Taxation in Denmark

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Taxation in Denmark consists of a comprehensive system of direct and indirect taxes. Ever since the income tax was introduced in Denmark via a fundamental tax reform in 1903, it has been a fundamental pillar in the Danish tax system. Today various personal and corporate income taxes yield around two thirds of the total Danish tax revenues, indirect taxes being responsible for the last third. The state personal income tax is a progressive tax while the municipal income tax is a proportional tax above a certain income level.

Income tax[edit]

National income tax[edit]

All income from employment or self-employment is taxed at 8% before income tax. This tax is termed a "labour market contribution" (Danish: arbejdsmarkedsbidrag) or colloquially a "gross tax" (Danish: bruttoskat). Income below DKK 46,200 (USD 7,000) (2019-level, adjusted annually) is income tax-free, but subject to the gross tax.[1]

The state (i.e., national) income tax has two income brackets (bottom and top). In 2019 income above DKK 46,200 is taxed at 12.16% (bottom-bracket rate), and income above DKK 513,400 is taxed an additional 15% (top-bracket rate).[1][2] In 2016, around 10% of all tax payers had sufficiently high taxable incomes to be eligible for the top-bracket tax.[3]

Municipal income tax[edit]

The municipal income tax varies from municipality to municipality. The highest local income tax in 2019 is 27.8%, and the lowest is 22.5% with an average of 24.9%.[4]

Interest paid is deductible in the municipal tax. Interest expenses up to DKK 50,000 per individual (DKK 100,000 for couples) receive a further deduction of 8%. The great majority of tax payers have interest expenses below this threshold, implying that the tax value of interest expenditures for most tax payers is ca. 33%.

There exist a number of other important deductions in the municipal tax. Commuting exceeding 24 kilometers/day receives a DKK 1.98 per kilometer tax deduction. For most commutes exceeding 120 kilometers per day, the rate is reduced to DKK 0.99 per kilometer above that threshold.[5] A number of other deductions apply. Furthermore, union fees not exceeding DKK 6,000 annually are tax deductible as well as some other job-related expenses. Furthermore, most contributions to funded pension funds are deductible in both national and municipal taxes.

Church tax[edit]

Members of the Danish National Church (about 75% of the Danish population) additionally pay an approximately 0.7% of their income to cover the expenditures of the National Church - the so-called church tax (Danish: kirkeskat). The exact rate depends on the municipality. Whereas the collection of the church tax is administered by the Danish tax authorities and the tax rate is levied upon the same official income concept as the municipal tax, the church tax is not regarded as a proper tax by e.g. Statistics Denmark, but as a "voluntary transfer from households to the state".[6] One can be exempted from paying the church tax by opting out of being a member of the National Church.

Maximum income tax level[edit]

The sum of municipal and national tax percentages cannot exceed 52.05% (2019) - the so-called "tax ceiling" (Danish: skatteloft).[7] Including the labour market contribution of 8%, the maximal effective marginal tax rate on labour income in 2019 is 55.9% (=0.08 + 0.92*0.5205). For capital income, there is a separate, lower maximum tax rate of 42%.

Tax on owner-occupied dwellings[edit]

In Denmark a special tax is levied upon the imputed income of owner-occupied dwellings. Its purpose is to create symmetry in the tax system by taxing the imputed rent of house owners. In 2019 the official tax rate is 1% (3% above a certain threshold) of the assessed value of the dwelling. However, the official assessment value is currently rather low compared to the average real market value of the dwellings. In 2017 the Danish parliament Folketinget agreed upon a housing tax reform, according to which the effective tax rate from 2021 onwards will be 0.44% (1.1% above a threshold) of a reformed and supposedly realistic assessment value.[8]

Other income taxes[edit]

The Danish corporate tax rate from 2016 onwards is 22% of taxable corporate income, almost exactly equal to the average corporate income tax rate in all OECD countries in 2018.[9] Personal income from shares (dividends as well as realized capital gains) are taxed at 27% below ca. DKK 50,000 and at 42% above the threshold.[10]

The annual yields of most pension scheme assets is subject to a special tax of 15.3%. As assets in funded pension schemes make up a considerable part of national wealth in Denmark, this tax gives a considerable - and growing - revenue, amounting to DKK 32 billion in 2017 or around 3% of total tax revenues.[3]

Indirect taxation[edit]

The revenue from indirect taxes constituted around one third of the total Danish tax revenue in 2016.[3] The single most important indirect tax as regards revenue is the Danish VAT, but Denmark also levies a land value tax on all privately owned land and a number of excise taxes.

VAT[edit]

Year VAT level
(Denmark)
Name
1967 10% MOMS
1968 12.5% MOMS
1970 15% MOMS
1977 18% MOMS
1978 20.25% MOMS
1980 22% MOMS
1992 25% MOMS

Denmark has a non-deductible value added tax (VAT) of 25%,[11] - MOMS (Danish: merværdiafgift, formerly meromsætningsafgift). The tax is subject to the European Union value added tax Directives.

In Denmark, VAT is generally applied at one rate, and with few exceptions is not split into two or more rates as in other countries (e.g. Germany), where reduced rates apply to essential goods such as foodstuffs. A number of services are not subject to VAT, however, for instance public transportation of private persons, health care services, publishing newspapers, rent of premises (the lessor can, though, voluntarily register as VAT payer, except for residential premises), and travel agency operations.

Land value tax[edit]

The Danish grundskyld (part of the Municipal Property Tax) is a land value tax, which taxes the base value of the land according to either:

  • The total value of the property minus the value of improvements or
  • The value of the property last tax year, altered by a growth/decline percentage.

Whichever of those two assessments is lower results in the base land value.[12][13] This base land value is taxed at between 1.6 and 3.4% in 2019.[4] Agricultural land is taxed as well, but at lower rates.

Denmark's tax structure in international comparison[edit]

The tax structure of Denmark (the relative weight of different taxes) differs from the OECD average. In 2016, the Danish tax system was characterized by substantially higher revenues from taxes on personal income, whereas on the other hand, no revenues at all derive from social security contributions. A lower proportion of revenues in Denmark derive from taxes on corporate income and gains and property taxes than in OECD generally, whereas the proportion deriving from payroll taxes, VAT, and other taxes on goods and services correspond to the OECD average.[14]

Professor of Economics at Princeton University Henrik Kleven has suggested that three distinct principles of policies in Denmark and its Scandinavian neighbours imply that the high tax rates cause only relatively small distortions to the economy: widespread use of third-party information reporting for tax collection purposes (ensuring a low level of tax evasion), broad tax bases (ensuring a low level of tax avoidance), and a strong subsidization of goods that are complementary to working (ensuring a high level of labour force participation).[15]

References[edit]

  1. ^ a b "Centrale beløbsgrænser i skattelovgivningen 2018-2019". The Danish Ministry of Taxation. Retrieved 21 January 2019.
  2. ^ "Centrale skattesatser i skattelovgivningen 2018-2019". The Danish Ministry of Taxation. Retrieved 21 January 2019.
  3. ^ a b c Statistics Denmark: Skatter og afgifter 2018 ("Taxes and Duties 2018"). Publication date October 2018.
  4. ^ a b "Kommuneskatteprocenter 1977-2019 i regneark". The Danish Ministry of Taxation. Retrieved 21 January 2019.
  5. ^ Befordringsfradrag 2018 og 2019. The Danish Ministry of Taxation, published 28 November 2018, retrieved 23 January 2019.
  6. ^ Nationalregnskab og offentlige finanser ESA 2010 - Hovedrevison 2014. Report published by Statistics Denmark in September 2014. Quotation from page 52 (in English summary).
  7. ^ "Skråt skatteloft - en historisk oversigt". The Danish Ministry of Taxation. Retrieved 21 January 2019.
  8. ^ Per Ulstrup Johansen og Mikael Trier: Danmarks økonomi siden 1980, p. 147f. Publisher: DJØF Forlag, 2018.
  9. ^ OECD Economic Survey of Denmark. Published January 2019.
  10. ^ Skatteberegning - hovedtrækkene i personbeskatningen 2018. Danish Ministry of Taxation, publication date 15 November 2017, retrieved 23 January 2019.
  11. ^ "VATGlobal". Vatglobal.com. Retrieved 15 December 2017.
  12. ^ "TAX.DK skat & afgift: Ejendomsskat". Tax.dk. Retrieved 15 December 2017.
  13. ^ "SKAT: Borger". Skat.dk. Retrieved 15 December 2017.
  14. ^ OECD Revenue Statistics 2018 - Denmark. Retrieved 7 December 2018.
  15. ^ Kleven, Henrik Jacobsen (2014): "How Can Scandinavians Tax So Much?" Journal of Economic Perspectives, 28(4): 77-98. DOI: 10.1257/jep.28.4.77

External links[edit]