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Income Tax in Denmark



Personal Income Tax

Tax Return due dates

Individual tax returns must normally be filed no later than on 1 July of the year following the tax year. However, if the individual receives a pre-printed tax assessment from the tax authorities, any change to the pre-printed tax assessment must be filed no later than 1 May. The tax authorities send out a pre-printed tax assessment if the tax authorities deem the income statement to be very simple. It is possible to extend the due date from 1 May to 1 July upon a written application.

The tax year ends on 31st December.

Tax Return Compliance

Individuals who are Danish residents or who have had Danish source income are obliged to file a Danish tax return.

Individuals who become taxable in Denmark during the calendar year are obliged to file a preliminary tax assessment ("pre-assessment") for the remaining part of the year.

The Danish tax authorities will issue a tax card to the employee on the basis of the preliminary tax assessment for the income year. The tax card information automatically becomes available to the Danish employer. If no valid tax card is available at the time of payment, the Danish employer must withhold 55 percent tax. Employees of a foreign employer with no Permanent Establishment in Denmark must meet their preliminary tax liability by paying the taxes themselves in 10 equal instalments during the year (June and December are exempted).

The final tax is calculated when the tax return has been filed in the year following the income year. Overpaid tax is refunded together with a non-taxable interest of 0.5 percent.

Outstanding taxes for the income year in question should be paid at the latest on 31 December (or the last bank day of the year) in the income year to avoid interest and extra charges. There will be a day-to-day interest (2.0 percent P.A. for income year 2016) on outstanding taxes from 1 January in the year following the income year. If the outstanding tax is not paid by 1 July in the year following the income year, a fixed fee of 4.0 percent (2016) is applied instead of the day-to-day interest.

Unpaid remaining tax liability of up to DKK 19,200 (2016) will automatically be carried forward plus the related 4.0 percent fee and collected along with the preliminary taxes the following year. Outstanding taxes exceeding DKK 19,200 will be collected in September, October and November together with the related 4,0 percent fee.

Statute of limitations: The tax assessments may be changed by either the tax authorities or the taxpayer until 1 May of the fourth year after the end of the income year. In certain situations, the Danish tax authorities can only make changes until 1 July two years following the end of the income year.

Tax formalities on entering Denmark: The employee must register for a tax card.

Tax formalities on leaving Denmark: The employee must deregister from the national register and notify the tax authorities.

Residents

Every year in March/April following the tax year, a resident will receive either a pre-printed tax assessment or an information letter from the Danish tax authorities. If the pre-printed tax assessment does not contain the correct taxable income or deductions, corrections must be returned to the tax authorities by 1 May at the latest. The filing deadline may be extended to 1 July by written application.

If the individual receives an information letter instead of a pre-printed tax return, the tax return must be filed no later than 1 July following the tax year.

If the individual has foreign income (such as rental income, salary, shares, or a house abroad), one or more special tax forms must be filed. Foreign wealth must also be declared on a separate tax form.

Non-residents

Non-resident must fill out an individual tax return and send it to the tax authorities no later than 1 July.

Non-resident individuals only have to declare Danish source income in their Danish tax return.

Tax Rates

Generally, individuals are subject to national income tax, municipal tax, regional tax, labour market tax, and church tax (all described below).

When assessing the tax under the ordinary scheme, the following types of income apply:

· Personal income (salary, benefits in kind, self-employment income, pension income, etc.).
· Capital income (interest income, interest expenses, net taxable capital gain, etc.).
· Taxable income (personal income added to capital income and adjusted for certain itemised deductions).
· Share income (dividends, capital gains on shares).
· Property value (value of property situated in Denmark or abroad).

The different types of income are subject to different taxes and are consequently taxed with different rates. This also means that the value of a deduction differs depending on in which income the deduction can be made.

Tax Rates are as follows:

Taxes (2018)
Income Basis
Tax Rate (%)
State Taxes:


             a)     Bottom Tax
Personal Income
11.15
             b)    Top Tax
Personal Income
15.00
Local Taxes:


             a)     Municipal Tax
Taxable Income
24.91
             b)    Regional Tax
Taxable Income
1.00
             c)     Labour Market Tax
Personal Income
8.0
Share Tax:


             a)     DKK 0 to 52,900
Share Income
27.00
             b)    Above DKK 52,900
Share Income
42.00

Note that tax bands and local taxes may be adjusted annually.

Altogether, the marginal tax rate cannot exceed 52.02%. However, labour market tax, share tax, property value tax, and church tax are not comprised by this rule.

Net capital income is taxed at a rate up to 42% (in 2018). Negative net capital income and other allowances may be deducted but not with full effect.

National Taxes

National taxes are categorised as bottom and top tax, due to which personal income becomes subject to progressive taxation.

Bottom tax

The bottom tax base is represented by the personal income plus positive net capital income. Bottom tax implies a taxation of 11.15% (2018).

Top tax

The base for top tax for a single person is the personal income plus positive net capital income. Top tax is 15% of the part of the top tax base exceeding DKK 498,900 (2018).

Local taxes

Municipal tax

Local income tax (municipal tax) is calculated on taxable income at a flat rate dependent on the municipality in question. The country average is 24.91% (2018).

Regional tax

Regional tax is calculated on taxable income at 1% (2018).

Labour market tax

Labour market tax amounts to 8% of the personal income.

Share tax

Share income up to DKK 52,900 (2018) (DKK 105,800 for a married couple) is taxed at 27%. Share income in excess of this amount is taxed at 42%.

Church tax

Church tax is imposed at a flat rate dependent on the municipality in question. The country average for church tax payers is approximately 0.9% (2018). Church tax is imposed by municipalities and is only charged for members of the Danish State Church (Lutheran). When registering in Denmark, all individuals should explicitly state if they should not be comprised.

Other income taxes

Special expatriate scheme
According to the special expatriate tax regime, expatriates who are employed in Denmark and scientists assigned to Denmark may be able to apply for a flat tax rate of 26% on their gross salary for up to 60 months . A number of conditions must be met, including that the guaranteed monthly salary, before deduction of deductible employee pension contributions, must be at least DKK 65,100 (2018) in average in the calendar year. Special rules apply for researchers. The 26% tax rate is calculated on cash salary, employer-provided telephone/internet, the taxable value of employer-provided company cars, and employer paid taxable health insurance. All other income is taxed in accordance with normal rules. No deductions are allowed against the flat rate taxed income. The employee’s stay in Denmark may be longer; however, after the 60-months period, the employee’s income is taxed at ordinary rates.

As the labour market tax also applies, the combined tax rate is 31.92% each year during the 60-months period.

The Government and a sufficient number of votes from other parties have in November 2017 agreed to extend the maximum period in the special tax regime from 60 months to 84 months and to increase the tax rate from 26% to 27% (effectively 32.84%, including AM-tax); with effect from 1 January 2018. A bill has been introduced in the Parliament and is expected to be passed on 19 December 2017.

Work force hire scheme

The work force hire scheme is a separate Danish limited tax liability. The concept of ‘work force hire’ implies that the employee continues to be formally employed by the employer in the home country, but is hired out to a company in Denmark as the host country under terms similar to a normal employment relationship. The company in Denmark is therefore deemed to be the employer for tax purposes in order to be covered by the work force hire rules. First and foremost, it must be possible to substantiate that the company in Denmark (the deemed employer) is also responsible for the work performed by the employee. Also, work performed as part of the activity of the Danish company may be seen as work force hire due to a recent change of the rules concerning work force hire. Employees who are hired by a Danish company under a work force hire arrangement are taxed in Denmark at a flat rate of 30% of the gross remuneration, etc. No deductions are allowed. Labour market tax should be paid as well. This gives a combined tax rate of 35.6%. The work force hire rules only apply to employees who are not liable to either ordinary limited tax liability or full tax liability in Denmark. Consequently, if their stay in Denmark is expected to exceed six consecutive months or 183 days within any 12-month period, it is not possible to use the work force hire rules. The six-month period is not interrupted by stays abroad due to holiday, etc. However, the period will be interrupted if the stay abroad involves a work assignment.

Deductions from Income

Pension

Contributions to approved Danish pension plans are tax deductible.

According to the tax treaty with the United Kingdom, Switzerland, the Netherlands, and Sweden, contributions to pension schemes set up in those countries may be tax deductible under certain circumstances.

Expatriates contributing to an exempted English pension plan may apply to the Danish tax authorities for permission to deduct contributions to the plan during residence in Denmark. It is a condition for the deduction that the expatriate contributed to the plan before coming to Denmark and that the U.K. employer has assigned the expatriate to Denmark.

Dutch employees may also under certain conditions be granted permission to deduct Dutch pension contributions for up to 60 months. For Swiss nationals, contributions to public saving pension plans are deductible for Danish tax purposes under certain conditions. No application to the Danish tax authorities is needed.

Child Benefits

There are no allowances for children or other dependents, but all residents who are insured under the Danish social security system and who have children under 18 years of age will receive a tax-free payment.

Age in years
Payment per child
0-2
DKK 17,964
3-6
DKK 14,220
7-17
DKK 11,184

Transport Deductions

Distance
Deduction
0-24 Kilometers per day
No deduction
25-120 Kilometers per day
DKK 1.93/kilometer
Above 120 Kilometers per day
DKK 0.97/kilometer



Corporate Tax

Companies are subject to tax on all income and are only allowed deductions on expenses that are related to the operations of the company.

According to Danish tax law, a territoriality principle prevails. Hence, a Danish company is not taxed on its worldwide income. Instead, income from a PE outside Denmark or from real estate located abroad is excluded from taxable income. Non-resident companies are taxed only on profits distributed from income sourced in Denmark. The corporate income tax (CIT) rate is 22%.

Hydrocarbon income tax

The ordinary CIT rate of 22% does not apply to Danish oil and gas upstream activities. Instead, there are two ring fenced taxes on Danish oil and gas upstream activities. One very similar to the ordinary CIT; however, the tax rate is 25% instead of 22% and the income is ring fenced (i.e. no tax losses from other income can be deducted in income from the Danish oil and gas upstream activities). In addition to the 25% tax, a special income tax, labelled ‘hydrocarbon tax’, is levied on profits from the exploration and extraction of oil and gas on the Danish continental shelf at a rate of 52%. The 25% tax is deductible in computing the hydrocarbon tax, resulting in an effective tax rate of 64%.

Annual tax depreciation of platforms, wells, and inter-platform installations is allowed with up to 15% on a declining balance. Pipelines and other infrastructure assets can be depreciated with up to 7%.

Exploration costs can either be expensed or capitalised for tax purposes. If capitalised, the costs shall be amortised over five years with 20% annually from the year of first oil.
The following assets, which are subject to the special hydrocarbon tax (52%), qualify for an uplift of 5% in six years (30% in total):
· Exploration costs; however, only if capitalised, and only on exploration costs before declaration of commerciality on a specific field. After first oil in company, exploration costs can no longer be capitalised and thus no uplift can be claimed. Appraisal wells are regarded as exploration costs, and not a fixed asset as, for example, production wells.
· Platforms, wells, inter-platform installations, pipelines, and other fixed assets; however, only if the company owns the fixed assets, and not on leased or rented assets.

No uplift is granted under Chapter 2 (25%).

Temporary tax incentive regime

A new voluntary and temporary tax incentive regime for oil and gas companies has been adopted (Chapter 3B).

The new regime increases depreciation of production assets subject to hydrocarbon tax to 20% and uplift to 6.5% in six years (39% in total). Furthermore, it advances depreciation, as well as uplift, to time of payment. No accelerated depreciation/uplift applies to Chapter 2.

Chapter 3B is applicable to investments submitted for approval during the 'investment window' from 1 January 2017 until 31 December 2025 and finally approved by the Danish Energy Agency and completed no later than 31 December 2026. A decision to enter into the 3B regime should be made when filing the tax return for the first year the regime shall apply.
If the average annual oil price increases to 75 United States dollars (USD)/USD 85 per barrel, from 2022 a 5%/10% surtax will apply to income from upstream oil and gas production before interest and tax (Chapter 2) capped to 20.1% of capital expenditure investments made during the investment window. The surtax is deductible in the hydrocarbon tax. Any repayment obligation expires in 2037.

Related activities

Activity connected to the prospecting, exploration, or exploitation of oil and gas is taxed at 22%; however, it is taxable under a more aggressive regime than non-oil/gas activity. Any activity connected to oil and gas (e.g. drilling, seismic surveying, oilfield services) is taxable, regardless of whether a PE exists or not. This may be tempered by provisions in applicable DTTs.

Tonnage Tax Scheme

Danish tax law provides for a special tax scheme for shipping entities.
The main principle of the Tonnage Tax Scheme is that qualifying shipping entities are not taxed on the basis of their actual income derived from their business but on a fictitious income based on the net tons (NT) carrying capability of their fleet used for purposes covered by the Tonnage Tax Act.

The Tonnage Tax Scheme is available to:
· Danish shipping entities organised as limited liability companies (Aktieselskab [A/S] or Anpartsselskab [ApS])
· foreign shipping companies with the place of management and control in Denmark, and
· European Union (EU) shipping companies with a PE in Denmark.

A decision to enter into the scheme should be made in the first income year where the entity qualifies for the Tonnage Tax Scheme, and the decision is binding for a period of ten years.

As a general rule, group-related shipping companies based in Denmark must make the same choice regarding the Tonnage Tax Scheme. However, shipping companies that do not have the same management or operating organisation and do not conduct business in related fields may be exempt from the joint decision provision.

The Tonnage Tax Scheme is restricted to certain types of business activities. The entity must operate at least one vessel of minimum 20 GT used for commercial transportation of passengers or cargo between different destinations or hire out such vessels on time charter contracts for the same purpose. The ships must be owned or chartered on either ‘bareboat’ terms or one-to-seven year or time-charter contracts with a call/buy option by the company. Certain restrictions apply for ships chartered on a time-charter basis without a call/buy option. The ships must be strategically and commercially run from Denmark.

Income from activities that are carried out in close connection with this business, such as the usage of containers and loading facilities, etc. may also be included in the Tonnage Tax Scheme. Ships used for exploration, diving, fishing, towing, sand dredging, etc. are specifically exempt from the scheme. The same applies for certain types of ships, such as barges, floating docks, etc. However, EU or European Economic Community (EEC) registered ships used for towage activities at sea (i.e. not in and around ports) during at least 50% of their operating time during the income year may be included in the Tonnage Tax Scheme.

Ship management companies may also use the Tonnage Tax Scheme. A ship manager is defined as a company doing business with crew management and technical management of ships qualified for use in the Tonnage Tax Scheme. It is a requirement that the ship manager has taken over the full operating responsibility and all obligations and responsibilities according to the International Safety Management codex.

Taxable income

The taxable income for the part of the business that qualifies for the Tonnage Tax Scheme is determined for each ship as a fixed amount of Danish kroner per 100 NT per day according to the following:

Ship net ton (NT)
Fixed amount per day (DKK per 100 NT)
2017
2018
0 to 1,000
9.60
9.82
1,001 to 10,000
6.90
7.05
10,001 to 25,000
4.12
4.22
Above 25,000
2.71
2.77

The income is taxed at the ordinary CIT rate of 22%. No deduction for expenses related to tonnage-taxed income is allowed.

Income that does not qualify for the Tonnage Tax Scheme is taxed according to the general tax provisions in Denmark, thus expenses are deductible. Consequently, deduction for losses derived from other income can be offset against the income calculated under the Tonnage Tax Scheme.

Furthermore, losses from tax consolidation with group companies and, to a certain extent, financial expenses are deductible under the Tonnage Tax Scheme. However, deductibility for financial expenses is subject to various capping rules and implies that gains/losses are not derived from financial instruments entered into in order to secure the shipping income.

Depreciation

Shipping entities that apply the Tonnage Tax Scheme from the time of their establishment may not deduct depreciation for tax purposes. Special rules apply for shipping entities that were already in existence when they elected to become subject to the scheme and for entities that elect to include certain other assets at a later point in time that were not previously subject to the scheme.

Gains on the sale of ships

Gains on the sale of ships that have not been used in the scheme prior to 1 January 2007 are tax exempt. The same applies to gains on the sale of contracts on the delivery of ships if the ship was destined to be delivered after 1 January 2007. Gains on the sale of ships used in the scheme in prior years are taxable. The taxable gain is calculated as the sale price minus the purchase price plus improvements. Any losses on ships acquired and sold within the same income year as the income year in which a gain is realised may be offset against the gain.

New activities to be included

In December 2015 the Danish Parliament passed an amendment to the Tonnage Tax Act including more activities under the Tonnage Tax Scheme from fiscal year 2016; however, the expansion of the Danish Tonnage Tax Scheme still awaits final approval from the European Commission. The new activities that would be covered due to an expansion include the following:

Guard, supply, and construction vessels

The amendment to the Tonnage Tax Act includes revenue from guard service (e.g. in connection with cable laying and other non-fixed installations).
It is also proposed that all activities relating to supply services are included in the Tonnage Tax Scheme. This means that, for example, transportation of victuals or bunker fuel oil will be covered.

The Danish Tax Administration (SKAT) interprets the current rules in a way that does not allow for the inclusion of the above-mentioned activities. The explanation for this is that these activities are supposedly not carried out between different destinations.

Ice management vessels

Every kind of ice handling at sea is included in the amendment. This can be escorting of vessels through icy waters, protection of drilling units against floating icebergs in arctic waters, and actual ice breaking.



Offshore installation vessels

The amendment includes construction at sea, including the building, repair, and dismantling of wind farms at sea. These activities are typically carried out by wind farm service vessels.
Furthermore, the amendment includes the building, repair, and dismantling of other offshore installations, such as oil installations, wave-breaking installations, and other coast protection measures. In regards to oil installations, the building, repair, and dismantling of these is only included when the activities are carried out outside the Danish sea territory or continental shelf.

Also, the amendment includes the laying, inspection, and repair of pipelines and cables on the seabed. Specialised pipeline layers and cable layers typically carry out these activities.

Accommodation and support vessels (ASVs)

Income from the housing of employees, spare parts, or workshop facilities in connection to offshore operations is included in the amendment to the Tonnage Tax Act. Specialised ASVs typically carry out these activities. The vessels can be part of comprehensive and lengthy offshore works and form an integral and necessary part thereof.

Deductions from Income
Depreciation, amortisation, and depletion
Tax depreciation need not be in conformity with book depreciation.

Annual depreciation allowances on machinery and equipment may be claimed under the diminishing-balance method at up to 25%. The depreciation base is the cost of fixed assets less sales proceeds from disposals and depreciation allowances previously claimed.

New machinery and equipment acquired between 30 May 2012 and 31 December 2013 could be included in the base with a supplement of 15%. Hence, 115% of costs of new fixed assets was added to the base and depreciated at up to 25% per year. If a company has applied this principle, the assets in question must be kept on a separate account until the end of the tax year 2017.

For ships, the depreciation rate is 20% in the year of construction and a 12% declining-balance basis in subsequent years.

Depreciation allowances on buildings (other than residential buildings and office buildings not adjoining an industrial building) may be claimed at up to 4% on the straight-line basis.
Airplanes, trains, and utility plants can be depreciated only at a 15% declining balance.
Rails, telecommunications facilities, and certain other long-life plant and equipment can be depreciated only at a 7% declining balance.

Depreciation allowances that are recaptured as part of a capital gain on the sale of an asset generally are fully taxable.

Acquired goodwill and other intangible property rights can be amortised at up to one-seventh per year on a straight-line basis. Costs related to the purchase of patents or know-how (including rights/licences to utilise patents or know-how) can either be fully expensed in the year of acquisition or amortised over a seven-year period on a straight-line basis.

Certain restrictions regarding the depreciable value of goodwill apply in the case of group transactions. Goodwill on the purchase of shares cannot be amortised for tax purposes.

Depletion of the cost of acquisition or exploitation of natural resources is subject to special rules.

Start-up expenses

No specific rules in Danish tax law govern the treatment of start-up expenses. Instead, these expenses are treated according to general tax law.

Companies may, under certain conditions, benefit from a scheme allowing for a cash payment equal to the tax value (22%) of negative taxable income, provided the negative income is created from research and development (R&D).

Bad debt

Companies may deduct loss on bad debt, which is not inter-company debt.
The main rule for calculation and taxation of companies’ gains and losses on receivables for tax purposes will be the inventory principle (i.e. taxation based on the difference in value at the beginning and end of the assessment year). Use of the inventory principle means that recognition of losses on these types of receivables for tax purposes is not conditional on a final loss having been ascertained.

Special rules apply to gains and losses on trade and inter-company receivables, as these, as a main rule, should be calculated according to realisation principles. Companies may, however, opt for the inventory principle for each category of receivables.

Charitable contributions

Companies may deduct a small amount in gifts to certain organisations approved by the Danish tax authorities and mentioned in the Danish tax authorities' guidelines. The deduction cannot exceed DKK 15,600 per year for tax year 2017 (previously DKK 15,200).

Furthermore, companies may deduct gifts to cultural organisations that receive a maintenance grant for operating expenses from either the government or the municipality. According to these rules, there is no limitation in terms of value, but certain restrictions regarding the use of the gift are applicable.

Finally, gifts to certain charitable organisations within Denmark or the European Union may be deducted, provided the recipient uses the funds for research. Deductibility is conditioned upon the organisation being approved by the Danish tax authorities. No limitation in regards to amount is applicable.

Fines and penalties

Fines and penalties are, in general, not deductible, as these are not considered operational expenses.

Bribes, kickbacks, and illegal payments

Even if considered economically reasoned and custom in certain jurisdictions, amounts used for bribery of officials are not deductible.

Taxes

Taxes are non-deductible for CIT purposes, except for employer’s tax, non-recoverable VAT, land tax, and coverage.

Net operating losses

Tax losses may be carried forward indefinitely. However, the utilisation of tax losses carried forward may be restricted. According to the rules, taxable income up to DKK 8,025,000 for 2017 (previously DKK 7,852,500) can always be eliminated by tax losses carried forward, whereas taxable income exceeding DKK 8,025,000 (previously DKK 7,852,500) can merely be reduced by 60% as a result of tax losses carried forward. For Danish tax consolidation groups, the rules apply for the group collectively. If losses are restricted, the limitation must be allocated to each of the companies according to complex rules.

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 comparable transaction. However, there are numerous exceptions (e.g. inter-company transactions).

Tax losses may not be carried back and utilised in previous income years.

Payments to foreign affiliates

A Danish corporation can claim a deduction for royalties, management fees, and similar payments made to foreign affiliates, provided that such amounts are made on an arm’s-length basis and reflect services received. Interest at normal commercial rates paid to foreign affiliates will generally be allowed as a deduction but is subject to very complex thin capitalisation and interest relief limitation rules.


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Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.

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This blog is Created by CA Anil Kumar Jain.