How does it impact your personal income tax when you deduct a home office in your personal taxable income in Denmark?
By calculating the cost of using your home office for your business and then deducting this cost in your personal taxable income you lower your personal income tax.
But the rules are quite strict and not everyone is able to apply the rules.
Change the appearance of the home office
First off, in order to deduct the cost of using your home office for your business from your personal taxable income and thereby lowering your personal income tax, you must change the physical appearance of the room that is used as your home office.
The tax office in Denmark can ask what you have in this home office.
For example, if you have a three-room apartment and you use one of the rooms for a home office, in order to receive a deduction of your personal income tax, the room used for the home office must be physically changed.
If the home office’s physical appearance has not changed, then as a general rule you cannot take a deduction in your personal income tax.
However, there is no 100% clear definition of the changes you must make to the appearance of the home office, and different people at the tax office may have differing interpretations of the specifications.
To one tax inspector, “changing the physical appearance” may not mean simply putting in a desk, office chair, bookshelf and books related to the business.
Machines or special furniture that are not used in a private residence could be considered a physical change.
It could also be actual installations you need to make – like in a mechanic workshop – than can change the physical appearance of the room.
However, this is seldomly the case for a typical client. Whether or not it looks like a normal office, tax inspectors may decline your deduction, depending upon their own personal interpretation.
Use of the office
In addition, you must use the office for a certain length of time in order for the deduction to be approved. It’s not enough that you spend a couple of evenings a week in the office. Although again, there isn’t a 100% clear definition, 5-8 hours per day should be sufficient. Again, experience with the tax office has shown that approval is largely dependent upon the tax inspector.
If you are renting your home
Your personal income tax deduction will be different if you rent your apartment/house versus owning it. If you rent, we look at the surface area of your lease, and then we calculate how much percentage of this area is used for the business. In order to calculate this, you can make a drawing of your lease and mark off how much of the space is actually used as an office in order to determine how much to deduct. For instance, if you’re renting a 100 square meter apartment and 10 square meters are used for the office, 10% of your lease is used for the business.
Monthly rent & utilities
We must then look at the costs (rent, electricity, heating, etc.) related to your apartment/house to determine how much to deduct. In the example above (with a 100 square meter apartment and a 10 square meter home office) you’re allowed to deduct 10% of the total cost in your personal taxable income thereby lowering your personal income tax, and you’re also allowed to deduct VAT (10% of the VAT) if the home office is 10% of the leased area. If your home office is bigger, then your deduction will also increase. For instance, if you use 25% of your home for business, then you may also deduct 25% of the electricity bill, 25% of the heating bill, and 25% of the VAT e.g. The deduction is always relative to the business usage of your apartment/house.
Water is another expense that may only be approved for deduction if its use directly relates to the business. For instance, a hairdresser might use the home office to cut a client’s hair, so water usage would normally be approved in this scenario. Once you’ve gathered all the relevant bills, you must deduct the percentage of the home office from the total expenses; in our example from above, 10%.
If you own your home
When you own a property in Denmark, you pay a mortgage to the bank, and you also pay interest on that mortgage. In terms of these costs relating to the mortgage itself, you cannot make any deductions for your home office, as the mortgage and interest are considered a private cost. However, the mortgage interests are deducted in your personal tax already.
In addition to the mortgage, you also pay a property tax as an owner, which is called “Ejendomsskat” in Danish. You normally have two instalments to pay annually. When it comes to property tax, if you use less than 10% of your property for the business, then you’re not allowed a deduction. If you use 25% (and above) of the property like a home office, you can take a deduction of the property tax you’ve paid in your company as a cost. For example, if you’ve paid 10.000 DKK in property tax, and you use 25% of your property for a home office, then you can deduct 25% of the 10.000 DKK, which is 2.500 DKK (this will be a cost for your company then).
Capital gain deduction
The tricky part is if you use 10-24% of your property for a home office, then you can only deduct this part of the property tax as a capital gain deduction. This deduction is not given in your personal income or in your company’s revenue, but rather as a capital gain deduction, which is a special field on the tax declaration.
In Denmark, when you do this capital gain deduction, you don’t get a 100% deduction but more like a third, so if you pay 50% in tax and deduct 1.500 DKK as a capital gain deduction, then you’re not going to get 750 DKK in a tax refund, because the 1.500 DKK will not have that much power as a tax deduction. It’s only measured at around a third, so the 1.500 DKK becomes a tax deduction of around 500 DKK. If you use 15% of your property as a home office and you pay 50% in tax, then you end up receiving a tax discount of 250 DKK.
Property value tax
Another tax you pay in Denmark for your property is called property value tax – “Ejendomsværdiskat” in Danish. This is not something that you pay individually; it’s included in the normal income tax you pay. You can always deduct a partial amount of property value tax if you have a home office; even if you use only 5% of your home as a home office, you can still receive a 5% partial deduction for this tax.
On the tax declaration, you must write the percentage of your home you use for a home office and how many days you’ve had it. When you do that, then you’ll automatically receive a tax deduction. Keep in mind that if you’re only registered for owning 50% of the property then your husband or wife should do the same because they’re also eligible to receive this discount.
If you’re an owner, the maintenance on your apartment or your house (painting, fixing a heater, etc.) is the next potentially relevant deduction. If you use less than 10% for business, then you’re not allowed to take any deductions on maintenance, but if you use more than 10%, then you’re allowed to take a partial deduction equivalent to the usage for business. So if you use 20% of your property for business, for example, and you need to paint the office, then you’re allowed to take a 20% deduction for both the VAT and the tax. You may take a partial deduction for everything related to maintenance.
We also deduct the utility bills (insurance on the house, chimney cleaner, etc.) as we would for rentals, according to the percentage used for business. However, as an owner, the tax office may only approve these deductions if you use around 25% or more of your home as your home office. Again, this depends on the inspector. Electricity and water have separate rules and are not included in this type of deduction.
For electricity, normally the tax office accepts a partial deduction, regardless of the percentage you’re using for business. So if you’re using 10% for business, normally they’ll approve a 10% tax deduction and VAT deduction of your electricity bill. No minimums here.
For water, the rules are similar to rentals. Normally they’d like to see that you actually use water for your business, and the home office must be at least 10% of the property in order to deduct the water bill. You also receive a partly VAT deduction, and you can deduct a certain amount of every cubic meter of water you use (an extra VAT deduction). Up until now, it’s been 6,18 DKK/cubic meter of water (2020 rate), deducted directly on the VAT declaration. But this can change, so make sure you have the updated amounts.
You’re not allowed to deduct new installations for your business (new air conditioning unit, water heater, oven, etc.).
If you have a home office, have a chat with us about it. Very few clients actually fulfil the criteria of making a physical change to their apartment or house, which is the first challenge.
Would you like us to help determine if you can deduct your home office from your personal taxable income?
(Last update of this blog: 3.7.2022)