In late June 1998 the Danish Parliament agreed on yet another tax reform, the third in only ten years.
This latest reform is primarily directed towards personal taxation, but also areas related to VAT and other duties as well as to business taxation are covered to some extent.
The major changes with regard to personal taxation are a decrease in the tax value of decrease in the tax value of deduction of interest, a new tax on pension funds, and a new real property. Environmental taxes have been increased. In the area of business taxation a new depreciation act has been passed, and new changes have been made regarding transfer pricing and thin capitalisation.
In this issue of Danish News we have attempted to describe in brief terms those parts of the June 1998 tax reform which are of greatest relevance to foreigners living or doing business in Denmark.
Please contact KPMG Denmark, e-mail Click Contact Link for more specific information.
TAX RATES
For individuals the changes with respect to tax rates and basic allowances are the following:
1. Reduction of the tax value of interest expenses
2. Reduction of the basic tax
3. Reduction of the tax value of deductible expenses
4. Increase of the basic allowance for medium tax
5. The basic allowance for positive net capital income in the high rate tax is abolished
6. Raise of the tax ceiling
7. Transition rules.
1.1 Reduction of the tax value of interest expenses
The tax value of interest deductions in an average municipality is scaled down from 46.4 per cent in 1998 to 32.4 per cent in 2001 as interest expenses are phased out of the medium tax and the basic tax.
1.2 Reduction of the basic tax
The basic tax will be lowered with 0.5 per cent per year in 1999 and the year 2000. In each of the years 2001 and 2002, the basic tax will be lowered with a further 0.75 per cent. The rate is thus reduced from 8 per cent in 1998 to 5.5 per cent in 2002.
1.3 Reduction of the tax value of deductible expenses
In 2002 deductible expenses (i.e. commuting allowance expenses, subscription to unemployment fund and trade union, alimony, etc) will be left out of the base for calculating the basic tax. Together with the lowering of the basic tax it means that the tax value of deductible expenses is reduced by 8 per cent from 1998 to 2002.
1.4 Increase of the basic allowance for calculating the medium tax
The medium tax will be maintained at 6 per cent. The limit for calculating medium tax will be increased by DKK 8,000 p.a. in the years 1999-2002, a total of DKK 32,000. Thus, the limit is raised from DKK 139,000 in 1998 to DKK 171,000 in 2002.
1.5 The basic allowance for positive net investment income in the high rate tax is abolished
In the calculation of the high tax, a basic allowance for positive net investment income of DKK 21,400 (DKK 42,800 for married couples) is granted in 1998. This basic allowance has been abolished as of 1999. For persons already paying high tax, the taxation on the first DKK 21,400 in positive net investment income will increase from 46.4 per cent in 1998 to 59.7 per cent in 1999.
1.6 Increase of the tax ceiling
The tax ceiling will be increased from 58 per cent in 1998 to 59 per cent in 1999.
1.7 Transition rules
Due to the major fall in the tax value of deductions on interest expenses, and deductible expenses, transition rules will be introduced for persons with especially large deductions.
Table 1 Rates for income tax and labour market contribution
% 1998 1999 2000 2001 2002 Basic tax 8.0 7.5 7.0 6.25 5.5 Medium tax 6.0 6.0 6.0 6.0 6.0 High tax 15.0 15.0 15.0 15.0 15.0 Local taxes (1) 31.7 31.7 31.7 31.7 31.7 Total 60.7 60.2 59.7 58.95 58.2 Tax ceiling (2) 58.0 59.0 59.0 59.0 59.0 Labour market contribution by employees 8.0 8.0 8.0 8.0 8.0 Contribution to compulsory labour market supplementary pension, ATP 1.0 1.0 1.0 1.0 1.0 Labour market contribution by employers 0.33 0.28 0.07 0.07 0.07
(1) Provided an unchanged local tax. Excluding church tax of 0.7 per cent in an average municipality.
(2) The church tax is not included in the tax ceiling.
Table 2 Income tax threshold amounts
1998 level - DKK 1998 1999 2000 2001 2002 Personal allowance 31,400 31,400 31,400 31,400 31,400 Basic allowance for medium tax 139,000 147,000 155,000 163,000 171,000 Basic allowance for high tax 251,200 251,200 251,200 251,200 251,200
The amounts will be adjusted annually according to Section 20 of the Personal Tax Act.
2. PROPERTY VALUE TAX
As of year 2000 the property value tax replaces the rental value and the standard deduction of DKK 3,000.
The property value tax is not an income tax but rather a taxation of real property.
Calculation of the property value tax
The property value tax is calculated on the same basis as the rental value, i.e. on the basis of the taxable value of the property as at 1 January in the income year. The tax totals 1 per cent of the property value up to DKK 2,150,000 (1998) and 3 per cent of the amount exceeding DKK 2,150,000. The basic amount is adjusted annually.
Transitional rules
For present owners, i.e. persons who own real property as at 1 July 1998, the property value tax is reduced by an amount of 0.2 per cent of the basis of calculation. For an owner of a property assessed at DKK 1,500,000, the property value tax is thus reduced from DKK 15,000 to DKK 12,000.
International impact
Foreign located detached houses, summer houses, etc which would have been covered by the property value tax if the property had been situated in Denmark are also covered by the property value tax.
In relation to Denmark's double taxation agreements, the property value tax ranges as a capital tax.
Limited tax liability of real property in Denmark
According to the current legislation, persons owning real property in Denmark without being fully liable to pay Danish tax have a limited tax liability of the income from the property. At the statement of the income, only the expenses, typically interest expenses, which are linked with the property are deductible.
After the conversion where rental value is no longer calculated, but rather property value tax, the interest expenses concerning the property can not set off the property value tax but the interest expenses are still deductible and can still be carried forward to be set-off against positive income in future 5 income years.
Commencement
The act comes into force as of the income year 2000.
3. 1 per cent Danish labour market supplementary pension - special pension scheme
The temporary 1 per cent contribution to the Danish Labour Market Supplementary Pension Scheme, the so-called ATP, becomes permanent as of 1999.
4. FREE CAR
The taxable value of a company car is calculated as 23 per cent of the car's value in 1998. The rate increases to 24 per cent in 1999 and to 25 per cent as of the year 2000.
The basis of calculation for the statement of the taxable value is expanded so that the basis of calculation is set at minimum DKK 160,000 and maximum DKK 450,000, irrespective of the actual value of the car.
5. PENSIONS
Contributions to capital pensions in bank and life insurance companies will no longer be deducted when calculating the high tax.
Payments for capital pensions etc. will then only have a taxable deduction value of approx. 44 per cent in an average local tax authority in 2002. The lump sum payment will still be taxed at 40 per cent.
It is now stated in the tax legislation that foreign individuals assigned to Denmark will not currently be liable to taxation in Denmark on income or capital gains accrued on their foreign approved pension schemes no matter whether the pension is set up with a bank or with an insurance company. The contributions paid during the assignment are still not deductible unless a tax treaty provides for that (UK and Switzerland).
6. COMMUTING ALLOWANCE
As of 2002, deductible expenses, incl. commuting allowances, cannot be deducted in the ordinary tax base. This means that the tax value of the deductions decreases by 5.5 percentage points in 2002 to approx. 32.4 per cent compared to 2001.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
For further information e-mail Click Contact Link or visit the KPMG Denmark website at Click Contact Link
