Everything You Should Know About Tax in Denmark
As Denmark is a welfare state, the belief is that the citizens and residents of the country have equal access to the services that they pay for with their taxes. So, if you are a resident of the country, you may find that the income tax in Denmark is high, but you will not mind paying it as you, along with everyone else will have unhindered access to assistance in case of illness and unemployment, opportunity to complete school and university without getting into debt, and enjoy public sector services, information and guidance.
Anyone working in Denmark is liable to pay income tax. So, if you are a foreigner who has just shifted to the country, you should be prepared for it. It is prudent to remember that Denmark has a progressive taxation system, where the more you earn, the higher is tax rate.
Also see our loan in Denmark comparison.
How to Pay Taxes in Denmark
The moment you start working in Denmark, you have to pay taxes. To do this, you will have to apply for a tax card. You can get a tax card by applying for it at the Danish Customs and Tax Administration (SKAT). Don’t think you can get away from paying taxes or not applying for a tax card. In case you do not get a tax card, your employer will deduct a whopping 55% for tax purposes from your salary.
A tax card in Denmark is electronic, but you will get a physical copy of it about two weeks after applying for the card. All employers have access to the information. Typically, the tax agency in Denmark receives all the information that they need to calculate the taxes of a person. They get this information via employers, banks and unemployment funds and unions. So, you do not have to worry about filling up lengthy forms. Instead, as a foreigner, you may be quite surprised to find that usually you just have to ensure that the information and details that the tax department has are correct.
In case you come to Denmark to work, the withholding of the tax by your employer is merely a preliminary tax. Your payslip will reveal the amount you have paid and if you are liable to pay more, you would have to ensure that you do it.
Paying Personal Income Tax in Denmark
As an individual, you can be taxed in Denmark as the following:
Full tax liability
Limited tax liability
Special expatriate rule or rule related to workforce hire
If you are a resident of the country, you will fall under the first category, which is the full tax liability category. This means that you will be liable to pay tax on your entire worldwide income unless you pay taxes in another country with which Denmark has signed a double taxation treaty.
The tax rate in Denmark for individuals based on the ordinary tax scheme can be up to 52.06% in 2020. However, if you include the AM tax, the rate can go up to 55.89%. While it may be shocking to learn that you could end up paying more than half your income in taxes, the good news is that you can apply several deductions and this can help reduce the overall tax rate in a majority of cases.
If you do not fall into the fully taxable resident category, you would be classified as a limited taxable resident. In such a case, you would have to pay taxes solely on income that you generate or earn in Denmark. So, if your stay in Denmark is longer than 183 days in a 12-month period and you get paid by an employer for performing work in Denmark, you would have limited tax liability. This also holds true for businesses that offer payment and remuneration to directors, dividends to stockholders, and payment to consultants and advisors.
The Denmark tax rate for limited tax liability can be up to 52.06% as of 2020 and this rate can increase to 55.89% if you take into consideration AM tax.
It is prudent to remember that in Denmark, individual tax rate covers national income tax, church tax, municipal tax, labour market tax, and regional tax. To ascertain your tax liability, you can use an online tax calculator for Denmark. Such a calculator will use different algorithms from the one used for the US- and the UK-focussed online tax calculators.
Personal Income that is Taxed in Denmark
In Denmark, the following income types are taxable:
Personal income from self-employment, pension, and salary
Capital income from interest and capital gains
Share income from dividends and capital gains on stocks and shares
Property value for properties based in Denmark or overseas
Taxable income includes personal income and capital income minus the itemised deductions. Once you make the deductions, it is only after that you would have to calculate state and municipal taxes. Hence, you can make several deductions to your annual income and salary before you calculate tax and pay the government. This is the reason there are different tax rates that people pay in Denmark even if they have the same annual income or salary.
Corporate Tax in Denmark
Once you establish a company in Denmark, you will be liable to pay corporate tax. The good news is that the corporate tax rate in Denmark is 22%, which is lower than the EU and OECD nations. Also, Denmark does not have a double taxation system for Danish companies that have branches in other nations. Hence, the low corporate tax rate and no double taxation makes Denmark an attractive destination for entrepreneurs and businesses looking to get a foothold in Scandinavia.
Furthermore, you will find that the labour costs in the country are highly competitive. Companies pay less than one percent per employee to a maximum of €1,350 as the social contribution, and this includes pension, healthcare and holiday pay contributions.
Businesses also benefit from the tax schemes that Denmark has for key employees and research and development. If research and development costs incur losses for a business, it can opt for reimbursement amounting to 22% of the losses that are related to the research and development costs.
The Bottom Line
Now you know everything related to tax in Denmark. So, whether you want to shift to the country to work or open a business, you will be able to do so with full knowledge of the taxation system in the country.