Taxation of Businesses in Denmark

Denmark has a special tax scheme for owners of sole proprietorships that allows them to defer or reduce their income tax. Under this scheme, a 22% corporate tax rate is applied to the portion of profit that is retained in the business and not withdrawn into the entrepreneur's private bank account. This temporary income tax on retained profit must be paid when the profit is withdrawn in subsequent years, with the difference between the 22% income tax and the actual personal income tax rate for that year being paid.

The scheme primarily allows business owners to defer personal income tax, but it can also eliminate the maximum 15% tax if income exceeds the highest tax threshold set in Denmark for the year. Additionally, the scheme increases the value of the tax deduction associated with interest on loans.

Owners of sole proprietorships in Denmark are advised to take advantage of this tax scheme, particularly when they are charged interest on company loans or when they have to pay the maximum tax due to high personal income earned while keeping money in the company from profit. Equalizing income between low and high profit years can help entrepreneurs avoid paying the maximum tax for a high-profit year. The maximum tax in Denmark 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:

1. If the total annual gross income (before deducting the 8% AM contribution) exceeds DKK 45,400 (2021) or DKK 44,250 (2020), the maximum tax rate of 15% is applied.
2. If the total annual gross income (before deducting the 8% AM contribution) exceeds DKK 49,348 (2021) or DKK 48,098 (2020), the maximum tax rate of 15% is applied.
3. If the total annual gross income (before deducting the 8% AM contribution) exceeds DKK 544,800 (2021) or DKK 531,000 (2020), the maximum tax rate of 15% is applied.
4. If the total annual gross income (before deducting the 8% AM contribution) exceeds DKK 592,174 (2021) or DKK 577,174 (2020), the maximum tax rate of 15% is applied.

In Denmark, owners of sole proprietorships can use a tax scheme to determine the portion of their income that can be taxed in advance. This can be done by selecting box 184 when updating the preliminary income estimate or by selecting field 147 on the annual tax return after the end of the year. To use this scheme, it is important to have separate private and business accounts and a separate bank account assigned to the business CVR number.

However, it is not recommended to use the tax scheme if there are no interest-bearing loans or if the maximum tax is not paid. The scheme can be used if there are interest-bearing loans but the maximum tax is not paid. In cases where there are neither interest-bearing loans nor payment of the maximum tax, the scheme can be used to defer payment of the tax. However, if the sole proprietorship is closed, the deferred tax must be paid immediately, including both the 15% tax on the portion of the money held in the business and the 15% additional tax that would not have been paid if the money had been withdrawn regularly.

Assets other than cash, such as equipment or stock products, can be used to retain profits under the tax scheme, as long as the money remains in the company. However, investing in stocks can only be done indirectly through investeringsforeninger or special investment products.

Because the Danish corporate tax scheme can be complex, it is advisable to seek the assistance of a certified accountant to perform the necessary calculations.