The business tax scheme in Denmark for 2023
The business tax scheme in Denmark is a particular tax scheme you can use as a sole proprietor to lower or postpone your income tax.
The tax scheme enables you to use the company income tax rate (22% in 2023) on the part of the profit from your sole proprietorship, not withdrawn from the business to your private bank account.
Therefore, the business tax scheme is also often referred to as the company income tax scheme or, in short, just as the “VSO”.
In other words, the 22% is a temporary income tax paid on the profit you keep inside your business.
Once you withdraw the profit from the business in later years, you will have to pay the difference from the 22% income tax already paid in the business tax scheme to the actual personal income tax percentage for the year when the profit is finally withdrawn.
If you would like to know how a sole proprietor pays tax in Denmark, we recommend reading this blog that covers all the basics of income tax for sole proprietors:
In year one, you use the business tax scheme to pay 22% income tax on a 100.000 DKK profit kept inside the business. You leave the profit in cash in the business bank account.
In year two, you would like to withdraw this profit from the business bank account to your private bank account. If your income tax rate is 40%, e.g. in year two, then you will pay the difference between the 22% tax already paid in the business tax scheme in year one and the 40% personal income tax rate you have in year two once you withdraw the profit from the business bank account.
So what is important to note here is that the business tax scheme mainly offers to postpone personal income tax.
However, in some cases, the business tax scheme can also eliminate the 15% maximum tax that applies when your income exceeds the maximum tax bracket.
The tax scheme also offers to increase the tax deduction value related to interest charged on loans, making it an exciting tax scheme for sole proprietors with loans that charge interest.
When should you consider the tax scheme as a sole proprietor?
In general, two situations should make you consider using the tax scheme:
1: You have a high personal income (the sum of the profit in your business and salary you might get from a job) – and you are paying maximum tax – and at the same time, you are keeping money inside the business from the profit
2: You are charged interest on loans in the business
What is a high income when considering the business tax scheme?
Well, a high income is, of course, a matter of definition. In the scope of the tax scheme, we look at the threshold for when the maximum tax kicks in. The reason is that we can level out income in-between years when there is a profit in your sole proprietorship, and you have kept money inside the company, e.g. in the company bank account.
By levelling out the income between a year with a high profit and a year with a low profit, you avoid paying maximum tax in the year with the high profit.
When do you pay maximum tax?
In Denmark, the maximum tax bracket is:
|15% maximum tax applies when total annual gross income exceeds (before 8% AM-contribution is deducted)||618.369 DKK||600.543 DKK||592.174 DKK|
|15% maximum tax applies when total annual gross income exceeds (after 8% AM-contribution is deducted)||568.900 DKK||552.500 DKK||544.800 DKK|
|15% maximum tax applies when total monthly gross income exceeds (before 8% AM-contribution is deducted)||51.530 DKK||50.045 DKK||49.348 DKK|
|15% maximum tax applies when total monthly gross income exceeds (after 8% AM-contribution is deducted)||47.408 DKK||46.042 DKK||45.400 DKK|
Preliminary income assessment
You can include the business tax scheme when updating your preliminary income assessment for 2023 by clicking the box “184”.
However, you will need to make some calculations first concerning how much of your profit can be taxed in the tax scheme.
How much is the maximum tax in Denmark?
The maximum tax is 15% extra in addition to your regular tax on all income earned above the maximum tax bracket.
So it can become quite a significant tax bill.
What are the requirements to use the tax scheme?
Not everyone can use the business tax scheme.
It is important that your personal economy and the business economy are clearly divided.
You need to have a separate business bank account registered to the CVR number of your business.
You cannot use your private bank account for the business when applying for the business tax scheme.
And you cannot mix your private bills with the company either.
Instead, you can make withdrawals from the business to your personal bank account when needed.
Private and business need to be 100% separated.
How is the tax calculated in the business tax scheme?
Using the business tax scheme is pretty complicated.
It requires a series of calculations to be made.
The complexity of the calculations is why most sole proprietors will need help from an accountant when using the tax scheme.
Can you use the business tax scheme after the year has ended?
Yes, even though you have not included the business tax scheme on your preliminary income assessment, applying the business tax scheme to your tax declaration is still possible.
That is done by clicking the box “147” on the tax declaration.
However, you still need to comply with the requirements, of course.
Which also includes preparing the required calculations for the tax scheme.
Does it make sense to use the tax scheme if you are not paying maximum tax?
The answer is not a clear “yes” or “no”.
It will depend on your long-term expectations for the development of your business.
In general, we do not recommend using the business tax scheme if you are not paying maximum tax or if you do not have loans that carry interest.
If you have loans that carry interest, it is always wise to use the business tax scheme, even if you are not paying maximum tax.
If you are not paying maximum tax and if you are not paying interest on loans, it is still possible to use the business tax scheme.
However, the motivation then would be to postpone income tax for later years simply.
That can turn out to be a terrible idea if you, e.g. decide to close your business in a few years and are forced to pay all the tax that has been postponed in the tax scheme at once. Often that would trigger the 15% maximum tax on some of the money kept inside the business.
15% in extra tax that you otherwise would not have had to pay had you withdrawn the money ongoing.
And then, of course, it was a bad idea to use the business tax scheme in the first place.
So talk with your accountant about the tax scheme and make a decision afterwards.
Do I need to keep the profit as cash in the business to use the tax scheme?
No, the profit can be stored as other assets also.
You can decide to keep your money as stock products e.g.
Or you can buy equipment.
You need to leave the money in the business.
Read more also on the tax office website
Can I buy shares and still use the tax scheme?
Direct investment in shares is not possible in the tax scheme.
But you can invest indirectly in shares through unique investment products (called “investeringsforeninger”).
Ask your bank what they can offer, and remember to mention that the investment product needs to comply with the tax scheme rules.
(Last update: 22.2.2023)