on January 1. As it turned out, however, the impact of this reform on the overall level of taxation in practice was minimal, very limited. The number of municipalities that existed in Denmark was reduced from 270 to 98 and 14 counties were replaced by 5 regions. According to the new arrangements, it was not the responsibility of the regions to impose taxes. Funding for the newly created regions was instead to come from contributions from municipalities and state subsidies. This reform made it necessary to raise the average municipal tax rate. In 2006, the municipal tax rate was 22.1%, while it had already reached 24.577% in 2007. The average municipal tax continued to rise, and in 2013 it reached 24.907%. The previously existing county tax was converted to a new health care tax at 8%. The body responsible for imposing the new tax was the central government. In 2013, it was decided to reduce the healthcare tax rate by as much as 2%, to 6%. This reduced the levels of taxation – there used to be three, and after the change only two remained. In 2009, talks began between the government and one of the opposition parties to introduce a sweeping tax reform. Plans were set to implement radical changes over the 2010-2019 period. The main goal of this reform was to lower the high marginal tax rates on personal income. In this way, it would be possible to stimulate labor supply, both in the medium and long term. This reform had the effect of reducing income taxes in 2010 by as much as DKK 29 billion. According to predictions at the time, the tax reform was expected to be revenue-neutral for Danish citizens in the overall perspective. Between 2010 and 2012, the reform was not subsidized, which was a most expedient measure – it was anticipated that this would stimulate the economy. In 2010, the focus was on such measures as raising the upper tax threshold by DKK 28,800 to DKK 389,000, abolishing the middle tax bracket considering also the 6% rate, and lowering the rate of the lower tax bracket from 5.26% to 3.67%. As a result of the reform, the highest marginal tax rate on labor income was also lowered from 63.0% to 56.1%, and the lowest marginal tax rate was lowered from 42.4% to 41.0%. Importantly, the marginal tax rate on positive net capital income, up to 51.5 after the abolition of the middle tax bracket, continues to be reduced. This is made possible by the introduction of an additional allowance for a total of DK$40,000 on positive net capital, which is income in the top tax bracket. For married couples, this additional relief is doubled to DKK 80,000. Sources of funding for the reform are primarily transportation, energy and environmental taxes, which were created to support the climate and energy policies introduced by the government. The necessary funding also comes from increased excise taxes on goods that are linked to unhealthy eating (sweetened beverages, fats, tobacco, candy). Another source of funding for tax reform is also base broadening measures. These measures consisted of phased-in reductions in the tax value between 2012 and 2019 from 33.5% to 25.5%. Deductions were made on the basis of the measurement and limitation of the deductibility of net interest on payment taxes. This applied to amounts above a nominal threshold of DKK 50,000 and for married couples DKK 100,000. Another restriction enacted was that payments to individual pension insurance schemes could not be deducted if the total was above DKK 100,000 per year. Tighter taxation on company cars and other fringe benefits was also enacted. In 2011, it was decided to introduce a 6% tax on pensions that exceeded DKK 362,800 per year. To somewhat compensate households for the effects of the new changes, so-called „green checks” were introduced. In 2010, it was decided that the budget needed to be consolidated, so an agreement on fiscal consolidation was reached in May of the same year. Amendments were made to the package that was introduced in 2009. The specific provisions that were included in the Fiscal Consolidation Agreement concerned:
– Allow taxpayers to deduct union membership dues from tax, up to DKK 3,000 (EUR 403). The threshold is imposed and is not subject to any modification or adjustment
– Suspension in 2011-2013 of the implementation of automatic adjustments to tax thresholds, also taking into account all kinds of personal allowances
– Introduction of a cap on the annual amount of child allowance starting in 2011. It could not exceed DK 35,000 (EUR 4,696), regardless of the total number of children in the household. This amendment was scrapped very quickly, as the new government decided to get rid of it in 2012. Instead, it was decided that child benefits would be reduced gradually by 5% until 2013
– The increase in the threshold for the highest income tax rate, which was planned for 2011, has been moved to 2014. The increase was to be 15% from DKK 389,900 to DKK 409,100 (from EUR 52,316 to EUR 53,892).
According to the findings of the Finance Act implemented in 2012, people over the age of 18 whose income was very low (less than DKK 212,000) could benefit from an „additional green check.” This benefit amounted to DKK 280. Another tax reform was introduced in June 2012. The reform consisted of presenting changes to issues such as income tax and the upper tax bracket. It was decided that the income tax credit rate had to increase, so the 4.40% rate in effect in 2012 was already 10.65% in 2022. The maximum limit on the income tax credit was also raised. In 2012 it was DKK 14,100, while the status for 2022 is DKK 34,100. In 2014, a special tax credit was introduced for people whose life circumstances forced them to raise children alone. It was phased in gradually, with a cap of 6.25% for 2022, capped at DKK 20,000. In line with the reform introduced in 2012, a decision was made to slowly but steadily raise the upper tax bracket. In 2012 it was DKK 389,900, while in 2022 it will already be DKK 467,000. In connection with the budget law that was passed in 2013, the Competition and Excise Package was achieved. The agreement takes into account the introduction of such changes as the abolition of the fat tax, a reduction in excise taxes on electricity and an increase in excise taxes on sugar, among others. This is aimed at reducing expenses, not only for businesses but also for consumers. The money to fund these changes was raised by lowering the personal allowance for each person, both under and over 18, by DKK 900 and raising the lower tax rate by 0.19 percentage points. This affected the marginal tax ceiling, which previously stood at 51.5% and increased to 51.7%. The planned increase in income taxes and abolition of excise taxes is likely to have a very similar effect on labor supply and distribution. Some of the elements of the 2012 tax reform that were anticipated for a later period were accelerated, moving their implementation to 2014. Starting in 2014, the employee benefit rate was gradually raised. In 2014 it was 7.65%, in 2015 8.05%, in 2016 8.3% and in 2017 8.75%. In 2018, the maximum allowance was increased from DKK 25,000 to DKK 28,600. In addition to this, the supplementary employment allowance for single parents was also increased. In 2014, it was 5.4% instead of the previous 2.60%, and the maximum benefit that could be received at the time was DKK 17,700. A certain growth plan was constructed for 2014, which included various measures that made it possible to reduce the public service obligation for electricity. This plan also made it possible to roll back the excise tax increase that was imposed on fossil fuels. The Growth Plan 2014 included as part of the financing an increase in the lower tax threshold rate by 0.28 percentage points, over the following five years. The plan was for the lower tax threshold rate to be raised by as much as 0.25 percentage points in 2015, while also raising the tax ceiling. In addition to this, there have also been talks about making the green check and additional green check gradually smaller from 2015. Significant changes were also implemented in 2014, which had the effect of reclassifying several Danish taxes – this, of course, refers to the major revision of the Danish national accounts and the implementation of the new ESA 2010 (European System of National and Regional Accounts) guidelines. For example, previously, contributions to the unemployment fund and church tax were classified as taxes, however, they have since been recognized as voluntary contributions. In 2015, a budget law was passed that allowed union membership dues to be tax-deductible at a higher amount – previously it was DKK 3,000, and after the law was enacted, the limit was raised to DKK 6,000. In 2016, another law was introduced, under which it was decided to abolish the so-called PSO-excise. It was necessary to find the necessary funds to finance the abolition, so the tax rate for the lower tax bracket was increased. The rate was increased to 0.05 percentage points in 2018, while in 2022 it was increased again by up to 0.09 percentage points. In 2022, the tax rate for the lower tax bracket was fully introduced, and from then on it is 12.20%. In addition to this, the tax cap was increased from 51.95% in 2017 to 52.07% in 2022. Changes were also made regarding the „green check.” In 2018 it was at DKK 190 while in 2022 it was DKK 380. In addition, in 2018 it was also agreed to abolish the media license, in a phased manner until 2022. These measures were financed by a significant reduction in the amount of personal allowance paid to people over 18, by DKK 2,900.
- How do I establish my tax residency in Denmark?
According to Danish law, the tax liability of Danish entrepreneurs and employees, is linked to tax residence. Persons who have been residing in Denmark for more than 6 months or persons who have decided to settle permanently in Denmark will be considered Danish tax residents and are obliged to pay taxes on their income, earned within and outside Denmark, in Denmark.
- Who is entitled to a full refund of tax paid in Denmark?
A full refund of tax paid in Denmark is due to anyone whose annual income was no more than DKK 42,900.
- When is the deadline for filing my tax return in Denmark?
The deadline for submitting your tax return to the Danish Tax Authority (SKAT) is 1 May (or 1 July).
- Is it compulsory to file a return with the Danish tax authorities?
Yes, it is compulsory for every Danish employee to file an annual return with SKAT, as failure to do so results in a penalty of approximately DKK 5,000.
- What is NemKonto?
A NemKonto is an employee bank account into which SKAT’s tax refund and payment for work is transferred.
- How much time do I have to submit my tax return and correction of my tax return in Denmark?
In Denmark, we can file a tax return and tax return correction or appeal up to 3 years and 4 months back.
- Who has a limited tax liability?
All persons who work in Denmark but are not resident there have a limited tax liability. Then only income earned exclusively in Denmark is taxed.
- What is a Personfradrag?
Personfradrag is a personal tax credit to which Danish residents who have worked in Denmark for 12 months are entitled.
- What is NemID and Tastselv?
NemID and Tastselv are special codes that a taxpayer can order via www.skat.dk, which are needed when filing a tax return in Denmark.
- What is ejendomsværdiskat?
Ejendomsværdiskat is a Danish state tax on the value of real estate, covering real estate regardless of where it is located. All residents of Denmark are obliged to pay this tax. Poles who are Danish residents must also pay this tax on their real estate that is located in Poland (rate of 1% per year – real estate worth less than DKK 3.04 million; rate of 3% per year – real estate worth more than DKK 3.04 million).
Discounts and exemptions regarding the cadastral tax:
- relief for persons over 65 years of age – 0.4%, but no more than DKK 2,000 for holiday homes and DKK 6,000 for year-round homes;
- if the flats are jointly owned, then it is sufficient that only one person is over 65;
- persons under 65 whose deceased spouse was over 65 retain the relief granted;
- taxpayers are exempted from paying this tax for the duration of the move (a period of a maximum of a few months between the purchase of the property and the move to the property; a longer period involves a tax surcharge from the time the contract of sale of the property is signed);
- taxpayers who have moved out of the property before the sale are also exempt from paying this tax;
- if the property has been damaged by forces beyond the control of the taxpayer and is uninhabitable, then a discretionary exemption from paying the tax may be applied for;
- if the property is rented out, then it is possible to apply for full exemption (when renting out the entire property) or partial exemption (when renting out part of the property), but you have to pay more than the cadastral tax on the rent;
- taxpayers who own property in another country, and pay tax there, may be exempt from paying tax on the same property in Denmark (proof of payment must be provided);
- the tax rate may be reduced by 0.2% if the property was purchased before 1 July 1998;
- the tax rate may be reduced by 0.4 per cent (up to a maximum of DKK 1,200) if a person lives in the property all year round.
- What is ejendomsskat (Municipal Property Tax)?
Ejendomsskat (Municipal Property Tax) is a Danish land value tax that taxes the base value of the land at the total value of the property less the value of the improvements or at the value of the property for the last tax year, modified by a percentage of decrease or increase. Proceeds from the sale of one’s own home are not taxed, as the marginal rate on capital gains (friværdi) from housing savings is approximately 0%. Property tax ejendomsskat is paid to the Danish municipalities twice a year.
- What does Skat til udbetaling mean?
Skat til udbetaling is the wording on the tax decision from the authority, which indicates the amount of tax refund.
- What does Restskat til betaling mean?
Restskat til betaling is the wording on the tax decision from the office, which means the amount of the SKAT surcharge.
- What is Forskudsopgorelse and Selvangivelse?
Forskudsopgorelse and Selvangivelse are Danish tax cards, on which you can find the number of your TastSelv code needed when you settle your tax electronically with the Danish tax authorities.
- What is Feriepenge, and who is entitled to it?
Feriepenge is a holiday benefit to which all persons legally working in Denmark are entitled. A Danish employee is entitled to 2.08 days’ holiday for every month worked, i.e. 5 weeks, but a minimum of 3 weeks of the 5 weeks’ holiday must be taken during the Danish holiday period (between 1 May and 30 September). You can also apply for Feriepenge up to six months after you have finished working in Denmark, but you must check out at the Folkeregister municipal office before you leave the country. Feriepenge is paid into your NemKonto for up to 3 months, for the previous tax year, which runs from 1 January to 31 December, and can only be used in the following holiday year from 1 May to 30 April.
- What is a Personnummer?
The Personnummer, or CPR (personal TIN) assigned by the Customs and Taxation Office – SKAT, which is needed for income tax and VAT.
- What is a Sundhedsbidrag?
Sundhedsbidrag is the 8 per cent contribution to Danish health insurance.
- What is Arbejdsmarkedsbidrag (AM-bidrag)?
Arbejdsmarkedsbidrag, or AM-bidrag, is an 8 per cent contribution to the labour market (Danish labour fund). This tax is referred to as gross tax; all income from self-employment or employment is taxed at 8% before tax.
- What is Danish Skattestyrelsen?
Skattestyrelsen is the tax authority in Denmark.