Company tax & dividend tax for limited liability companies

Company income tax rate

Limited liability companies pay a company tax of 22% (2018 rate).

Company tax is paid on the revenue which means that, in order to estimate how much you’ll pay in tax, you must take your company sales and subtract the company costs, including depreciations and interest, etc. The remaining amount, which is either the revenue or the deficit, will be subject to a 22% tax if it is a revenue or, if there’s a deficit, then no tax is to be paid of course.

Postponing the Deficit

A deficit can be postponed to the forthcoming year. If you have a deficit in the first year, for instance, you can offset the deficit with the following year’s revenue. You may have a deficit of 100.000 DKK in 2018, but if your revenue in 2019 is 100.000 DKK, you can then offset the deficit you had in the previous year, so that your taxable income in 2019 is 0 DKK.

That’s important information: by moving your deficits from one year to the next, the potential revenue offset it.

Payment Due Dates

Company tax is paid twice a year in partial payments, and those payments will naturally be based upon an estimate (since nobody knows the actual revenue before the year has ended) and are due on March 20th and November 20th. If you have a limited liability company, then the first time you receive a letter from the tax office about your company tax, it will almost always state that you must pay 0 DKK. This is because the tax office doesn’t yet know how much you’re supposed to pay, so they’ll send a letter, informing you that these partial payments are due in March and November, but they won’t state the payment amount; you must estimate your payments on your own.

How do you estimate your payments?

Let’s say you’re in the month of January, and you already know you’re going to have revenue this year. Make an estimate for the entire year, as precisely as you can. After interest and depreciation, take 22% (this will be the company tax) of this revenue and divide by two – one payment for March 20th and the other for November 20th. If the amount isn’t precise, it’s no big deal, because when the year is finished, you’re required to make an annual report and submit a tax declaration. Then in the following year, you’ll pay the remaining tax or receive a refund, depending on whether you over- or underestimated your payments.

Split Year

Limited liability companies don’t necessarily have to follow the calendar year. They’re allowed to have a split year, which means you may have up to 18 months in your first fiscal year. For instance, if you start the company on July 1st, 2018, then your first year can run from July 1st, 2018 to December 31st, 2019, which is 18 months. Another option is for the first year to end on December 31st, 2018. It’s completely up to you, but the maximum is 18 months in the first year.

If you choose to have 18 months in the first year, then the tax gets more complicated, since you would, in theory, have a partial payment on November 20th of the first year and then March and November of the second year. Companies, however, will only have the two payments in the following year.

The year must finish before we prepare the tax declaration, so this 18-month year would start on July 1st, 2018 and finish on December 31st, 2019, after which the tax declaration must be submitted on June 30th 2020.

Company income taxes are declared 6 months after the fiscal year ends.

In this example with a 18 months fiscal year, when we submit the tax declaration on June 30th 2020, the tax office will calculate the actual tax, which will be 22% of the revenue (2018 rate), plus some interest in most cases. This tax will be due on November 20th of 2018, and any tax you might already have paid in March and November the previous year (the 2 tax installments that was paid in 2018 in our example from before) will be offset in the total tax due. You’ll receive an annual tax statement that will show all this information, including your revenue from July 1st, 2018 to December 31st, 2019, as well as the 22% in company tax and added late fee interest, which is around 5%.

You could also receive a refund. If you do, your tax statement will show the total company tax, offset by the two payments you made in March and November, as well as the overpaid tax to be refunded.

So remember that if you start a company in 2018 and your company follows the calendar year, with a year-end on December 31st, 2019, you have some leeway before you must pay the tax. This can be very good for the cashflow.

Companies that don’t follow the calendar year

In theory, any company can decide when they’d like their fiscal year to end, but only 10% of our clients choose something other than the calendar year. Most companies choose December 31st, because it’s easier to produce an annual overview if it follows the calendar year. But some people prefer ending the year on June 30th or January 31st. For those who do not follow the standard, the company tax can get tricky.

Let’s assume that you have June 30th as your fiscal year, for example. You’re still allowed to have 18 months maximum in your first fiscal year, so if you start a company on July 1st, 2018, and your fiscal year ends on June 30th, then your first fiscal year will be 12 months, finishing on June 30th, 2019.

The partial tax payments make this a bit complicated. In the first year, 2018, as is normal, you won’t likely pay anything in November. Then in 2019, you’ll make a partial payment in March, but even though the year finishes on June 30th, 2019, the partial payment you make in November, 2019, still counts toward your first fiscal year, despite being paid after the fiscal year is finished. One advantage of this is you can avoid paying interest, because you have that time span to calculate the correct revenue, from which you can calculate exactly how much you must pay in additional tax for the last installment on November, 2019.

You can also pay company tax by following the calendar year. If you choose this route, when the year is finished on June 30th, 2019, you must file your tax declaration on December 31st 2019.

Once the tax declaration has been submitted, then the rules are the same as for companies who follow the calendar year: You’ll receive an annual tax statement, where your revenue is listed, along with the 22% tax and added interest for being late, which is about 5%. The total company tax will be offset by the two payments you made in March and November, after which you will see the remaining tax payment or tax refund.

Dividends & Dividend Tax

After you’ve paid this tax, the money that’s left, which is basically the revenue after tax, is something that you can either keep in the company to increase your equity or take out as a dividend.

There are two setups for this: you own the limited liability company, yourself, so you’re the sole shareholder or are one of a couple of partners; or you have a company that owns the shares, which would be a holding company.

Holding Company

If you have revenue in your limited liability company, and you want to transfer this revenue to your holding company, then it comes down to how many shares your holding company owns. If you own more than 10% of the shares, then you’re allowed to pay out a dividend to the holding company, which will be paid from the result after tax.

Why would you do that? Well, by taking the revenue away from the company as a shareholder, creditors won’t be able to claim this money if something was to go wrong, because the money has been paid out as a dividend to the holding company. With the money in a holding company, you can use it for investments or just hold it there for safety purposes.

Sole Shareholder

If you’re the sole shareholder, you’re also allowed to pay out money to yourself. There are three ways you can do this: through an invoice, a payslip or a dividend.

An Invoice
A shareholder might own a sole proprietary company and can then send an invoice to the limited liability company and get paid that way.

A Payslip
You can also be hired as an employee, through which you’ll receive a payslip from the limited liability company.

A Dividend
You also may receive a dividend from the company of up to 52.900 DKK, taxed at 27% (2018 rates), or more than 52.900 DKK , taxed at 42% (2018 rates).

You might ask, what’s the difference? Which is best: to receive an invoice, a payslip or a dividend?

It all depends on the personal income tax you’re paying as a private person. For instance, if you look at the dividend, the first 52.900 DKK (2018 rate) will be taxed at 27% (2018 rate), which is the dividend tax. This sounds pretty low, because in Denmark, you normally pay 50-60% of tax on your personal income, but you must keep in mind this is after the company has paid income tax. If the company income tax is 22% and you have to pay an additional 27% in dividend tax, then you’re actually paying 49% in total tax, which is only on the first 52.900 DKK (2018 rate).

If you earn more than 52.900 DKK (2018 rate), then you must pay 42% in dividend tax on the amount that is above 52.900 DKK. Again, you already paid 22% in company income tax, so now the total tax is actually 64%, which is quite a lot to pay as a private person to get your money out of your limited liability company. So if you want to take out a dividend as a sole shareholder, then consider taking out only 52.900 DKK, if your personal income tax is higher than the 49% total.

If you have a low income as a private person with, say, 40% in personal income tax, then it doesn’t make sense to take out a dividend, because the dividend tax will be higher than your personal income tax. In this case, your better option would be to take it out as a salary or to make an invoice as a sole proprietorship, because the personal income tax would be lower.

On the other hand, if you’re in the maximum tax bracket (topskat), then your personal income tax might be much higher than 49%, so the better option would be to take a dividend for at least the first 52.900 DKK, because your personal income tax would be lower. It all depends on your personal income.

Married couples

There are also some special rules if you’re married: the amount you can take out as a dividend with the 27% dividend tax is doubled, so that instead of 52.900 DKK, you can take out 105.800 DKK. That might make taking out a dividend the better option, because the tax there is 49%. Again, it depends on your personal income and your personal income tax.

Do you have any questions?

Please send us an email: info@daniaaccounting.com

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