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Taxation in Denmark
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Taxation in Denmark

Business Taxation

Corporations registered in Denmark are taxed on their worldwide income, including capital gains. Branches of non-resident corporations that constitute a permanent establishment are taxed only on Danish income and income from real property in Denmark. As such, a Danish branch of a foreign company may sometimes distribute profits to the foreign parent without withholding taxes.

Denmark’s corporate tax rate is 30% for 2004 on all forms of company and branches, on earned income, unearned income and capital gains. There are no indications of any intention to change the rate, which has been at this level since 2001, having come down progressively from 50% in 1990, in an attempt to make Denmark more internationally competitive.

A Danish holding company may upon application be jointly taxed with its wholly owned subsidiaries, Danish as well as foreign, provided that a separate tax return is prepared for each of the companies included in the joint taxation. The tax returns for all the companies/branches covered by the grouped taxation must be prepared in accordance with Danish tax rules. The aggregate taxable income is then taxed at the Danish corporate rate, but will have had the advantage that in arriving at the aggregate, it will have been possible to set off subsidiaries’ losses and gains.

To calculate taxable income, ordinary business expenses (including interest and royalty payments and foreign-exchange losses) are deductible. Except for real estate taxes, most direct corporate taxes are not deductible. Net operating losses may be carried forward for an unlimited time and offset against taxable profits, but they may not be carried back.

A Danish company may also receive tax-free dividends from a Danish or foreign subsidiary if it owns at least 20% of the share capital and has owned this stake for at least one year. However, the exemption does not apply to dividends received from low-taxed finance companies in countries regarded as tax havens.

If a Danish company is treated as a transparent entity for foreign tax purposes, it will also be treated as a transparent entity for Danish tax purposes. The entity will be treated as a permanent establishment and will consequently not be able to deduct interest and royalty payments to the parent company. Other adverse tax effects are loss of protection under Danish tax treaties.

Taxable Income and Rates

Operating expenses are fully deductible if incurred for the purpose of earning income, including salaries, staff expenses, rent, maintenance, etc. Most current expenses are deductible as operating expenses. However, only 25% of entertainment expenses are deductible unless incurred for the purpose of exports.

Expenses incurred for establishment or expansion are not tax deductible with the exception of fees for the professional services of lawyers or accountants.

R&D costs and market research costs are fully deductible in the year in which they occur or through depreciation over a five-year period.

Computer software is fully deductible in the year of acquisition, as are small capital purchases, ie up to a threshold of DKK 10,800.

The rate and method of depreciation for tax purposes depend on the asset class, but broadly speaking the declining-balance method is used except for industrial buildings. Machinery, equipment, ships and motor vehicles are depreciated as a single asset pool up to 25% a year as if they were single composite assets. Special rules apply to assets that are leased.

Losses (or gains) deducted in connection with sale of ships, machinery and equipment and calculated as the selling price minus the book value tax basis. The result is applied to the aggregate value of the asset pool so that capital gains are unusual.

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