Business Structure and Tax in Denmark

CORPORATE TAXATION

UNLIMITED  TAX  LIABILITY

For tax purposes, a coroporation is considered resident in Denmark if it is incorporated incorporated in Denmark and registered at the Danish Business Authority as having a Danish place of business. Foreign companies with whose actual place of management is in Denmark are also considered resident in Denmark. The actual place of management is typically the place where the management decisions concerning the company’s day-to-day operations are made.

LIMITED  TAX LIABILITY 

Foreign companies can be subject to limited tax liability either through a branch or a permanent establishment or through withholding  taxes on certain types of Danish source income.

Danish branches and permanent establishments of foreign companies are taxed under the same rules and rates as Danish resident companies:

• Company tax rate
  Taxable income – including capital gains – is normally subject to a corporate tax of 22% (2021). The tax rate is identical for public limited companies, private limited companies, and permanent establishments.

• Danish income subject to withholding tax
  Certain types of payments to nonresidents are subject to Danish withholding tax, which may be reduced according to a double taxation treaty.

• Dividends
  Dividends paid to a parent company in another EU member state or a state with which Denmark has entered a double taxation treaty are exempt from withholding tax if the shares qualify as subsidiary shares. The same applies to dividends paid on group shares (that are not subsidiary shares, i.e. holdings below 10%) provided that the recipient company is resident within the EU/EEA. Dividends paid on portfolio shares to a foreign shareholder are normally levied a withholding of 27%.

• Interest
  Interest is generally not subject to withholding tax unless if it is paid to a foreign group member company that is tax resident outside the EU and outside any of the states with which Denmark has entered a taxation treaty. In this situation, interest withholding tax is levied at 22%. Certain other exemptions apply, mainly relating to CFC taxation.

• Royalties
  Royalties are subject to a 22% withholding tax, while arts are subject to a VAT exemption. In most cases, the payer may reduce its withholding in accordance with the tax treaty applicable to the payee. Also, the EU Interest and Royalty Directive may  provide an exemption from withholding tax if the payee is an immediate parent, sister or subsidiary company resident in the EU.

TAX BASE 

Taxable income is generally calculated as the turnover of the business activities minus depreciations, interest, and other business expenses.

CAPITAL GAINS 

Gains and losses realised on the sale of tangible and intangible assets, including goodwill, are generally included in taxable income. However, gains realised on the sale of shares are tax-exempt if the shares qualify as either “subsidiary shares” or “group shares”.

“Subsidiary shares” are shares held by a corporate shareholder that holds a minimum of 10% of the share capital in a subsidiary located in the EU, the EEA, or a country with which Denmark has entered a double taxation treaty.

“Group shares” are defined as shares in companies with which the shareholder is jointly taxed or might be jointly taxed.

If the shares do not constitute group shares, subsidiary shares or treasury shares, they constitute portfolio shares. Gains on portfolio shares are fully taxable regardless of the holding period. Losses on the sale of portfolio shares are generally tax deductible.

TAX  LOSSES 

Tax losses may be carried forward indefinitely.

Certain restrictions on the right to carry tax losses forward apply when more than 50% of the share capital or 50% of the voting rights at the end of the financial year are owned by shareholders different from those that held control at the beginning of the income year in which the tax loss was incurred.

Similarly, under certain circumstances, tax losses are cancelled if a Danish company receives a debt forgiveness or is the subject of a comparable transaction. However, there are numerous exceptions  (e.g.  intercompany transactions).

CFC TAXATION 

According to the Danish CFC (taxation of controlled financial companies) rules, a Danish company must include in its taxable income the total income of a subsidiary, foreign or Danish, if such subsidiary qualifies as a CFC.

The consequence of CFC taxation is that the Danish holding company is taxable of a pro rata share of the Danish/foreign company’s income, irrespective of the rules in a double taxation treaty, if any.

MANDATORY DANISH JOINT TAXATION

A mandatory joint taxation regime obliges all Danish resident companies and Danish branches that are members of the same domestic or international group to file a joint group tax return. The definition of a group generally corresponds to the definition of a group for accounting purposes. The tax consolidated income is equal to the sum of the taxable income of each individual Danish company or branch which is a member of the consolidated group.

VOLUNTARY INTERNATIONAL JOINT TAXATION 

A non-Danish subsidiary  may be included as a member of a Danish tax grouping provided that the group includes all its foreign companies and branches in the Danish tax grouping. In effect, this all-or- nothing provision rules out the possibility for major international groups to have their Danish

subgroup file a Danish group tax return that includes only certain “cherry-picked” (typically loss-making) foreign group members.

• Tax returns
  Tax returns are completed based on audited financial accounts with adjustments for tax. Tax returns must be filed no later than six months following the end of the accounting year. Corporations with an accounting year-end that falls within the period from 1 January to 31 March must file a tax return no later than 1 August in the same calendar year.
• Payment of tax 
  Corporate income tax must be paid on a current year basis in two equal instalments due on 20 March and 20 November. The authorities request payments of 50% of the average of the final income tax of the last three years. In addition, voluntary additional payments may be made on the same dates; such voluntary payments are adjusted interest rate when set against the final tax bill.
  The final tax bill is settled by 20 November in the following year. Underpaid tax is then payable by 20 November with a surtax of 5.1% of the tax amount (rate for 2010 tax year). Overpaid tax is refunded by November of the following year with interest of 1.6% (rate for 2010 tax year).
   

TAXATION OF INDIVIDUALS

TERRITORIALITY  AND  RESIDENCE

Individuals are subject to full tax liability when they (1) take up residence or (2) stay in Denmark without taking up residence when the stay exceeds six consecutive months interrupted only by short stays abroad (and then as from the day of arrival). An individual subject to full tax liability in Denmark is taxed on  his/her  worldwide  income  and  gains received or accrued.

Individuals are subject to limited tax liability on Danish source income.

EMPLOYEE GROSS INCOME 

All remuneration from employment, whether in cash or in another kind, is subject to tax when the employee has obtained a legal right to the remuneration, regardless of where payment is made and regardless of whether remitted. The liability extends to any living or housing allowance and any reimbursement of tax or other personal liability, whether paid directly to an employee or borne by the employer on the employee’s behalf.

CAPITAL GAINS AND INVESTMENT INCOME

Taxable gains and investment income are added to taxable income. Certain allowances are available.

DEDUCTIONS

As opposed to corporations, individuals may deduct certain non-business expenses.

• Business deductions
  An employee may be entitled to deduct travelling expenses, subscriptions to professional associations, necessary business literature, tools of trade, etc. (if exceeding DKK 5,600 per calendar year). As opposed to corporations, individuals may deduct certain non-business expenses:

• Non-business expenses
  An individual subject to full tax liability can deduct all interest paid and contributions or premiums paid under certain pension schemes with a Danish pension fund or insurance company.

• Personal allowances
  A personal allowance of DKK 43,400 (in 2015) is granted with the effect of reducing income tax payable at ordinary rates. The allowance is granted to each individual, but where a spouse cannot utilize the entire personal allowance, the balance is transferred to the other spouse.

SPECIAL TAX REGIME FOR EXPATRIATES

A special legislation relates to foreign employees working temporarily in Denmark. Assuming that certain conditions are met, these expatriates can be covered by a 26% tax rate for a period of up to 60 months. The 26% rate is after a deduction of labour market contribution of 8%.

TAX RATES: STATE AND LOCAL INCOME TAX

Personal income after deduction of 8% labour market contributions, i.e. the effective marginal tax rate is (100-8) x 51.5% or (8 + 47.38) = 55.38%.

Income and allowances are divided into three categories:

1. Personal income –  e.g. cash salary, director’s fee, free company car, and free telephone – less pension contributions
2. Capital income, e.g. net interest income and net capital gains
3. Other allowances deductible from the total taxable income

Church tax (members only) will be imposed at a flat rate dependent on the municipality in question. The country average is 0.7%

TAX  CREDITS 

An individual resident in Denmark is entitled to deduct foreign income taxes paid or accrued on foreign source income from the Danish tax payable up to a maximum of Danish tax paid on the part of the taxable income, which is foreign source income.

TAX RETURNS 

Husbands and wives file separate returns for the income year. Taxpayers receive a pre-printed tax return in March, containing information that the tax authorities have  already  obtained  from  employers, financial institutions, etc. If the tax return is not correct, it shall be corrected, signed, and filed no later than 1 May.

Taxpayers with more complicated tax returns (most expatriates) shall file tax returns no later than 1 July.

The tax year for individuals is the calendar year.

PAYMENT  OF  TAX  

It is required that employers withhold income tax from salaries paid out (“A-tax”). For other types of income, an advance tax (“B-tax”) has to be paid in ten equal instalments during the income year.
 

VAT

Denmark applies the VAT system established by the European Union.

Denmark imposes VAT on imports and taxable deliveries of goods and services at a rate of 25%.

A number of business activities are exempted from paying VAT. The most important ones are within hospitals, medical and dental care, insurance, banking, and certain financial activities.

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