Danish Business Structures and Tax

A guide for overseas businesses wishing to take their business to Denmark

1. Introduction

This guide seeks to introduce you to some of the legal and practical aspects of taking your business to the Denmark. It describes various possible business structures available to a foreign investor and outlines the basics of how they are taxed.

This document is a general guide only. It is intended merely to highlight issues and not to be comprehensive. It does not aim to provide legal advice and should not be relied upon for this purpose.

London and Copenhagen, 31 March 2017.

For further information and advice please contact:

Steen Rosenfalck
Partner

T +44 (0)20 7553 9931
E sr@millerrosenfalck.com
I millerrosenfalck.com

The material contained in this guide is provided for general purposes only and does not constitute legal or other professional advice. Appropriate legal advice should be sought for specific circumstances and before action is taken.

© Miller Rosenfalck LLP March 2017

2. Business Structures

Business can be conducted through companies, by partnerships or by individuals acting as sole traders.

The business activities of sole traders and partnerships are not distinct from the personal activities of the proprietor(s) of such businesses. The proprietor has unlimited liability for the debts of the business.

A limited liability company – the most common forms being a public or private limited company – is an independent legal entity. The limited company is separate from the personal affairs of its owner; i.e. its shareholders. A limited company will only cease to exist when it is wound up in accordance with relevant legislation; this means that a company can carry on as long as there are individuals appointed to act on its behalf.

Investors are generally free to choose their preferred form of legal entity. However, permission is required for most non-EU/EEA residents to set up a branch operation in Denmark.

The majority of inward investors prefer to set up a new business operation in Denmark using one of the following types of corporate legal entities:

  • Public limited companies (Aktieselskab, abbreviated: A/S).
  • Private limited companies (Anpartsselskab, abbreviated: ApS).
  • Branches (of foreign limited companies).

These are all regulated by law. Other ways of establishing a business will not be dealt with here.
It is also possible to do business via a SE company (European Company) and a SCE (European Co-operative Society) in Denmark but these entities are not widely used.

2.1 Public limited companies (Aktieselskaber)
The liability of each shareholder is limited to the number of shares subscribed to or alternatively the purchase price of the shares acquired.

A public limited company must have a share capital with a nominal value of minimum DKK 500,000 (or EURO equivalent). The capital may be contributed in either cash or in other assets.
Subject to contribution in cash only (no assets), only 25% or DKK125,000 of the initial share capital must be fully paid up before registration.

The management is required to call a general meeting to discuss the financial affairs of the company if 50% or more of the share capital has been lost. The Management may be held liable for any mismanagement of the company.

There are generally no restrictions in terms of foreign ownership by individuals or companies.

Management
The company may be managed by either (1) a board of directors (bestyrelse) with an executive board (direction) or (2) a supervisory board (tilsynsråd) with an executive board.

The supervisory board shall have at least 3 members normally elected by the shareholders at a general meeting. In terms of the board of directors neither the chairman nor the deputy chair may be an executive director.

The primary tasks of the board of directors are to set out the strategic direction of the company and to hire and supervise the executive directors whereas the primary task of the supervisory board is to hire and supervise the executive directors.

Where a company for the previous 3 years has employed on average more than 35 people, the employees are entitled to representation on the board of directors or on the supervisory board as applicable.

The executive director’s primary task is the day-to-day management of the company.

Compliance
The following details of the company must be filed with the Danish Business Authority (Erhvervsstyrelsen):

  • Denomination of the share capital.
  • Names and addresses (including CPR number if applicable) of the founders of the company.
  • Names and addresses of the members of the board of directors and the managing director(s).
  • Articles of association.
  • The annual report (including details of any shareholder holding 5% or more of the votes).
  • The authorised signatories.

Further, shareholders holding at least 5% of the capital must be disclosed in a publicly available register.

2.2 Private limited companies (Anpartsselskaber)
Private limited companies are in general subject to the same rules governing public limited companies but the daily management and compliance are typically simpler.

The main differences are:

  • A board of directors or supervisory board is not required unless the company employs more than 35 people. If so, the employees are entitled to be represented on the board of directors or on the supervisory board.
  • A minimum share capital of DKK50,000 is required. An initial share capital of at least 25% or minimum DKK50,000 must be fully paid up before registration.
  • If more than half of the share capital is lost, the management must call a general meeting as above.

A mini private limited company aimed at start-ups has recently been introduced. The so-called Entrepreneur Company (Iværksætterselskab (IVS)) may be registered with a minimum paid in share capital of DKK1 on condition that 25% of the annual net profits must be retained and transferred to the company’s capital reserves until reaching a minimum of DKK50,000. Dividends cannot be distributed until the share capital and capital reserves amount to DKK50,000.

2.3 Branches (of foreign limited companies)
Foreign limited companies may carry out activities through a branch in Denmark.

A branch is required to register with the Danish Business Authority, and must not commence business activity in Denmark until the application form has been filed and accepted. Branches of foreign companies which are not based in the EU, the EEA or in countries with which mutual recognition agreements are not in place will be required to submit a declaration from a relevant governmental authority in the jurisdiction of the parent company recognising establishment of branches of Danish companies in the foreign jurisdiction.

A branch operating in Denmark is subject to Danish law. The name of a branch must include its origin as well as its status as a branch of a foreign limited company. The branch must be managed by a designated branch manager who is not required to reside in Denmark.

Each year the annual report of the foreign company must be filed with the Danish Business Authority, where the report will be made publicly available.

2.4 Representative offices
Presence through a representative office is an option, if the activities are limited to being of an “auxiliary and preparatory nature”. Such activities cannot include any kind of sales activities, nor power to enter into binding contracts on sales on behalf of a non-resident company.

The activities could be the gathering of information for the foreign company or maintenance of a showroom. However, in case of maintaining a showroom no individual in the representative office can have the authority to enter into contracts.

3. Accounting Requirements

The board of directors together with the managing director are responsible for the bookkeeping and for preparing annual reports for each financial reference period.

The management report prepared by the board of directors and the auditors’ report are integrated parts of the annual report.

The annual report must be approved by the shareholders at the company’s annual general meeting. The annual report must be filed with the Danish Business Authority without undue delay after the approval at the general meeting and no later than five months after the end of the financial year.

Form and contents of the annual report
The disclosure requirements and the form and contents of the annual report are set out in the Financial Statements Act (the ‘Act’). In addition, the annual report must comply with Danish accounting standards. If a company is listed, the annual report must comply with the International Accounting Standards (IAS) and the International Financial Reporting Standards (IFRS). Non-listed companies may choose to comply with IAS and IFRS as well.

According to the Act a company must prepare an annual report consisting, as a minimum, of:

  • A statement by the board of directors and the management on the annual report.
  • A balance sheet.
  • A profit and loss account.
  • Disclosures, including disclosure of accounting policies.
  • A statement of changes in equity as well as a management report.
  • An auditors’ report.

Small and medium-sized companies may be exempt from some of the disclosure requirements.

4. Audit requirements

All limited companies must be audited by an independent auditor (in certain cases very small companies may be exempted). The auditor is appointed by the shareholders at the general meeting.

During the financial year the auditor reports to the board of directors. In addition, the auditor provides the shareholders with an auditors’ report, which is an integrated part of the annual report.

The auditors’ report must state whether the annual report complies with the disclosure requirements of the Danish Financial Statements Act and whether it provides a “true and fair view” of the company’s state of affairs at the balance sheet date as well as of the profit or loss in the financial period.

Auditors must comply with the auditing standards published by the Danish Institute of State Authorised Public Accountants (FSR), which is a member of the International Federation of Accountants (IFAC). Thus, the audit must be performed in accordance with the International Standards on Auditing (ISA).

5. Establishment

5.1 Formation of limited liability company
A memorandum of association must be prepared and signed by the founders. The memorandum of association must contain the draft articles of association which should include the following information as a minimum:

  • Name of the company.
  • Objects of the company.
  • Share capital.
  • Share capital rights
  • Management body.
  • Annual general meeting.
  • Financial year.

Further, the memorandum of association should include additional information such as the names and addresses of the founders, the subscription price of the shares and the deadline for subscription and payment of subscribed capital.

The board of directors should submit the application to register to the Danish Business Authority (Erhvervsstyrelsen) within 2 weeks from the signing of the memorandum.

Registration is subject to proof of the relevant minimum capital having been paid in fully; typically into the client account of a law firm who then certifies that the company is compliant.

A company in the process of incorporation; e.g. a company which has not yet been issued with a company registration number, is not considered an independent legal entity. Therefore, the founders will be liable for the activities of the company until registration is complete. Upon registration the company assumes all liabilities, including the liabilities related to activities carried out between the date of incorporation and the date of registration.

It is possible to register a company online within 2 to 3 working days. If you choose paper form you should expect at least 4 to 5 weeks to register.

5.2 Ready-made companies
In order to save time in connection with the incorporation of a new company you may purchase a dormant company which has never traded from formation agents.

The acquisition of a ready-made-company allows investors to set up a business almost instantly. Immediately after the acquisition, an extraordinary shareholders’ meeting must be held in order to decide the necessary changes to the articles of association, to elect new members for the board of directors, and to appoint the auditor. The articles of association must be changed in respect of the name, the objectives and frequently also the financial year. The changes adopted at the shareholders’ meeting must then be filed for registration with the Danish Business Authority.

5.3 Registration of branch office
A registered branch office of a foreign company is entitled to carry out any business activity included in the objects of the foreign company. The foreign company is legally required to register the branch office with the Danish Business Authority including submission of the following documents:

  • A certificate of legal existence of the foreign company in its country of incorporation.
  • Proof of authority in respect of the individual with authority to act on behalf of the foreign company.
  • A copy of the articles of association of the foreign company if the foreign company’s country of incorporation is located outside the EU/EEA.
  • The incorporation certificate of the foreign company.
  • A statement of mutuality from the relevant non-EU/EEA foreign authority in question confirming entitlement of Danish companies to register a branch in the foreign jurisdiction.
  • A certified power of attorney issued to the branch manager.

5.4 Choice of business form
Naturally, commercial considerations will be of overall importance in determining how to organise your business activities legally.

Tax and various compliance issues, however, may also play a part in the decision making and we therefore identify below some advantages and disadvantages of the various forms of business entity:

Read more

6. Corporation tax

6.1 Tax rate
Taxable income – including capital gains – is subject to a corporate tax rate of 22%. The tax rate is the same for public limited companies, private limited companies and branch offices.

Company residence and territoriality

Unlimited tax liability
A company is resident in Denmark for tax purposes if it is incorporated in Denmark or is deemed to have its effective management in Denmark. Effective management is determined on the basis of the place of the day-to-day business decision making.

Furthermore, due to Danish anti-avoidance tax rules, a Danish incorporated group company may be re-classified as a permanent establishment of a foreign company (limited tax liability) if considered a transparent entity under foreign tax rules.

Limited tax liability
Foreign companies can be subject to limited tax liability either through a branch office, a permanent establishment or through withholding taxes on certain types of Danish source income.

Due to anti-avoidance tax rules, a permanent establishment of a foreign group company may be re-classified as a permanent establishment of another foreign group company, if the foreign group company is considered a transparent entity under foreign tax rules.

6.2 Permanent establishment
Non-resident companies conducting business in Denmark through a permanent establishment (typically a branch office) are subject to tax on all income attributable to or received from this establishment.

In addition, non-resident companies are subject to tax on income from real estate in Denmark.

Non-resident companies are obliged to file a tax return to declare such income.

6.3 Danish income subject to withholding tax
Certain types of payments to non-residents are subject to Danish withholding tax of 22%. The payments may, however, be reduced in accordance with a double tax agreement (DTA) or an EU Directive.

Dividends

Inbound
Dividends received on shares in subsidiaries and group shares are not subject to corporation tax where:

a) The company owns at least 10% of nominal share capital in the subsidiary; and
b) the company is Danish or resident in an EC/EEC member state where the EU Parent-Subsidiary directive applies or in a state with which Denmark has a DTA; or
c) where the company group is subject to Danish group taxation.

Outbound
Dividends paid from Danish companies to a non-resident company can be distributed free of withholding tax provided that:

a) the foreign company qualifies as a company under Danish rules; and
b) the foreign company directly owns at least 10% or more of the Danish company; and
c) the distribution of dividends to the foreign company is subject to either the EU Parent–Subsidiary Directive or by one of Denmark’s DTAs.

or if

a) the foreign company qualifies as a company under Danish rules; and
b) the foreign company has decisive influence directly or indirectly (e.g. more than 50% of the votes) in the Danish company; and
c) the foreign company is resident in an EU/EEA member state; and
d) the distribution would be protected either under the EU Directive or the relevant DTA had there been a direct ownership of at least 10%.

The 22% rate is reduced to 15% under the domestic tax rules if the foreign company holds less than 10% of the Danish company and the tax authorities in the state of the foreign company exchange information with the Danish tax authorities under the relevant DTA treaty or according to an administrative tax assistance agreement.

The exemptions require that the Danish company can certify that the foreign company meets the conditions prior to the payment of the dividend.

If the above requirements are not satisfied, the Danish company must withhold tax on the dividend at a rate of 27% (subject to treaty relief). The foreign company can subsequently reclaim the withholding tax from the Danish tax authorities.

Royalties
According to Danish tax law withholding tax must be paid on all royalties for the use – or the right to use – patents, trademarks, designs or models, plans, secret formulas or processes, or information concerning industrial, commercial or scientific processes. Payments for the purchase of underlying intangible assets are generally not subject to withholding tax. However, payments for access to know-how may be deemed subject to withholding tax.

The withholding tax rate is 22% subject to treaty relief.

Royalty payments to a receiving associated company in another EU member state are exempt from Danish withholding tax if the requirements under the EU Interest-Royalty Directive are met.

Royalty payments for the use of any copyright to literary or artistic work are not subject to Danish withholding tax.

Interest
Generally, Denmark does not levy withholding tax on interest payments to non-residents.

Interest payments from a controlled Danish company (holding more than 50% of share capital or votes) made to non-resident companies are subject to Danish withholding tax at a rate of 22%.

However, Danish withholding tax does not apply to interest payments on controlled debt to a foreign company protected by either a double taxation treaty or the EU Interest-Royalty Directive and further exemptions with respect hereto are available.

6.4 Tax losses
Tax losses may be carried forward indefinitely. Carry-back of tax losses is not possible.

For income years beginning 1 July 2012 or later, tax loss carried forward up to DKK 7,782,500 (2016) can be set off in the following tax years. Older losses must be used first. Further tax losses carried forwards can only reduce the remaining taxable income with up to 60%. Any part of the tax loss carried forwards in excess thereof must be set off in a subsequent tax year.

Tax losses must be registered electronically and failure to register may result in the loss of entitlement to carry forward the losses.

Certain restrictions exist on the sale of a company with tax losses. The restrictions generally intend to prevent interest income and other passive financial income to be offset by tax losses carried forward if the company has activities at the time of the change of ownership.

The restrictions apply if, at the end of the financial year, more than 50% of the share capital or more than 50% of the votes are owned by shareholders different from the shareholders at the beginning of the previous financial year, in which the tax loss incurred. The restrictions also apply, if the company does not have any financial risks in respect of commercial activities at the time of the change of ownership. The rules do not prevent a tax loss company from changing its activities or type of business. The rule also applies to foreign companies with a Danish permanent establishment.

Special rules apply for group companies (25% holding of shares). A subsidiary’s tax loss carry-forward may be limited if a change of ownership takes place in the parent company.

These rules also apply to transparent group companies as mentioned under “Company residence and territoriality”.

The restrictions do not apply to listed companies.

In certain cases, a tax loss carry-forward may also be restricted or forfeited in connection with a capital reconstruction.

6.5 Taxation of Controlled Financial Companies (CFC)
A parent company is subject to CFC taxation on profits from Danish or foreign subsidiaries in the following situation:

a) The parent company is a direct or indirect shareholder in – and has controlling influence (directly or indirectly based on votes, shareholder agreement etc.) in – the foreign or Danish company, and
b) the business of the foreign or Danish subsidiary is considered financial (more than 50% of total taxable income consists of taxable financial income), and
c) the financial assets of the subsidiary on average exceed 10% of the total assets of the parent company.

The consequence of CFC taxation is that the parent company is liable to tax on its (average) direct or indirect pro rata share of the total income of the Danish or foreign subsidiary, irrespective of the rules in a double taxation treaty, if any.

The rule also applies to foreign permanent establishments of a Danish company, where Denmark has the right to tax the income of the permanent establishment under a double taxation treaty.

6.6 Filing a tax return
Corporate tax returns must be filed annually, and no later than 6 months after the end of the financial year except for companies with financial years ending between 1 February and 31 March for whom the deadline is 1 August. The final tax assessment is normally issued at the end of October or beginning of November however with the electronic filing such should be available instantly.

6.7 Payment and collection
Corporate tax is paid on account in two equal instalments due on 20 March and 20 November respectively in each financial year.

The tax paid on account is collected automatically and calculated on the basis of 50% of the average corporate tax paid during the last three years.

Special rules apply for companies which did not pay, or were not subject to, corporate tax in the previous three years.

Companies may voluntarily pay additional tax on account. Such payments must be made no later than 20 March and 20 November of the financial year.

6.8 Tax audits
Tax audits are not performed on a regular basis. However, the tax authorities perform random tax audits on a number of companies and branches every year.

Further, target areas for the purpose of tax audits are published annually.

6.9 Penalties
A penalty is payable for the late filing of a tax return. Interest of 0.8% per month on overdue corporate tax is charged on the outstanding balance.

Such interest charges and fines are not deductible for tax purposes.

6.10 Limitation periods
The limitation period is 3 years and 4 months. In terms of adjustments to transfer pricing, the limitation period is 5 years and 4 months.

7. Taxation of individuals

7.1 Territoriality and residence
Danish tax legislation distinguishes between full tax liability for resident individuals and limited tax liability for non-resident individuals. Citizenship does not affect tax liability.

Residents are taxable on their worldwide income and capital gains. Furthermore, residents are liable to pay tax on gifts received subject to certain exceptions.

Non-residents are taxed only on income and capital gains deriving from sources in Denmark.

Wealth is not taxed in Denmark.

7.2 Special rules for taxation of expatriates
Denmark offers a favourable tax regime for highly paid key employees and researchers recruited from abroad provided they have not been subject to Danish taxation (full or limited) in the previous 10 years.

Subject to certain conditions, foreign employees may elect to be taxed at a flat rate of 26 % on their gross salary for an aggregate period of 60 months instead of being subject to normal taxation.

Taxation under the special regime is subject to the following conditions being met:

  • The monthly gross pay must be at least DKK62.300 (2016) before deduction of labour market contributions.
  • The employee must work for an employer subject to full or limited Danish taxation or branch offices or permanent establishments which have a legal representative in Denmark and subject to Danish tax liability and compliance.
  • A written employment contract satisfying the relevant criteria must be in place between the parties.
  • The employee must not within five years prior to the commencement of the employment have been directly or indirectly involved in the management or control of the capital of the business of the employer.
  • The employee must not within three years prior to and one year after becoming liable to tax in Denmark have been employed by the research institution, business, Danish or foreign group company or business with whom the employment relationship is entered into.

All other income, including benefits-in-kind other than company car and free telephone, are taxed at the ordinary rates. Such income includes any private income received by the expatriate from outside Denmark.

7.3 General rules for taxation of individuals

Personal allowances
A deduction from income tax is granted as a personal allowance to each individual. The allowance amounts to DKK 44,000 (2016) and it is adjusted annually on the basis of indexation.

Married individuals, subject to full tax liability, may elect to transfer an unused balance to their spouse. Special rules apply to married individuals subject to limited tax liability only.

Danish tax computation
Taxable income is based on gross income less deductions. If the tax return covers less than a calendar year, the income is generally pro-rated in order to reflect the full effect of the graduated system of taxation. The income tax consists of a three-tier state income tax, a flat rate state surtax “health care tax” and a flat rate local income tax.

Income tax
Income and allowances are divided into three categories:

1. Personal income; e.g. cash salary, director’s fee, free company car and free telephone – less pension contributions.
2. Capital income; e.g. net interest income and net capital gains.
3. Share income; e.g. dividend, profit & loss from transfers of shares and managed funds.

Deductions are either included in computing the net income of the above categories or categorized as general deductions when computing the taxable income.

A basic tax at the rate of 9.08% (2016) is imposed on the total taxable income exceeding DKK 44,000.

Personal income in excess of DKK 467,300 (2016) plus positive net capital income is taxed at a rate of 15%.

Local income tax
Church and local taxes are levied at flat rates. The rates are set each year by the local authorities and vary locally. The tax is levied on taxable income exceeding DKK 44,000 (2016). The average municipal tax rate is 24.9% (2016). The average church tax is 0.70% (2016).

In addition, a health care tax at a flat rate of 3% has replaced the former county tax. The tax is imposed on taxable income exceeding DKK 440400 (2016).

The tax rates for non-residents subject to limited tax liability are identical to the state tax rates for resident individuals together with a fixed local tax rate making the tax burden almost identical to the tax burden of residents.

Deductions
Contributions to Danish social security (labour market pension and labour market contribution) and to Danish pension schemes as well as certain business expenses are deductible from the personal income. However, deduction for payment to certain Danish pension schemes can be made up to DKK 52,400 (2016).

Interest payments are deductible from capital income.

Certain transport costs and alimonies are deductible from the taxable income. An earned income relief for expenses for e.g. allowance for extra costs of living, subscriptions to professional associations and necessary business literature is allowed, subject to a deduction of an annual amount of DKK 5,800 (2016).

Employed individuals are entitled to an in-work allowance of 8.30% of annual gross income capped at a maximum of DKK28.000 (2016).

Tax credits
Individuals are entitled to claim tax credits and/or tax exemption in respect of income deriving from foreign sources.

If an individual, who is resident in Denmark, is assigned abroad for a period of at least six consecutive months, the salary earned abroad is wholly or partly exempt from Danish tax if certain conditions are met.

The tax exemption does not depend on the tax amount actually paid in the other state.

Inheritance tax
Inheritance from a deceased individual, who was resident in Denmark at the time of his/her death is subject to inheritance tax. The tax comes in two bands. Firstly, the inheritance tax is a flat rate of 15% of the value exceeding DKK 276,600 (2016) and is calculated on the basis of the total value of the estate.

An additional tax of 25% is levied on the amount received by recipients, who were not closely related to the deceased. Thus, the total effective tax rate is 36.25%.

Certain amounts are exempt from the inheritance tax, e.g. any inheritance and insurance payments accruing to the spouse of a deceased individual.
Gift tax
Individuals, who are closely related to the donor, can receive tax free gifts, if the cumulative value of all donations for one calendar year to immediate family members does not exceed DKK 65,700 (2016).

A child’s or a stepchild’s spouse can receive gifts tax free, if the cumulative value of all donations for one year does not exceed DKK 21,500 (2016).

Gifts between spouses are tax-free.

The gift tax is 15%, and it is only imposed on the above individuals, if the cumulative value of the gifts for one year exceeds the tax-free limits.

Gifts to other relatives (e.g. to siblings and nieces and nephews) or unrelated parties is subject to normal income tax which can be up to around 51,5%.

8. Value Added Tax

Denmark applies the system of value-added tax (VAT) established by the European Union. At EU level a one stop shop for VAT was introduced as of 1 January 2015 allowing businesses to elect to file returns in one EU-country only for all VAT supplies in the EU as opposed to registering in each country in which there is a supply.

Denmark imposes VAT on imports and taxable deliveries of goods and services – unless exempt – at a rate of 25%.

A number of business activities are exempted from VAT. The most important ones are: hospital, medical and dental care, insurance, banking, and certain financial activities as well as travel agency services.

Businesses supplying taxable goods or services (including branches or agencies of non-Danish companies) in Denmark must register for VAT. There is no minimum threshold for registration.

Refund of Danish VAT is available for foreign companies not registered for VAT in Denmark. A company which is established outside of the EU and carrying out business in Denmark is required to have a business establishment in Denmark in order to register for Danish VAT.

Please contact:

Steen Rosenfalck - Partner

DD +44 (0)20 7553 9931

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