Can a consultant invoice through an LTD (ApS)? – and why it can get VERY expensive in tax if you get it wrong!
There can be many reasons to have an LTD (ApS) in Denmark.
Often an LTD (ApS) is chosen because of considerations in relation to liability.
Other times it can be due to tax considerations.
Or both of course.
Most people prefer paying 22% in company income tax (the company income tax rate in Denmark in 2023), rather than paying personal income tax on money earned.
Especially if profits are high.
And who would not be happy to have limited liability on top of that?
But can you even invoice your consulting services through an LTD (ApS)?
The answer is usually “yes” – but sometimes it can also be a “no”.
In general, you can say, that just because you issue an invoice through an LTD (ApS) in Denmark for your consulting services, that does not necessarily make it a company income.
It is only a company income, and taxed as such, as long as you are not considered being an employee in relation to the client.
In some circumstances, you might have just put yourself at risk of double or even triple taxation.
Yes, triple taxation.
NB: And this risk applies to everyone – also for other types of industries than just consulting services!
Why is that?
Well, in this setup we need to look at the 3 mechanisms involved:
1: There is your client paying for the consulting services to the LTD (ApS);
2: There is your LTD (ApS) which are invoicing the consulting services and receiving the payment from the client;
3. And finally there is you, receiving a salary from the LTD (ApS) at some point.
The big question here is:
Is the money, in reality, being paid from the client to you?
Meaning that it is you and not the LTD (ApS) that is the beneficiary.
This situation can occur if the work you perform for the client, has the characteristics of normal employment.
There is not one single thing that you can point at to determine who is the beneficiary.
But it is the overall situation that will govern.
Some consideration that could point in the direction of you being an employee would be
The client is giving instructions and inspecting the work done as in normal employment;
You only have 1 client or 1 major client;
The agreement between the client and you is ongoing and has no specific term;
Your working hours are set by the client;
The contract stipulates a termination period;
You get paid per hour, weekly, monthly;
The client pays for the costs relating to the work done;
You have paid holiday, employee insurance and similar.
In the worst possible scenario, you are considered the beneficiary, and not the LTD
The tax consequences for you being considered the beneficiary and not the LTD will most likely be:
The LTD (ApS) will first have to reduce its income with the invoiced amount incl. VAT.
Secondly, the LTD (ApS) will now instead be taxed on the full amount received by the client.
So the full sales including VAT.
The LTD (ApS) will be able to deduct any salary you already have received as a cost.
The tax on the remaining amount is 22% (company income tax).
This is the first time tax is paid.
You as the shareholder/director might already have received part or all of the money as salary in the LTD (ApS).
In that case, you would already have paid personal income tax on this salary.
Even though corrections are made for the LTD (ApS) as described above, the salary you already have received is taxed.
This is therefore the second time tax is paid.
The sales incl. VAT from the LTD is now added to your personal income and taxed one more time.
This is the third time tax is paid.
Often bringing the total tax to more than 100%.
There are examples from the tax court, however, where already paid salary in the LTD to a shareholder is deducted from the taxable amount before tax is calculated.
But there are also situations where the full amount is taxed once more.
Basically making the tax triple.
Is it possible to repair a situation like this?
Well, yes and no.
Civil law opens up the possibility to make a correction.
However, the high court has already made rulings clearly stating that in cases like this, concerning beneficiaries, then it is not possible to make a correction.
So here a “no” must be observed.
How can you avoid this situation?
Make sure the contract between the LTD (ApS) and the client is “bulletproof”.
Especially, consider the points from above carefully.
Are you not sure if you could actually be considered an employee?
In general, the best advice is:
If you are not sure, then do not invoice through an LTD (ApS).
If you instead should choose to invoice through a sole proprietorship, then there will still be tax consequences, if you would be considered an employee.
But the amounts in tax would be smaller since you normally already would have been taxed in your personal income.
So a sole proprietorship is not a perfect solution either, but definitely safer (and cheaper) than an LTD (ApS).
If you already have a feeling that you are actually just an employee, then do not bother with the LTD (ApS) or the sole proprietorship.
Simply become an employee and save yourself a ton of headache and tax.
(Last update of this blog: 16.10.2023)