Taxation System for Businesses in Denmark
In Denmark, sole proprietors can benefit from a tax scheme called VSO which allows them to defer or reduce their income tax. They can pay a 22% corporate tax rate on profits from their business that have not been withdrawn from the company into their private bank account. The deferred income tax is paid when the profit is withdrawn in subsequent years, and the business owner pays the difference between the 22% corporate tax rate and the actual personal income tax rate for the year in which they withdraw the profit. This scheme can help business owners defer personal income tax and potentially eliminate the maximum 15% tax on income that exceeds the highest tax threshold in Denmark for the year. The tax scheme also allows for an increase in the value of the tax deduction associated with interest on loans. Business owners in Denmark should consider taking advantage of this tax scheme when they are charged interest on company loans and when they have to pay the maximum tax, particularly in years when they earn a high profit. They can avoid paying the maximum tax by equalizing income between low and high profit years.
Denmark’s maximum tax bracket is shown below:
- DKK 45,400, which applies to all taxpayers
- DKK 49,348, which applies to taxpayers who are subject to labor market contributions (paid by most employees and some self-employed individuals)
- DKK 544,800, which applies to taxpayers who are married and file a joint tax return
- DKK 592,174, which applies to single taxpayers.
In Denmark, sole proprietors can utilize a tax scheme by selecting box 184 when updating their preliminary income estimate or field 147 on their annual tax return to calculate the portion of their income that can be taxed under the scheme. To take advantage of this scheme, the entrepreneur must have a separate bank account assigned to their business CVR number and keep their private and business accounts separate. It is not recommended to use the tax scheme if the entrepreneur has no interest-bearing loans and does not pay the maximum tax. However, if they have interest-bearing loans but do not pay the maximum tax, they can use the scheme. If they neither have interest-bearing loans nor pay the maximum tax, they can use the scheme to defer paying the tax, but they will be required to pay the whole tax that was deferred in the tax scheme right away if they want to close their sole proprietorship.
Profits can be kept in other assets such as equipment or stock products, but the money must remain in the company to use the scheme. However, when it comes to stocks, one can only invest in them indirectly through investeringsforeninger or special investment products. As the Danish corporate tax scheme can be complex, it is advisable to seek the help of a certified accountant to make the necessary calculations.