Taxes in Denmark [2023] – A Complete Guide [Clear Finances ]

Last updated on 7 de April de 2023

Denmark is known for its high taxes but remarkable standard of living. We do an analysis of the most important taxes in Denmark, with the goal to teach you how much tax workers, investors, corporations and consumers pay.

Introduction

Denmark is considered one of the most prosperous countries in the world. With an advanced economy, it also has a very generous welfare state. This requires financing.

If you are interested in moving to Denmark, or simply want to know how its tax system works, learning about its taxes is very useful.

We will carry out an in-depth analysis to see how workers, investors, companies, and consumers are treated from a tax perspective.

Denmark is also one of the most expensive countries in Europe. According to WorldData.info, the cost of living in the Scandinavian country is 20% higher than in the United States and 12% higher than in the United Kingdom. However, it also enjoys high salary levels.

When it comes to the currency, Denmark is one of the few countries within the European Union that does not use the Euro. Instead, it kept its own national currency, the Danish Krone (DKK).

Nevertheless, the value of the Krone is pegged to that of the Euro at an exchange rate of €1 = DKK 7.44. Prior to the introduction of the Euro, the Krone was pegged to the Deutschmark, Germany’s old national currency,

Throughout this analysis, and for simplicity purposes, we will see tax amounts in Danish Krone, as well as in Euros and US Dollars, at an approximate exchange rate of €1 = $1 = DKK 7.50.

Taxes on Earned Income

Labor income is subject to both social security contributions and income tax.

As in most developed countries, both the employer and the employee must make contributions to the social security system, and other social payments. These are set by the Danish government.

Nonetheless, such payments are significantly lower than those applicable in other developed countries with strong welfare states.

Regarding employers, they must pay approximately 13,700 DKK per year ($1,827/€1,827) in social security contributions. This will be used to finance services like the pension system, sick leave or the maternity leave fund.

I say approximately because the exact amount of social security payments depends on the sector in which the company operates. It is interesting that such payments are essentially a flat fee, not related to how high or low the employee’s salary is.

When it comes to workers, they will only have to pay 1,136 DKK per year ($151/€151). This is used to finance the pension system. It is a very low amount.

However, workers will also have to pay 8% of their gross salary in employment contributions. These will be used to pay for things like sick leave or vocational training. And they will be calculated on the entire gross salary, without capping contributions for high-income earners.

At the same time, many Danes also have to pay a church tax. This varies depending on the municipality of residence and averages 0.7% of the gross salary. Taxpayers have the option to officially leave the church and stop paying this tax.

Income Tax

As workers, once we have paid our symbolic contribution to the Danish pension system, employment contributions equivalent to 8% of our gross salary and, if applicable, church taxes, we will then have to pay income tax.

Income tax is calculated on the taxable base and not the entire gross salary. The tax base is equivalent to our gross salary minus social security payments, employment contributions, church taxes and deductions.

One of the most important deductions is the basic deduction, which is 48,000 DKK per year ($6,400/€6,400). The other important one is the deduction for employment, which is 10.65% of our gross salary, with a limit of 48,800 DKK ($6,507/€6,507).

Additionally, it is possible to reduce our taxable base by making use of optional deductions. These would be for expenses related to commuting to work and even mortgage interest.

Once we know our taxable base, we will calculate how much tax we have to pay to both local authorities and the central government.

Local taxes vary depending on the municipality where we live and range between 22.5% and 27.8%. The average local income tax rate in Denmark is close to 25%. It is a flat tax rate applied on the entire taxable base.

Central government income taxes apply everywhere in the country. They follow a progressive structure with two brackets:

From 0 to 552,500 DKK ($0-$73,667/€0-73.667€): 12.10%
Over 552,500 DKK ($73,667/€73,667): 15%

Something very interesting is that, regardless of where we live, and although the local income tax is set by our municipality, the total tax burden, taking into account labor contributions, church tax, as well as local and central income taxes, can never exceed 52.05% of our gross salary no matter how much we earn.

This measure is known as the fiscal ceiling and set directly by the Danish central government.

Total Tax Burden on Earned Income

In order to assess the total tax burden on labor income, we will compare the total employment costs for a company with the employee’s net salary. This will indicate how much money is going to the tax authorities one way or another.

This will be done for various income levels to analyze the progressiveness in the tax system.

For this exercise, we will focus on a worker who is unmarried and has no dependents, who pays church tax, does not use any of the optional deductions and works in a sector with average social security contributions:

As we can see, the total tax burden low-income earners bear is close to 33%. This percentage increases to about 40% for the middle class and exceeds 50% with those with very high incomes.

Capital Income Taxes

Let us know discuss what taxes apply to income from savings and investments in Denmark.

When it comes to dividends, two brackets apply, depending on how much income we have received in this form:

From 0 to 56,500 DKK ($0-$7,533/€0-7,533€): 27%
Over 56,500 DKK ($7,533/€7,533€): 42%

Other forms of capital income, including interest, rental income from real estate investments, as well as realized capital gains, are subject to the following tax brackets:

From 0 to 46,800 DKK ($0-$6,240/€0-€6,240): 37%
Over 46,800 DKK ($6,240/€6,240): 42%

Denmark is clearly not the most attractive country to live in for those who depend on their assets to generate income.

It is worth mentioning as well that Denmark has no wealth tax. It was abolished in 1997.

Corporate Tax

As far as corporations are concerned, the profits they make are also taxable.

The general corporate tax rate in Denmark is 22%, below that of most major European countries whose corporate rates hover around 30%.

VAT

The consumption of goods and services in Denmark is subject to Value Added Tax, and this is one of the highest in the world.

The general VAT rate in Denmark is 25% and applies to most purchases made in the country.

Only newspapers, magazines as well as international travel are exempt from VAT.

Denmark Public Finances

Before concluding our analysis, we will analyze the state of Danish public finances to understand if resources are being well managed.

The following graph shows the level of public debt in Denmark relative to the size of the economy since the year 2000:

As we can see, the Scandinavian country is in a great position. Public debt barely exceeds 30% of GDP. And, unlike most European countries, including Germany, the last 20 years show a gradual improvement in its finances.

This data indicates that there is no need for more taxes or spending cuts in Denmark in the near or medium-term future.

Conclusion

Denmark is a country with elevated taxation. Both labor and capital income are subject to high tax rates. And consumption is taxed heavily as well, in the form of one of the most onerous VAT rates anywhere in the world.

It is interesting to see that companies are treated better from a fiscal perspective, since corporate taxes and employers’ social security payments are moderate.

What there is no doubt about is that the Danish government is able to properly manage its resources, not needing to borrow money in order to finance its day-to-day operations.

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And if you want to learn about taxes in another Scandinavian country, check out this link:
Taxes in Sweden – A Complete Guide

Taxes in Denmark [2023] – A Complete Guide