Becoming knowledgeable of a country’s tax regime is crucial for all companies considering expanding to new locations. In 1994, numerous independent firms administered by PKF International Limited curated a Worldwide Tax Guide (WWTG) to guarantee international companies with the answers to their most frequently asked tax questions in publication form.
This article will deliver information regarding treaty and non-treaty withholding rates, foreign tax relief, exchange controls, taxes payable, determination of taxable income, basic fact, and much more. While this article will deliver information on the tax regime in Denmark, it is vital to understand this article should not be regarded as a complete explanation of the taxation affairs.
Essential Facts
Before knowing its tax regime, it’s vital to learn some brief facts about Denmark. Denmark’s full name is the Kingdom of Denmark with Copenhagen as the capital and Danish being its primary language. Denmark population is 5.7 million people with its dominant religion being Christianity. Their monetary unit is the 1 Danish Krone (DKK), Int. Dialing code is +45, and their internet domain is .dk.
Non-resident companies pay taxes on income sourced in Denmark while Danish resident companies pay corporate income tax on Danish profits and moderately on foreign-source income. Danish group companies and Danish permanent institutions along with real properties of foreign subsidiaries must undergo compulsory Danish joint taxation. Value added tax (VAT) is applied at a standard fee, but contingent upon exemption and zero-rating. Interests, royalties, and dividends are contingent to withholding tax unless exempted under the appropriate tax treaty.
Denmark’s tax law offers unilateral relief for foreign taxes paid on some forms of income such as royalties and dividends, and more. This relief may not surpass the Danish tax liability relating to the relevant foreign income. Relief can be restricted on the tax that the foreign state is eligible to levy under the treaty if a tax treaty is already in place. If some or all income earned in a separate country that does not have a treaty with Denmark, then foreign tax is liberated by the credit method under domestic tax rules.
Danish group companies and Danish stationary institutions along with the real estate of foreign subsidiaries are contingent upon compulsory Danish joint taxation. These companies must contain the same financial year as group taxation allows the merger of profits and losses. If voluntary global tax is elected, permanent establishments and real estate along with all foreign group companies must be incorporated in the joint taxation. Associated party transactions must agree with the arm’s length principle.
Danish external dividends are usually liable to 27% withholding tax while external interest payments are generally 30%. However, numerous adjustments apply, for example, this withholding tax is decreased or refunded under most tax treaties. Generally, Denmark does not enforce exchange controls on business activities. The treaty and non-treaty withholding tax rates differ between each treaty country, for example, Armenia’s dividends percentage is 15/0 with an interest percentage of 0, and royalties’ percentage of 0 as well; whereas China’s in 10% for dividends, interest, and royalties. It’s vital to research the rates for the country you desire included in the treaty.
Taxes Payable
- Company Tax: Residential corporations are liable to Danish income tax on their profits made in Denmark and to income sourced abroad, to some extent. Non-residential companies are also required to pay tax on income profited in Denmark. Corporate income tax is 22%.
- Branch Profits Tax: Departments of foreign companies have a fixed taxed on income acquired from profits made in Denmark, at the corporate tax fee of 22%.
- Capital Gains Tax: Disposals of assets are generally included in taxable income and contingent on tax at the standard corporate tax rate. Capital gains on disposals of shares are absolved unless the shareholding is less than 10% of the listed company while capital losses on disposals of liabilities and assets of a Danish stationary institution are taxable in Denmark.
- Value Added Tax (VAT): Is imposed at a standard rate of 25% of the retail price of the majority of goods and services and the legislation generally complies with EC Directives. No graduated rates reside. A payroll tax between 3.54% – 13.6% is mandatory on the pay-roll itself or before capital and interest gains.
- Property Tax: Proprietors of real estate are contingent to a local property tax according to the value of the land with rates ranging from 1.6% – 3.4%.
- Fringe Benefits Tax (FBT): Tax value of the majority benefits in principle is the fair market value. Therefore, employees taxed on profits in kind acquired.
- Social Security Taxes: Funded almost entirely through income taxes with exceptions from ATP and Health Contribution. The contribution is charged on gross salary and business income accordingly at a rate of 8%.
- Other Taxes: Transfer tax is charged on registration only. When a change in ownership of real estate occurs, a rate of 0.6% + 1,600 DKK, and 1.5% + 1,660 DDK on mortgages. Different rates implement on registrations for aircraft and ships.
Establishment of Taxable Income
Taxable or net income is reached by adapting the accounting profits for non-deductible items and non-taxable income.
| Determination | Reasoning |
| Stock/Inventory
| Inventory might be esteemed at market or cost value. |
| Capital Gains and Losses | See the above portion. |
| Depreciation | Properties costing less than 12,900 DKK or have an estimated useful life less than three years can be automatically written off. Machinery, furniture, ships under 20 tons, and more are written off at a rate of 25%, maximum. Buildings for manufacturing devalued under the straight-line method according to the useful life have a standard rate of 4% per annum. |
| Dividends | Obtained from a subsidiary are exempt from tax if the parent company owns 10% and above of the share capital throughout an annual period. Withheld tax will be deemed as a tax payment on the account. |
| Interest | The interest is included in taxable income, except for interest on overpaid corporate tax. Companies must calculate this income on an accrual’s basis. Interest on overdue tax is not deductible. |
| Losses | If the profit surpasses 7,852,500 DKK, it may be possible to deduct 60% of the remaining profit. If more than 50% of the shares within the company have transferred ownership since the loss incurred, losses may not be counterbalanced against capital income and interest. |
| Controlled Financial Company (CFC) Income | Profits completed by foreign subsidiaries and Danish financial companies will be taxed in Denmark if the parent company controls the company and if the business if mainly of financial nature. |
Individual Tax
Individuals considered to be residents of Denmark for tax purposes if they inhabit accommodation in Denmark as their stable home or stay in the country for a period of six months and more. Any profit will be taxed in Denmark as some assets are considered taxable as sold at market value.
Profits made by more than 50% held shares and votes of financial corporations created in low tax countries are taxable in Denmark at 22% CFC, this only applies if the company’s financial revenue is more than 50% of its total earnings, but it may not apply if the company is recognized in an EC or a tax treaty country.
Personal income includes income earned from a taxpayer’s employer; lodging; free use of the telephone; free use of vehicle, and more. Unemployment benefits and pension payments are also considered personal income.
