Taxes in Denmark

Taxation in Denmark - introduction

Denmark has arguably been one of the most popular countries in recent years, both for entrepreneurs who have decided to open and run their own business outside their home country and for people who have emigrated in search of better paid jobs or new investments. The main reason for choosing to live in the Kingdom of Denmark is undoubtedly the fact that the country offers its citizens an extremely caring social policy, high salaries, especially for professionals and specialists in various fields, and a progressive tax system, whereby the tax rate increases as the taxpayer's income rises. In addition, Denmark has a liberal economic policy and equal law for OECD and EU members, and all official matters can be dealt with via www.skat.dk. However, the distribution of taxes in Denmark (the relative weight of different taxes) deviates from the OECD average.

In 2016, the Danish tax system stood out with significantly higher income generated from individual income taxes, while, in contrast, no revenue originated from social security contributions. Denmark exhibited a lower share of income derived from corporate income and gains taxes, as well as property taxes, compared to the overall OECD average. However, the proportion stemming from payroll taxes, VAT, and other taxes on goods and services aligned with the OECD average.

Countries generate tax revenue through a combination of individual's income taxes, corporate income taxes, social insurance taxes, taxes on goods and services, and property taxes. The composition of these tax policies can impact the overall distortionary or neutral nature of a tax system. Generally, taxes on income, whether individual or corporate, have the potential to create more economic distortions than taxes on consumption and property. This is due to the fact that danish income taxes can affect incentives to work, invest, and save, influencing economic behavior in ways that may hinder overall efficiency and productivity. In contrast, consumption and property taxes are often considered to be less distortionary and can contribute to a more stable and predictable revenue stream. The design and balance of these tax components play a crucial role in shaping the economic impact of a country's taxation system.

Denmark is consistently ranked among the top two countries in terms of happiness, reflecting a widespread satisfaction with the state's welfare system and its associated benefits. According to the World Happiness Report, there is a correlation between happiness and social equality. The official Denmark website notes that "most Danes will tell you that they are happy to pay taxes because they can see what they get in return," which includes free tuition, healthcare, and social security.

What is worth knowing about the Danish tax system?

Persons who choose to live and work in Denmark have an unlimited tax liability, and thus should submit a tax return to the Danish tax authority every year by 1 May (or 1 July), preferably via the online government portal www.skat.dk, using the pre-ordered 8-digit code TastSelv. In contrast, limited tax liability - begrænset skattepligt - applies to persons working in Denmark but living outside Denmark or employed by a Danish company under a fixed-term employment contract.

Taxes in Denmark apply to both owners of companies (Iværksætterselskab - IVS; Kommanditselskab - K/S; Aktieselskab - A/S; Interesselskab - I/S; Anpartsselskab - ApS, also known as Danish LLC), sole traders (Enkeltmandsvirksmhed), a branch (Filial af udenlandsk selskab) or representative office (Salgskontor) of a foreign company or a cooperative association (Andelsforening/Brugsforening), as well as persons employed under an employment contract, a contract of mandate or even unemployed persons receiving social assistance and benefits from the arbejdsløshedskasse - a-kasse.

In Denmark, taxes are divided into direct and indirect taxes. Indirect taxes are punktafgift (excise duty), environmental taxes, moms (VAT) and customs duties. In Denmark, there are direct taxes, such as ejendomsværdiskat (land tax), employee contributions, kirkeskat (church tax), deductible and non-deductible corporate and personal income tax, ATM (pension contributions), foreign labour hire tax, sundhedsbidrag (health insurance contributions), property value tax, kommuneskat (municipal tax) and ejendomsskat (Municipal Property Tax).

Since the introduction of income tax in Denmark through a significant tax reform in 1903, it has remained a cornerstone of the Danish tax system. Currently, a substantial portion—approximately two-thirds—of the total tax revenues in Denmark is generated from various personal and corporate income taxes. The remaining one-third of tax revenue comes from indirect taxes. Notably, the state personal income tax follows a progressive tax structure, while the municipal income tax is a proportional tax applicable above a specified income threshold. The tax-free rate is set each year, which in 2019 was 10.10 per cent on gross salary (the most DKK 37 200 per year). Income tax percentage rates are also set anew each year, and their value in 2019 was:

1. 8% - income below DKK 50 217.
2. 39.2% - income between DKK 50 217 and DKK 558 043.
3. 56.5% - income above DKK 558 043.

In addition to income tax, a number of other taxes must be paid, such as CIT - a 22 per cent corporate tax; excise duty - an indirect tax levied on selected consumer goods; VAT - a 25 per cent tax on goods and services; other taxes such as: mobile municipality tax paid to the regional authorities, which averages 24.92%; 27% tax on income from shares - from 0 to DKK 54 000; 42% tax on income from shares - above DKK 54 000; voluntary church tax, which averages 0.92%; cadastral tax (1% per year for properties worth less than DKK 3.04 million, and 3% per year for properties worth more than DKK 3.04 million); as well as an 8 per cent labour market contribution (AM-bidrag).

What else is worth knowing about the Danish tax system? Below you will find some relevant facts:

1. Ejendomsskat (Municipal Property Tax) is a land value tax paid twice a year on the base value of the land, taking into account the entire value of the property, after deducting the cost of improvements (or the value of the property for the previous tax year, adjusted for a percentage of increase or decrease).
2. In Denmark, in order to submit the annual tax return via the website www.skat.dk, the 8-digit code TastSelv must be produced in advance, which will be found on the tax cards: Selvangivelse and Forskudsopgorelse. If you are employed in Denmark, it is necessary to apply for a tax card and obtain a personal tax number.
3. Selvangivelse is a pre-filled tax return form sent by SKAT to the address provided when registering a company in Denmark, which must be completed and submitted by 1 July, while after 2 July SKAT issues a print containing the tax decision - Årsopgørelse, which may contain the formula Restskat til betaling - meaning the amount of the surcharge, or Skat til udbetaling - meaning the amount of the tax refund.
4. In Denmark, taxpayers who are self-employed are required to register through the Agency for Enterprise and Trade at the local Customs and Taxation Office.
5. Danish taxpayers are required to pay income tax.
6. In Denmark, companies whose annual revenue exceeds DKK 50 000 are required to register their activities with the Register of Foreign Service Providers (RUT), preferably through the virk.dk website, as a VAT payer (MOMS), the rate of which is 25%. This applies to any type of business regardless of whether it is a sole proprietorship or limited liability company in Denmark. For goods and services that are exported, the rate is 0% (employee leasing, exhibitions, entertainment, cleaning, construction and maintenance work, conferences and sporting events), which means that their sale is not taxed, but when they are purchased, the recipient is entitled to a tax deduction (on the invoice, enter the net value using the Reversed chargé formula, meaning that the buyer should charge and pay MOMS on the service or good in question; the buyer's registration number - SE-number or CVR - should also be entered. In addition, certain services, such as funerals, postal charges, sports and games, medical care, culture, social benefits, the arts, insurance, passenger transport, travel agency services, real estate transactions and financial operations, are exempt from paying MOMS.
7. An individual who is classified as a full tax resident in Denmark will typically be subject to taxation under the standard tax scheme, with the marginal tax rate that cannot exceed 52.07% (or 55.90%, inclusive of AM tax, which is considered income tax for Double Taxation Treaty purposes) in the year 2023. The calculation for the top-bracket tax for a single person is based on the individual's personal income plus positive net capital income.
8. In 2023, the tax rate for net capital income is taxed at a rate up to 42%. The top tax is determined as 15% of the portion of the top tax base that surpasses DKK 568,900 (in 2023), following a deduction of 8 % for the labor market tax. However, various deductions are applicable, resulting in a lower effective tax rate for most individuals in practice. The maintenance of the bottom and top state personal income tax rates, the maximum tax rate ceiling, and the corporate tax rate reflects the stability in the Danish tax policy for that year.
9. If you own a house or an apartment in Denmark, you are required to pay property value tax based on the public assessment of the property. The Danish Tax Agency assesses the property value every other year. It's noteworthy that individuals residing in Denmark must also pay property value tax on any foreign property they own, and conversely, individuals living abroad are obligated to pay property value tax on any property they own in Denmark. This taxation of property values applies to both domestic and foreign real estate assets owned by individuals with ties to Denmark.
10. Approximately 74% of the Danish population are members of the Danish National Evangelical Lutheran Church (Folkekirken), and as members, they pay church tax. The church tax contributes to funding the operation and maintenance of the churches within the municipality. This system helps support the activities and services provided by the church and is a significant source of revenue for the Danish National Evangelical Lutheran Church. Members who are subject to church tax have a portion of their income allocated to sustaining the church and its associated expenses. The church tax varies from municipality to municipality.

Personal taxes vs. corporate taxes

Whether you are a company owner or an employee of a company in Denmark, you are obliged to pay taxes to the treasury. For companies, SKAT issues and sends a pre-filled tax return (Selvangivelse) for the previous year to the address you provided when registering your business, which you must complete, taking into account any allowances and company costs, and submit to the Danish tax authorities by the deadline. If you do not have a physical address, you can utilize a virtual office service to provide a legitimate business address. This not only ensures compliance with Danish regulations but also offers a professional image for your company while managing your business efficiently from any location. After 2 July, you can expect a tax decision document (Årsopgørelse), which is also issued and sent by Skattestyrelsen. In Denmark, taxpayers have three years and four months both to appeal the tax decision and to make corrections to the return or simply to submit an overdue form, but it is worth remembering that SKAT has seven years to verify any documents on the basis of which we deducted costs from tax, and there are heavy financial penalties for providing false information or for not submitting the tax return by the deadline.

Tax formalities in Denmark

In Denmark, every taxpayer should comply with a number of important formalities relating both to documents such as the annual tax return or VAT return (applicable to entrepreneurs) and deadlines that must be observed so as not to incur a financial penalty (a penalty of up to DKK 5 000 may be incurred for failing to settle accounts with the Danish tax authorities), including the following:

1. 1 May - by this date, a simplified tax return should be filed by those who have income from gainful activity or no income at all.
2. 1 July - by this date, the tax return (Selvangivelse) should be filed by those running their own business in Denmark and by individuals (aged 15 and over, as well as younger individuals who are already earning income); to file the tax return at a later date, a postponement must be requested.
3. 2 July - after this date, SKAT starts issuing and sending out tax decision documents.
4. 1 August - a tax return must be filed by this date if the tax year ends between 1 February and 31 March (in this case, the tax should be paid on 20 March - if you make a larger advance payment, you will receive a tax refund with interest higher than in the bank; and on 20 November - then the interest will be lower than in the bank, as the interest rate is reduced by 0.4).
5. 10 days after the end of the quarterly or monthly accounting period, VAT must be paid to SKAT.
6. In the case of local taxes, the deadlines for their payment are set by the municipality responsible.
7. In Denmark, employers are obliged to issue their employees with both weekly or monthly pay slips (Lonseddel) and a document confirming their earnings (Oplysningsseddel - PIT-11).

Remember that in Denmark you have to submit your annual tax return up to 6 months after the end of the 12-month tax year, during which time you can take into account all the tax allowances to which you are entitled, the rates of which are usually set annually, including for: interest expenses on both mortgages and consumer loans, commuting to work, running a dual household, crossing bridges, accommodation, Cross border, as well as food.

Taxes Denmark - summary

To summarise: the Danish tax system is clear and precisely designed, applies to both individuals and natural persons, and includes taxes such as income tax, excise duty CIT, VAT, etc. In Denmark, taxes are progressive and thus the tax threshold depends on the amount of income; besides, when completing the tax return sent by the Danish tax office, you can take into account all the allowances you are entitled to and deduct the costs you incur when running your own business.

FAQ

1. What taxes do I have to pay when deciding to live and work in Denmark?
   When you decide to live and work in Denmark, you have to pay a number of taxes, the type and amount of which depend both on your income and whether you run your own sole proprietorship or company, whether you are an employee of a Danish company with an employment contract for an indefinite or fixed term, or whether you are an unemployed person drawing benefits from a-kasse.
   
   In Denmark we have taxes such as:
   • income tax (3 thresholds: basic, middle and highest),
   • Church tax,
   • VAT,
   • CIT,
   • excise duties,
   • environmental taxes
   • land tax,
   • tax on the value of real estate assessed at public valuation,
   • city tax,
   • tax on hiring foreign labour to work in Denmark,
   • pension and health insurance contributions,
   • customs duty.
   
   
2. What is the tax-free amount in Denmark?
   The tax-free amount is determined in Denmark every year and in 2019 has been set at 10.10 per cent of gross salary - no more than DKK 37,200 per year.
   
   
3. What are the tax thresholds in Denmark?
   There are 3 income tax thresholds in Denmark: basic, middle and highest. The amount of income tax is determined each year and in 2019 its percentage rates have been set at:
   • 8% for income below DKK 50 217,
   • 39.2% for income between DKK 50,217 and DKK 558,043,
   • 56.5% for income above DKK 556,043.
   
   
4. By when do I have to submit my tax return when running a business in Denmark?
   In Denmark, Skattestyrelsen sends out a pre-filled tax return form - Selvangivelse - which must be completed and corrected and then submitted via www.skat.dk by 1 July.
   
   
5. When will I receive my tax refund when I run my own business in Denmark?
   If you run your own business in Denmark, expect to receive a tax decision document - Årsopgørelse - after 2 July, with the refund amount (Skat til udbetaling) marked in green or the surcharge amount (Restskat til betaling) marked in red. This document is issued and sent, to the address given when registering the company, by SKAT. If you wish to check the tax decision, you can also click on Se årsopgørelsen on your individual skat.dk account, and you can make corrections to the form by clicking on Ret årsopgørelsen/oplysningsskemaet.
   
   
6. What laws apply to income tax in Denmark?
   In Denmark, the laws relating to income tax are:
   • Kildeskatteloven - Withholding tax act,
   • Ligningsloven - The Tax Assessment Act,
   • Skattekontrolloven - The Tax Audit Act,
   • Personskatteloven - Income Tax Act.
   
   
7. Who is subject to limited tax liability in Denmark?
   In Denmark, limited tax liability - begrænset skattepligt - applies to persons working in Denmark but living outside Denmark or employed by a Danish company under a fixed-term employment contract.
   
   
8. What is a double taxation treaty?
   A double taxation agreement is designed to protect taxpayers from double taxation. The bilateral tax treaties between Denmark and other countries say that:
   • income that is earned in the country of employment will only be taxed once (where it is earned), and exempt from tax in the country of residence or domicile (taxpayers are required to pay tax in the country with the higher tax rate),
   • taxes paid in the country of employment will be deducted from the taxes to be paid in the country of residence or domicile.
   
   
9. What does Danish excise duty cover?
   Punktafgift, or Danish excise duty, which is levied on goods, according to EU directives, and covers, for example, chocolate, snuff, tea, wines, fruit wines, confectionery, cigars, cigarillos, natural gas, Hawaiian cigars, chocolate, chewing tobacco, beer, liquid gas, cigarettes, pipe tobacco, cigarette papers, electricity, car tyres, alcohol and coffee.
   
   Differentiated excise duty covers: fuels, disposable packaging, ice cream, coffee, light bulbs, video cassettes, tobacco products, spirits, beer, chocolate products, wine, tea, cars. It is worth remembering that Denmark has also introduced its excise taxes, which you should be aware of when running a business in the country.
   
   
10. What tax reliefs am I entitled to when living and working in Denmark?
    If you live and work in Denmark, you are entitled to tax relief, the rates of which are usually set each year, for e.g:
    • commuting to work, which is affected by the number of commutes and the distance travelled. All employees of companies in Denmark whose journey from their place of residence to their place of work, irrespective of the means of transport, is 24 kilometres in both directions are eligible for this tax relief, which also applies to commuting from their country of origin to work in Denmark. If you want to benefit from this relief, you will need to present e.g.: bus tickets, ferry tickets, fuel receipts, Danish public transport tickets or airline tickets (DKK 1.94 per 1 km, round trip distance from 25 km to 120; and DKK 0.97 per 1 km for distances above 120 km round trip - 2018 data),
    • accommodation, which can be used by temporary workers if they present the rental agreement for the premises and accommodation receipts or bank statements for rent and utilities. It is also necessary to present pay slips for the period in question, in case the employer has deducted a percentage of the costs from the employee's salary (in 2018, it was DKK 214 per day).
    • Interest expenses on mortgages and consumer loans, which can be used by taxpayers who are paying such a loan and who receive a minimum of 75 per cent of their annual income from work in Denmark. If you are married, you must also take your spouse's income into account. If you want to take advantage of this tax relief, you must provide an English or Danish-translated certificate in your annual tax return with details such as the amount of interest paid, the name of the bank and the type of loan, and a certificate from the bank confirming the amount of interest paid in the year. With a mortgage you must also deduct 1% of the value of the property,
    • Bridge crossing, for taxpayers who have to cross a toll bridge to get to work,
    • Cross border, for taxpayers with a minimum of 75% of their annual income from work in Denmark. For married couples, you must include your spouse's income in your joint annual tax return (your spouse's domestic income should not exceed DKK 42,000). If you wish to take advantage of this relief, you must provide both a marriage certificate, translated by a sworn translator into English or Danish (the marriage certificate may be on an EU form), and a certificate from the tax office stating your spouse's and your own income,
    • running a dual household, for taxpayers running a second household in their place of residence. If you wish to take advantage of this allowance, you must present both your marriage certificate (which may be on an EU form) and a certificate from your municipality stating that you and your spouse have a joint place of residence (all documents should be translated into English or Danish by a sworn translator),
    • board, for temporary employees (in 2018, this allowance was DKK 498 per day).
    • Under the special expatriate tax regime in Denmark, individuals employed in the country, including scientists assigned to Denmark, may have the opportunity to request a flat rate taxed at 27 % on their gross salary. This favorable tax rate can be applicable for a duration of up to 84 months.
    
    
11. What is a-kasse?
    A-kasse (arbejdsløshedskasse) - is a Danish organisation that offers voluntary unemployment insurance. The cost of such insurance starts at DKK 479 per month if you have a full-time job.
    
    
12. When am I entitled to Feriepenge and Personfradrag?
    Feriepenge, or holiday pay for those working legally in Denmark (2.08 days of holiday for each month worked - 5 weeks; a minimum of 3 weeks of this holiday must be taken during the holiday period, i.e. between 1 May and 30 September. You can also apply for Feriepenge up to 6 months after you have left your job in Denmark, if you register at the Folkeregister municipal office before you leave Denmark. Holiday pay is paid into your NemKonto for up to three months, for the previous tax year (which runs from 1 January to 31 December), and can only be used in the following holiday year (between 1 May and 30 April).
    Personfradrag, on the other hand, is a personal tax credit for all Danish residents who have worked in Denmark for 12 months.
    
    
13. What is the Danish cadastral tax?
    The cadastral tax in Denmark, or ejendomsværdiskat, is a state tax on the value of real estate. Who can be exempted from this tax?
    • taxpayers who have moved out of the property before the sale,
    • taxpayers who own a property in another country and pay the tax there (proof of payment must be provided),
    • taxpayers who rent out the property can apply for total exemption (when renting out the entire property) or partial exemption (when renting out part of the property); then, unfortunately, you have to pay more than the cadastral tax on the rent,
    • taxpayers who move can be exempted from paying this tax for the duration of the move, for a maximum period of a few months, between the purchase of the property and the move into the property; a longer period involves a tax surcharge from the moment the property sale contract is signed,
    • in the event that the property is uninhabitable because it has been damaged by forces beyond our control,
    • relief for persons over 65 years of age - 0.4 %, with a maximum of DKK 6 000 for year-round houses and DKK 2 000 for holiday homes,
    • where the property is jointly owned, it is sufficient for one person to be over 65,
    • the relief granted is retained by persons before the age of 65 whose deceased spouse was over 65,
    • if the property was purchased before 1 July 1998, the tax rate can be reduced by 0.2%,
    • if the person has not lived in the property for a year, the tax rate may be reduced by 0.4% (not more than DKK 1 200).
    
    
14. Where can I obtain CPR?
    The Personnummer, or CPR (personal taxpayer identification number), is issued by SKAT (the Tax and Customs Administration). The CPR is needed to settle both VAT and income tax in Denmark. In Denmark, the entity that issues taxpayers with a tax identification number - CPR (Central Person Register), is Folkeregistret (Citizens Service Office or, based in Aalborg, Copenhagen and Aarhus, the Foreigners Service Office), With a CPR, you have the right to free health care in Denmark (to obtain a CPR, you need an employment contract, proof of identity and a tenancy agreement).
    
    
15. What is Arbejdmarkedsbidrag and Sundhedsbidrag?
    Arbejdsmarkedsbidrag (AM-bidrag) is an 8 per cent contribution to the labour fund in Denmark. Arbejdsmarkedsbidrag is a gross tax, as all income from employment or self-employment is taxed at 8 per cent before tax.
    Sundhedsbidrag, on the other hand, is the 8% health insurance contribution in Denmark.
    
    
16. What are indirect taxes?
    Indirect taxes encompass levies and charges settled through the purchase of goods and services. Each time you acquire an item or, for instance, turn on your water faucet, you pay indirect taxes to the state. These taxes are embedded in the overall cost of the goods or services you purchase