Tax System for Businesses in Denmark
In Denmark, owners of a sole proprietorship can benefit from the VSO tax scheme. This scheme allows a 22% corporate tax rate to be applied on the portion of the profit from the sole proprietorship that has not been withdrawn from the company into the entrepreneur's private bank account. The entrepreneur will pay temporary income tax on the retained profit, and when the profit is withdrawn in subsequent years, they will have to pay the difference between the 22% income tax rate and the actual personal income tax rate for that year. This scheme is primarily used to defer personal income tax, but can also eliminate the maximum 15% tax once income exceeds the highest tax threshold in Denmark. The scheme also allows for an increase in the value of tax deductions associated with interest on loans.
A sole proprietor in Denmark should consider using the VSO tax scheme when charged interest on company loans or when required to pay the maximum tax. In situations where high profits are earned, the entrepreneur can balance income between low and high-profit years to avoid paying the maximum tax for a particular year. In Denmark, the maximum tax is 15% in addition to the regular tax on all income earned above the maximum tax threshold. By using the VSO tax scheme, sole proprietors can save money on income tax and better manage their finances.
Denmark’s maximum tax bracket is shown below:
- When the total annual gross income exceeds DKK 45,400 (2021) or DKK 44,250 (2020), the 15% maximum tax applies.
- When the total annual gross income exceeds DKK 49,348 (2021) or DKK 48,098 (2020), the 15% maximum tax applies.
- When the total annual gross income exceeds DKK 544,800 (2021) or DKK 531,000 (2020), the 15% maximum tax applies.
- When the total annual gross income exceeds DKK 592,174 (2021) or DKK 577,174 (2020), the 15% maximum tax applies.
In Denmark, sole proprietors can use the VSO tax scheme to defer or reduce their income tax. The entrepreneur can select box 184 when updating their preliminary income estimate to calculate in advance what portion of their income can be taxed under the scheme. To take advantage of the scheme, the entrepreneur should have separate private and business accounts, with a separate bank account assigned to their business CVR number. They can also select field 147 on the annual tax return to use the scheme.
The tax scheme is not advisable for companies in Denmark that have no interest-bearing loans and do not pay the maximum tax. However, it can be used if the entrepreneur does not pay the maximum tax but has interest-bearing loans. If the entrepreneur neither has interest-bearing loans nor pays the maximum tax, they can use the scheme to defer paying the tax. However, if they want to close their sole proprietorship, they will be required to pay the whole tax that was deferred in the
tax scheme right away, including both the 15% tax on the portion of the money held in the business and the 15% additional tax they would not be required to pay if they had withdrawn the money on an ongoing basis.
It's important to note that profit can be kept in the company as other assets, such as equipment or stock products, but the money must remain in the company. When it comes to stocks, one can only invest indirectly through investeringsforeninger or special investment products.
As the Danish corporate tax scheme is complex, it's advisable to enlist the help of a certified accountant to make all the necessary calculations.
