Denmark

Individual - Income determination

Last reviewed - 02 June 2020

Employment income

All remuneration from employment, whether in cash or in kind, is subject to tax when the employee has obtained a legal right to the remuneration, regardless of where payment is made and regardless of whether remitted. The liability extends to any living or housing allowance and any reimbursement of tax or other personal liability, whether paid directly to an employee or borne by the employer on the employee’s behalf.

An employee is taxed on the value of a company car. Regardless of actual use, the taxable value is calculated as a fixed percentage of the car’s original purchase price (the list price for leased vehicles). The value is fixed at 25% of the list price of the first DKK 300,000 and 20% of the remainder. An environmental amount is added. The employee will be taxed by 1/12 each month even if the car has been available for just one day during a month. As of the fourth calendar year after the first registration of the car, the basis for the calculation is reduced by 25%. The minimum basis for the calculation remains DKK 160,000.

Payments to an employee for expenses of travel, entertainment, or any other service to be performed on behalf of the employer are taxable only to the extent that they are not actually expended in the performance of the service. Special rules apply for free housing provided by the employer. For some work-related benefits in kind, a limit of DKK 6,500 (2021) applies.

Any employee who is given a free telephone from their employer is taxed on DKK 3,000 (2021), regardless of actual usage and saved private expenditures. If spouses are both comprised by this tax, a reduction of the tax is applicable.

Equity compensation

Share-based payments are, as a starting point, taxed as any other remuneration from employment, with the marginal tax rate at approximately 56%. However, the rules are very complicated and dependent on the specific situation. A beneficial reward scheme has been reintroduced from 1 July 2016.

Further, special rules apply under certain conditions and limitations for 'small start up businesses', as defined in the legislation.

Business income

In general, private business owners (i.e. individuals operating a business on their own account and risk) are comprised by the general tax rates, etc. as employees. However, a number of rules and practises only apply to private business owners.

It may be possible for independent business owners to use a special tax scheme, the Business Tax Scheme. This scheme primarily ensures that private business owners get full value when deducting commercial investments (e.g. interest expenses) thereby increasing the possibilities of consolidating and expanding the business by taxing the savings more gently than savings made for private purpose.

In order to obtain the approval to apply the Business Tax Scheme, a number of formalities regarding bank accounts, withdrawals, and accounting, ensuring that private and corporate funds can be distinguished, must be observed. Basically, the business taxable profit is all taxable income with deduction of all corporate expenses. When using the Business Tax Scheme, the business profit that is not cashed for private use is taxed at 22%, which is equivalent to the corporate tax.

Capital gains and investment income

Generally speaking, Denmark imposes tax on capital gains arising from the sale of private (non-business) assets. Typical assets not subject to capital gains taxation (if assets are non-business related) are furniture, art, jewellery and similar.

Properties
Gains from the sale of privately owned properties, which has served as the primary place of living for the owner (during period of ownership), will not be subject to capital gain taxation, if the property is located on a lot/land which is less than 1,400 square meters in size. This is known as the "parcelhusregel". If the lot/land is larger than 1,400 square meters, then the realized gain may still be exempted from taxation depending on actual circumstances. A similar rule exist for vacation houses/properties (known as "sommerhusreglen"), although conditions differs somewhat from what applies for ordinary houses/properties.

Taxable capital gains from the sale of other property acquired after 1 January 1999 are taxed either as personal income or capital income. Special transitional rules apply to profits on property acquired before 1 January 1999 and sold in the income year 1999 or later.
 
For Individuals subject to full tax liability (resident and tax treaty resident in Denmark), foreign properties owned are subject to special exit tax rules. Under these rules an unrealized gain due to increase in the property value (of a property located outside of Denmark) will be subject to exit tax upon departure from Denmark. Gain is determined based on value of the property upon arrival to Denmark (or date of purchase if bought while already living in Denmark) converted to DKK using exchange rate on the date of arrival/date of purchase, and then the value of the property in DKK using the exchange rate on the date the Danish tax liability (tax liability as resident subject to taxation on worldwide income) ceases.

Capital gains and investment income
Taxable gains and investment income are added to the taxable income. Certain allowances are available.

The taxable income of an individual subject to full tax liability (resident and tax treaty resident in Denmark) includes interest, dividends,  profits from gains on sale of shares, rents, royalties, professional fees, pensions, annuities, and alimony from all sources, wherever located, subject to any limitation that may be imposed under a tax treaty.

While sale of ordinary shares is taxable based on a realisation principle, a so-called mark-to-market taxation is applied on bonds, investment funds, ETF etc., which implies that each year taxable gain/loss is to be declared even though a sale has not actually occurred. The gain/loss is determined based on the market value at the start of the year compared to the value end of the year (values for start and end of the year will be changed to value upon arrival/departure if moving to/out of Denmark during the year). Value is to be converted to DKK using exchange rate at start of the year/end of the year, so this will cover both gain due to increase in value of the investment fund etc, and also gain due to currency fluctuations.
 
Capital gains on bonds, investment funds, ETFs and other claims are exempt from taxation if the individual's net gain across all such types of income does not exceed the equivalent of DKK 2,000 per year. If the limit of DKK 2,000 is exceeded, then gains are taxable in their entirety.

Capital gains taxation also applies to capital gains related to transactions of funds between accounts kept in other country of DKK, where a capital gains arises due to fluctuations in the exchange rate between the relevant currency and DKK between the time where the money was originally deposited and the time where the same funds are later withdrawn. In this regard a first-in, first-out principle is applied. Capital gains determined in this regard is composed by the threshold of DKK 2,000 per year (see above). This type of capital gain evaluation is to be made for persons who are considered resident and tax treaty resident in Denmark, and will include any withdrawals of funds from accounts with funds in other currency than DKK (possible also transfers between accounts in the same bank), payments made to reduce mortgage principal etc.

Pension
In certain cases foreign pension plans will not qualify as tax approved under Danish tax rules, and in that case the pension plan will be subject to mark-to-market taxation. This applies for individuals subject to full tax liability (resident and tax treaty resident in Denmark).  

The gain/loss is determined based on the market value at the start of the year compared to the value end of the year (values for start and end of the year will be changed to value upon arrival/departure if moving to/out of Denmark during the year). Value is to be converted to DKK using exchange rate at start of the year/end of the year, so this will cover both gain due to increase in value of the pension plan, and also gain due to currency fluctuations.  

Besides the capital gains taxation, there may also be possible taxation related to contributions made to the foreign pension plan if such are still being made.

Treatment of intellectual property (IP)

Individuals shall include profit or loss regarding sales of IP in their personal income. This means that profit from sale is subject to ordinary taxation.

Royalties, defined as payment for the right to use any patent, trademark, secret formula, etc., are subject to a fixed tax rate of 22%, which must be withheld by the payer of the royalty. According to many tax treaties, Denmark has either waived right to tax the royalties or accepted a lower tax.