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.

Contents

History

Overview

The types and levels of taxation in Denmark have changed dramatically since the state's inception. In the sixteenth century, Denmark primarily obtained state income through taxes excised on feudal Demesne lands [1] and the Sound Dues, which required foreign ships to pay a toll when passing through the Øresund bordering Denmark. In fact, the Dues comprised two-thirds of Denmark's tax revenue throughout the sixteenth and seventeenth centuries. [2] The costs of warfare, such as those of the Thirty Years' War, were further fulfilled by Denmark's heavily agricultural economy. In later conflicts such as the Scanian War and the Great Northern War, however, Denmark ceded much of its territory, resulting in monetary losses that prompted higher tax rates and the introduction of an initially small income tax. Massive population growth resulted in expansion of agriculture and consequently an expansion of taxes gained from tariffs on exports and wheat sales. By 1897, Denmark's income tax encompassed 15.00% [3] of the state's total revenue, far surpassing any other European country at the time. From 1897 to the present, Denmark continued to boast exceptionally high income tax rates, never dropping below the top five countries in Europe in terms of percentage revenue earned from income taxes. [3] Following World War II, as with many other countries, Denmark began to enact several social welfare programs, including aid for the sick and the unemployed. [1] These, along with expansion of the public sector (schools, teachers, etc.) contributed to the income tax being a staple of Denmark's tax revenue.

Changes in the 20th and 21st Centuries

The exact form of income tax has varied through the past century. Between 1903 and 1966, income tax was levied only on "assessed" income, which did not include personal taxes that were spent on other areas, such as to the church. After 1966, income tax was changed to be levied on taxable income, which included personal taxes spent on other areas and later also included income received from stocks and interest. [4] In recent years, public sentiment[ original research? ] towards taxes has leaned towards limiting the welfare state and consequently the income tax. In 2001, a "tax freeze" that prevented the further increase of taxes was administered by the then liberal-conservative government of Denmark. The tax freeze could only be waived in particular times of crisis, and a tax could only be increased at the expense of a different form of tax. [5] Furthermore, the Danish Tax Reform of 2010 gradually cut taxes "to increase labour supply in the medium to long term and at same time contribute to soften the effects of the global economic crises in the short run." [6] The tax cuts impacted the high, middle, and low classes, and resulted in a net cut of 30 billion DKK between 2010 and 2019. Despite these policies, income taxes have stabilized at providing around 50% of Denmark's total revenue since 1990. [3] According to the World Happiness Report, [7] Denmark ranks among the top two in terms of happiness, indicating a general contentedness with the state's welfare state and the benefits provided. The World Happiness Report also states that happiness is correlated to social equality. The official Denmark website remarks that "most Danes will tell you that they are happy to pay taxes because they can see what they get in return," including free tuition, healthcare, and social security. [8]

Taxes on income

Denmark disposable income after tax Not including Value-added tax or Property tax Denmark disposable income.webp
Denmark disposable income after tax
Not including Value-added tax or Property tax

Municipal & National income tax

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 50,543 (~US $8,300) (2021-level, adjusted annually) is income tax-free, but subject to the gross tax. [9]

The state (i.e., national) income tax has two income brackets (bottom and top). [10] In 2016, around 10% of all tax payers had sufficiently high taxable incomes to be eligible for the top-bracket tax. [11]

In 2023 the Social Democratic-liberal coalition government of Prime Minister Mette Frederiksen passed a tax reform that split the previous top-income tax bracket into three brackets:

This tax reform is intended to increase long term labour supply, [12] specifically in the light of the labour shortages experienced within various high skilled jobs, especially within fields like IT, engineering and health services [13]

There is also a municipal income tax varies from municipality to municipality, with rates varying from 22.5% to 27.8% in 2019. [14] 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 kilometres per day (15 mi/d) receives a DKK 1.98 per kilometre (DKK 3.19/mi) tax deduction. For most commutes exceeding 120 kilometres per day (75 mi/d), the rate is reduced to DKK 0.99 per kilometre (DKK 1.59/mi) above that threshold. [15] 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.

The sum of municipal and national tax percentages cannot exceed 52.05% (2019) –the so-called "tax ceiling" (Danish : skatteloft). [16] 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% (Before inflation. Meaning real gains above inflation is effectively taxed higher than 42% because the tax is not adjusted for inflation).

The following table displays a summary of taxes paid to the national government, although the tax bases for each may be different.

National Income Tax Rates (2021)*
Income (DKK)Gross (LMC)State TaxEffective Marginal Rate
0 –50,5428%0%8%
50,543 –544,7998%12.16%8% –18.15%
544,800+8%15%18.15% –22.99%

*The table displayed above does not include the municipal income taxes, each of which have their own rates and income thresholds.

Researcher Tax Scheme

Certain people who have moved to Denmark to take up work as Researchers or Highly Paid Employees can become members of the Tax Scheme for Researchers. Members of the Scheme are exempt from normal taxation, but instead pay a 32.84% flat tax, inclusive of Labour market contributions.

Members of the Researcher Tax Scheme do not have tax cards as they are exempt and not part of the normal income tax system. They also do not pay Social Contributions or Municipal Taxes (except for taxes on wealth and property).

Members of the Scheme are only able to use it for taxes paid on their income at source, such as Payroll tax. If a member earns income that they have to report the tax on themselves (such as shares or at a side business) they have to pay tax on it through the normal system. When a member pays tax through the Researcher Scheme and through the normal taxation scheme the Government ignores their income from the Researcher Scheme when calculating their tax bands and tax rate. [17]

Researcher Tax Scheme (2024)
Income TaxLabour Market ContributionsEffective Rate
27%8% after tax32.84%

Social Security Contributions

There are also flat amounts in social contributions to particular funds in Denmark. These payments are set amounts in DKK, rather than a per cent of an individual's income. Both the employer and the employee are required by law to pay into these social funds, with the employee paying a total of DKK 1135 annually. The requirements for employers are displayed in the following table:

Social Security Contributions Summary
FundEmployer Contribution (Average)
Mandatory Pension SchemeDKK 2270
Educational SchemeDKK 2780
Occupational InjuryDKK 215–5140
Pension Finance SchemeDKK 590
Maternity Leave FundDKK 1150
Industrial Injury InsuranceDKK 1035–23470
Total~ DKK 14900

Church tax

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". [18] One can be exempted from paying the church tax by opting out of being a member of the National Church.

Tax on owner-occupied dwellings

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 onward will be 0.44% (1.1% above a threshold) of a reformed and supposedly realistic assessment value. [19]

Other income taxes

The Danish corporate tax rate from 2016 onward is 22% of taxable corporate income, almost exactly equal to the average corporate income tax rate in all OECD countries in 2018. [20] 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. [21]

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. [11]

Indirect taxation

The revenue from indirect taxes constituted around one third of the total Danish tax revenue in 2016. [11] 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

YearVAT level
(Denmark)		Name
196710%MOMS
196812.5%MOMS
197015%MOMS
197718%MOMS
197820.25%MOMS
198022%MOMS
199225%MOMS

Denmark has a non-deductible value added tax (VAT) of 25%: [22] 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

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:

Whichever of those two assessments is lower results in the base land value. [23] [24] This base land value is taxed at between 1.6 and 3.4% in 2019. [14] Agricultural land is taxed as well, but at lower rates. [25]

Registration fee on motorized vehicles

Like in Singapore, Brazil, and Norway, Denmark has a very high public taxation fee on buying motorized vehicles (cars, motorcycles, commercial vehicles). The motorized vehicle registration tax for private households is over 100% of approximately the first 100,000 DKK of the auto dealer's price, and 150% on the amounts over appr. 100.000 DKK of the auto dealer's price on the vehicle. Commercial enterprises and two-seater vehicles for private household buyers (no passenger seats in the back) pay a lower registration fee. An additional tax is required if commercial vehicles are used for private purposes. If this tax is not paid, and the vehicle is used privately, the tax penalty is severe. [26]

Denmark's tax structure in international comparison

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. [27]

According to OECD, Denmark had the highest tax to GDP ratio of all its member countries in 2021 with a ratio of 47,4%. [28] This is partly due to various tax-funded social transfer schemes such as pensions and unemployment benefits also being taxable when received by beneficiaries. [29] [30] Additionally, due to the Danish universal welfare model, most Danish welfare schemes are tax funded as opposed to insurance-based, being calculated as a percentage of one's income tax instead of a lump sum contribution. [31]

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). [32]

Related Research Articles

<span class="mw-page-title-main">Economy of Denmark</span>

The economy of Denmark is a modern high-income and highly developed mixed economy. The economy of Denmark is dominated by the service sector with 80% of all jobs, whereas about 11% of all employees work in manufacturing and 2% in agriculture. The nominal Gross National Income per capita was the ninth-highest in the world at $68,827 in 2023.

<span class="mw-page-title-main">Taxation in the United Kingdom</span> United Kingdom tax codes

In the United Kingdom, taxation may involve payments to at least three different levels of government: central government, devolved governments and local government. Central government revenues come primarily from income tax, National Insurance contributions, value added tax, corporation tax and fuel duty. Local government revenues come primarily from grants from central government funds, business rates in England, Council Tax and increasingly from fees and charges such as those for on-street parking. In the fiscal year 2023–24, total government revenue was forecast to be £1,139.1 billion, or 40.9 per cent of GDP, with income taxes and National Insurance contributions standing at around £470 billion.

A wealth tax is a tax on an entity's holdings of assets or an entity's net worth. This includes the total value of personal assets, including cash, bank deposits, real estate, assets in insurance and pension plans, ownership of unincorporated businesses, financial securities, and personal trusts. Typically, wealth taxation often involves the exclusion of an individual's liabilities, such as mortgages and other debts, from their total assets. Accordingly, this type of taxation is frequently denoted as a netwealth tax.

<span class="mw-page-title-main">Taxation in the Republic of Ireland</span> Irish tax code

Taxation in Ireland in 2017 came from Personal Income taxes, and Consumption taxes, being VAT and Excise and Customs duties. Corporation taxes represents most of the balance, but Ireland's Corporate Tax System (CT) is a central part of Ireland's economic model. Ireland summarises its taxation policy using the OECD's Hierarchy of Taxes pyramid, which emphasises high corporate tax rates as the most harmful types of taxes where economic growth is the objective. The balance of Ireland's taxes are Property taxes and Capital taxes.

In France, taxation is determined by the yearly budget vote by the French Parliament, which determines which kinds of taxes can be levied and which rates can be applied.

Taxation represents the biggest source of revenues for the Peruvian government. For 2016, the projected amount of taxation revenues was S/.94.6 billion. There are four taxes that make up approximately 90 percent of the taxation revenues:

This is a list of the maximum potential tax rates around Europe for certain income brackets. It is focused on three types of taxes: corporate, individual, and value added taxes (VAT). It is not intended to represent the true tax burden to either the corporation or the individual in the listed country.

Due to the absence of the tax code in Argentina, the tax regulation takes place in accordance with separate laws, which, in turn, are supplemented by provisions of normative acts adopted by the executive authorities. The powers of the executive authority include levying a tax on profits, property and added value throughout the national territory. In Argentina, the tax policy is implemented by the Federal Administration of Public Revenue, which is subordinate to the Ministry of Economy. The Federal Administration of Public Revenues (AFIP) is an independent service, which includes: the General Tax Administration, the General Customs Office and the General Directorate for Social Security. AFIP establishes the relevant legal norms for the calculation, payment and administration of taxes:

In Austria, taxes are levied by the state and the tax revenue in Austria was 42.7% of GDP in 2016 according to the World Bank The most important revenue source for the government is the income tax, corporate tax, social security contributions, value added tax and tax on goods and services. Another important taxes are municipal tax, real-estate tax, vehicle insurance tax, property tax, tobacco tax. There exists no property tax. The gift tax and inheritance tax were cancelled in 2008. Furthermore, self-employed persons can use a tax allowance of €3,900 per year. The tax period is set for a calendar year. However, there is a possibility of having an exception but a permission of the tax authority must be received. The Financial Secrecy Index ranks Austria as the 35th safest tax haven in the world.

Taxation in Norway is levied by the central government, the county municipality and the municipality. In 2012 the total tax revenue was 42.2% of the gross domestic product (GDP). Many direct and indirect taxes exist. The most important taxes – in terms of revenue – are VAT, income tax in the petroleum sector, employers' social security contributions and tax on "ordinary income" for persons. Most direct taxes are collected by the Norwegian Tax Administration and most indirect taxes are collected by the Norwegian Customs and Excise Authorities.

Taxes in Germany are levied at various government levels: the federal government, the 16 states (Länder), and numerous municipalities (Städte/Gemeinden). The structured tax system has evolved significantly, since the reunification of Germany in 1990 and the integration within the European Union, which has influenced tax policies. Today, income tax and Value-Added Tax (VAT) are the primary sources of tax revenue. These taxes reflect Germany's commitment to a balanced approach between direct and indirect taxation, essential for funding extensive social welfare programs and public infrastructure. The modern German tax system accentuate on fairness and efficiency, adapting to global economic trends and domestic fiscal needs.

<span class="mw-page-title-main">Taxation in South Africa</span>

Taxation may involve payments to a minimum of two different levels of government: central government through SARS or to local government. Prior to 2001 the South African tax system was "source-based", where in income is taxed in the country where it originates. Since January 2001, the tax system was changed to "residence-based" wherein taxpayers residing in South Africa are taxed on their income irrespective of its source. Non residents are only subject to domestic taxes.

In Slovakia, taxes are levied by the state and local governments. Tax revenue stood at 19.3% of the country's gross domestic product in 2021. The tax-to-GDP ratio in Slovakia deviates from OECD average of 34.0% by 0.8 percent and in 2022 was 34.8% which ranks Slovakia 19th in the tax-to-GDP ratio comparison among the OECD countries. The most important revenue sources for the state government are income tax, social security, value-added tax and corporate tax.

Taxes in Bulgaria are collected on both state and local levels. The most important taxes are collected on state level, these taxes include income tax, social security, corporate taxes and value added tax. On the local level, property taxes as well as various fees are collected. All income earned in Bulgaria is taxed on a flat rate of 10%. Employment income earned in Bulgaria is also subject to various social security insurance contributions. In total the employee pays 13.78% and the employer contributes what corresponds from 18.92% to 19.62%. Corporate income tax is also a flat 10%. Value-Added Tax applies at a flat rate of 20% on virtually all goods and services. A lower rate of 9% applies on only hotel services.

The tax system of the Czech Republic is similar in its main features to the systems of developed and especially European countries.

Taxes in Lithuania are levied by the central and the local governments. Most important revenue sources include the value added tax, personal income tax, excise tax and corporate income tax, which are all applied on the central level. In addition, social security contributions are collected in a social security fund, outside the national budget. Taxes in Lithuania are administered by the State Tax Inspectorate, the Customs Department and the State Social Insurance Fund Board. In 2019, the total government revenue in Lithuania was 30.3% of GDP.

In Latvia, taxes are levied by both national and local governments. Tax revenue stood at 28.1% of the GDP in 2013. In 2023, a decade later, that number fell to 21.77%, as the economy of Latvia grew, the 2013 Latvian economic crisis came to an end, and trading expanded with other Baltic nations. The most important revenue sources include income tax, social security, corporate tax and value added tax, which are all applied on the national level. Income taxes are levied at a flat rate of 23% on all income. A long range of tax allowances is given including a standard allowance of €900 per year and €1980 per year for every dependent.

Taxes in Cyprus are levied by both the central and local governments. Tax revenue stood at 39.2% of GDP in 2012. The most important revenue sources are the income tax, social security, value-added tax and corporate tax, and are all collected by the central government.

<span class="mw-page-title-main">Value-added tax</span> Form of consumption tax

A value-added tax is a consumption tax that is levied on the value added at each stage of a product's production and distribution. VAT is similar to, and is often compared with, a sales tax. VAT is an indirect tax, because the consumer who ultimately bears the burden of the tax is not the entity that pays it. Specific goods and services are typically exempted in various jurisdictions.

Ethiopia has a long history of taxing its population. As of 2002, reforms have changed the way the tax system works in the nation; these reforms have aimed to centralize tax authority. Currently the nation's federal government lobbies many different types of taxes on its population; these taxes include income taxes on four main schedules, property taxes, and value added taxes (VAT).

References

  1. 1 2 "An Economic History of Denmark". EH.net.
  2. ↑ The North American Review, vol. 84, no. 174, 1857, pp. 48–70. JSTOR, www.jstor.org/stable/25104806.
  3. 1 2 3 "GPIH - Government budget historical series". gpih.ucdavis.edu. Retrieved 2019-08-03.
  4. ↑ Atkinson, Anthony B.; Søgaard, Jakob Egholt (2015-12-03). "The Long-Run History of Income Inequality in Denmark" (PDF). The Scandinavian Journal of Economics. 118 (2): 264–291. doi:10.1111/sjoe.12143. ISSN   0347-0520. S2CID   154820995.
  5. ↑ "Tax Policy Reforms in Denmark" (PDF). Organization for Economic Co-Operation and Development.
  6. ↑ "Annex A", Tax Policy Reform and Economic Growth, OECD Tax Policy Studies, OECD, 2010-11-03, pp. 111–113, doi:10.1787/9789264091085-10-en, ISBN   9789264091078
  7. ↑ "Home". worldhappiness.report. Retrieved 2019-08-03.
  8. ↑ "Among the happiest countries". Denmark.dk. Retrieved 2019-08-03.
  9. ↑ "Centrale beløbsgrænser i skattelovgivningen 2018-2019". The Danish Ministry of Taxation. Retrieved 21 January 2019.
  10. ↑ "Centrale skattesatser i skattelovgivningen 2018-2019". The Danish Ministry of Taxation. Retrieved 21 January 2019.
  11. 1 2 3 "Publikation: Skatter og afgifter 2018 - Danmarks Statistik".
  12. ↑ "Overblik: Her er regeringens udspil, der skal give danskerne skattelettelser for milliarder". Altinget.dk. 2023-11-06. Retrieved 2024-04-29.
  13. ↑ "Labour market information: Denmark - European Commission". eures.europa.eu. Retrieved 2024-04-29.
  14. 1 2 "Kommuneskatteprocenter 1977-2019 i regneark". The Danish Ministry of Taxation. Retrieved 21 January 2019.
  15. ↑ "Befordringsfradrag 2018 og 2019. The Danish Ministry of Taxation, published 28 November 2018, retrieved 23 January 2019".
  16. ↑ "Skråt skatteloft - en historisk oversigt". The Danish Ministry of Taxation. Retrieved 21 January 2019.
  17. ↑ "Tax scheme for researchers Skat.dk". 9 February 2024.
  18. ↑ "Publikation: Nationalregnskab og offentlige finanser ESA 2010 - Hovedrevison 2014 - Danmarks Statistik".
  19. ↑ Per Ulstrup Johansen og Mikael Trier: Danmarks økonomi siden 1980, p. 147f. Publisher: DJØF Forlag, 2018.
  20. ↑ "OECD Economic Survey of Denmark. Published January 2019".
  21. ↑ "Skatteberegning - hovedtrækkene i personbeskatningen 2018. Danish Ministry of Taxation, publication date 15 November 2017, retrieved 23 January 2019".
  22. ↑ "VATGlobal". Vatglobal.com. Retrieved 15 December 2017.
  23. ↑ "TAX.DK skat & afgift: Ejendomsskat". Tax.dk. Retrieved 15 December 2017.
  24. ↑ "SKAT: Borger". Skat.dk. Retrieved 15 December 2017.
  25. ↑ "Denmark | Taxation in Agriculture". OECDiLibrary. 2020. Archived from the original on 2022-08-08. Retrieved 2023-11-18.
  26. ↑ Explained:Denmark's crazy car registration tax. Denmark's news in English The Local dk Retrieved 2022-11-15
  27. ↑ OECD Revenue Statistics 2018 - Denmark. Retrieved 7 December 2018.
  28. ↑ "Home". www.oecd-ilibrary.org. Retrieved 2024-04-29.
  29. ↑ "Denmark" (PDF). Archived from the original (PDF) on 2021-12-04.
  30. ↑ "Unemployment benefits". lifeindenmark.borger.dk.
  31. ↑ Nielsen, Jon (5 December 2022). "OECD kårer gang på gang Danmark til verdensmestre i høj skat, men vi er faktisk nummer 5". AE.dk. Retrieved 29 April 2024.
  32. ↑ Kleven, Henrik Jacobsen (November 3, 2014). "How Can Scandinavians Tax So Much?". Journal of Economic Perspectives. 28 (4): 77–98. doi:10.1257/jep.28.4.77 – via www.aeaweb.org.
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