The essential Tax Law in Denmark

These are the highlights if you want to know more about the essential Tax Law in Denmark. This entry was drafted by KLAR Advokater. Link to E-Iure Network.

This collaboration is a brief step-by-step guidance. In no case it can be considered as legal advice. If you want -or need – legal advice, ask for a lawyer or a law firm. In that case KLAR Advokater is an excellent option in Denmark.

Corporate Residence

As a main rule European companies and foreign companies which have a management effectively placed in Denmark or that carry on business activities through a branch in Denmark are subject to corporate tax in Denmark.

Different Company Types

Limited liability companies

Most Danish limited liability companies, such as A/S (Public Limited Liability Company) and ApS (Private Limited Liability Company) are subject to corporate taxation.

Partnerships and limited partnership companies

In most cases partnerships and limited partnership companies are transparent in terms of tax which means that only the owners/partners are subject to tax and not the company itself.

Branches

Foreign companies with a branch in Denmark are, with regard to the income deriving from the branch, subject to corporate taxation in Denmark. Income from a Danish company’s foreign branch is under certain conditions not subject to Danish corporate taxation.

Corporate Taxation

Danish corporation tax is currently set at a flat rate of 22 %*.  Business expenses and depreciations are tax deductible, which means that only the corporations’ net income is to be taxed. Furthermore, Danish companies can carry losses forward for an unlimited period, so that these can be deducted from later positive net incomes.

Depreciation

As a main rule companies’ expenses are tax deductible.

Machinery and equipment used for the operation of the company is depreciated with 25 %. However the depreciation of assets with a long life span, such as airplanes, ships etc. is being gradually reduced from 25 % to 15 % in the period from 2008 until 2016. Infrastructure facilities are depreciated with 7 % and buildings are as a rule depreciated by up to 4 %. Goodwill and other intangibles are depreciated equally over 7 years.

Tax Returns

Companies are obliged to submit a tax return for each fiscal year. However, small and medium-sized companies are exempted from this obligation and only have to submit financial and operating data via the tax authorities’ homepage (www.skat.dk). An English version is also available.

Furthermore, companies are obliged to pay taxes on account, which are charged every 20 March and 20 November.

Capital gains

Capital gains from a subsidiary or group company are exempted from tax. As a main rule capital gains deriving from bonds and debts owned by a company are taxed as corporate income tax at a rate of 22 %.

Shareholders who are not resident in Denmark are as a main rule not subject to Danish tax for capital gains on shares in Danish companies.

Dividends

As a main rule, a parent company is exempted from tax on dividends from a subsidiary or group company. If the parent company is a foreign company, it is usually a condition for the tax exemption that the distributing company is not able to deduct the dividends from its taxable income.

Joint Taxation

Danish companies are taxed jointly with their Danish group companies or branches. Negative income of one company or branch can be deducted in positive income of another affiliated company or branch.

It is optional for a Danish company to choose whether to be jointly taxed with a foreign affiliated company/branch or not. If the companies choose to be jointly taxed this taxation must include all companies and branches within the group globally and joint taxation must typically apply for a 10-year period.

Transfer Pricing

The Danish rules on Transfer Pricing are based one the OECD Transfer Pricing Guidelines. Transactions between affiliated companies must comply with the arms-length principle which implies that products or services must be transferred at the relevant market price. Some groups may be subject to documentation requirements.

Thin capitalisation

If a group’s controlled debts exceed DKK 10 million and the debt to equity ratio exceeds 4-to-1 at the end of the fiscal year, thin capitalisation rules may apply.

CFC Taxation

Financial companies (companies where more than 50 % of the income is financial and where at least 10% of the assets are financial) controlled by a Danish company are subject to CFC Taxation. If a company holds the majority of the voting rights in a subsidiary company it is considered as a controlling company. According to the CFC taxation, the total income of the subsidiary is subject to Danish tax.

Double Taxation Relief

If a company is subject to taxation in both Denmark and another country, double taxation may be relieved in accordance with a tax treaty, if such a tax treaty has been entered into between Denmark and the other relevant country. If a company is subject to double taxation in Denmark and a country with which Denmark has not entered a tax treaty with, a tax credit may be granted according to specific Danish rules.

Personal Taxation

Income taxes

Persons who are tax liable in Denmark pay up to 55 % in income taxes depending on their level of income and right to tax deductions. As an indicator of the taxation level all income up to DKK 479.600 in 2017 per year is taxed at approximately 42 % and income exceeding DKK 479.600 in 2017 is taxed at a marginal tax rate of approximately 55 %.

Relaxed taxation of foreigners

In spite of the high level of income tax in Denmark, foreigners who move to Denmark to work may apply for favourable income taxation. In Danish this taxation is called “Forskerordningen” (i.e. the “scientist arrangement”) and contains a flat rate income tax at 32 %. In return for this low income tax level the employee has no tax deductions at all and can only be subject to these special rules for a period of up to 60 months (5 years).

In this context, the term”scientist” is relatively broadly defined and also includes other professions, e.g. professional footballers.

However, there are numerous requirements that have to be met for the person to be subject to these rules. One of the requirements is that the employee’s fixed gross salary must exceed DKK 63.700 (approx. EUR 8.570) per month.

Taxes on personal dividends and/or capital gains

For shares owned by persons who are tax liable in Denmark, dividends and/or capital gains will be taxed with 27 % of an amount up to DKK 51.700 and with 42 % of amounts exceeding DKK 51.700.