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Tax
1. Individuals
Individuals domiciled in Denmark are subject to taxation based on their aggregate income both in Denmark and abroad. The Danish tax regime is a progressive taxation system, founded on the general principle that the higher the income, the higher the tax levied. In comparison with other European countries, Denmark is often referred to as a high-taxation country. However, the Danish tax regime is based mainly on direct taxation rather than indirect taxation. The costs for social security are relatively few and are as a main principle covered by the state, due to the relatively high direct taxation.
In order to attract highly specialised foreign employees the main tax regime is supplemented with two alternative taxation methods. The first alternative taxation method is based on a gross tax rate of 25% on all taxable income and with no possibility for deduction of any costs in a period for up to 36 months. From the year 2008 there is a second alternative taxation method based on a gross tax rate of 33% on all taxable income and with no possibility for deduction of any costs in a period for up to 60 months.
1.1 Intensive programmes
Intensive programmes are well know and used in many companies in order to attract and keep key-employees. In principle all kinds of warrants, stock-options and other sorts of bonus allocations are subject to income tax. In practice, however, intensive programmes are often subject to special tax exemption so that the taxation is lower than the tax on income.
2. Corporate
The rate of corporate income tax is currently 25%. Danish resident holding companies and branches or agencies of non-resident companies trading in Denmark are subject to corporate income tax.
As a general rule dividends are subject to taxation. However, dividends received by a Danish holding company from a subsidiary are exempt from tax, provided that the holding company holds at least 15% of the share capital for at least 12 months (from the year 2009 the holding company must hold at least 10%). Dividends from subsidiaries located in tax havens may be treated differently.
2.1 Thin capitalisation
Under the current tax regime companies may as a main rule deduct all interest payments subject to a 4:1 debt/equity ratio (thin capitalisation). This rule is supplemented by two additional rules:
1) A limitation based on value of assets: Net financing expense will be limited to an amount corresponding to 6.5 % of the net assets of the group. The rate of 6.5 is subject to an annual adjustment (“Asset Limitation”).
2) A limitation based on annual profits: Net financing expenses cannot exceed 80 % of the EBIT (“EBIT Limitation”).
2.1.1 Shares
Capital gains on Danish shares owned by a foreign company are as a main rule not subject to Danish taxation. Capital gains on shares owned by a Danish company for less than three years are subject to corporate income tax. Losses may be set off against taxable gains on other shares held for less than three years and can be carried forward indefinitely. Capital gains on shares owned by a Danish company for three years or more are tax free and losses are not deductible.
2.1.2 Property and other assets
Buildings and other assets owned by companies and used for business purposes are subject to depreciation for tax purposes and capital gains tax.
3. VAT
The VAT rate is currently 25%.
As a main rule, business transactions are subject to VAT in Denmark. However, the sale of real estate and financial services are exempt from VAT. All forms of letting of real estate are also exempt from VAT, however, VAT may be added if the rental property is used for business purposes.
4. Transfer pricing
Transfer pricing rules apply and are based on the general arm’s length principle. Therefore all business transactions within group companies must be completed on general market terms, as if the transaction were carried out between independent parties. The Danish transfer pricing regime is in general in accordance with the OECD and EU guidelines on transfer pricing.
