In Denmark, owners of a sole proprietorship have access to a special tax scheme called VSO that allows them to defer or reduce their income tax. The scheme applies a 22% corporate tax rate to the portion of profit that has not been withdrawn from the company into the entrepreneur's private bank account. When the retained profit is eventually withdrawn, the entrepreneur is required to pay the difference between the 22% income tax and the actual personal income tax rate for that year. The scheme also allows for the elimination of the maximum 15% tax once income exceeds the highest tax threshold. Additionally, the value of the tax deduction associated with interest on loans can be increased.
Sole proprietors in Denmark should consider using the tax scheme when charged interest on company loans and when they must pay the maximum tax. By equalizing income between a low profit year and a high profit year, entrepreneurs can avoid paying the maximum tax in years of high profit. In Denmark, the maximum tax is 15% in addition to the regular tax on all income earned above the maximum tax threshold.
Denmark’s maximum tax bracket is shown below:
In Denmark, sole proprietors can take advantage of the tax scheme by selecting box 184 when updating the preliminary income estimate and field 147 on the annual tax return. To do this, the entrepreneur must have separate private and business accounts and a separate bank account assigned to their business CVR number. The tax scheme is not advisable for entrepreneurs who have no interest-bearing loans and do not pay the maximum tax, but it can be used if they do not pay the maximum tax but have interest-bearing loans.
If entrepreneurs do not have interest-bearing loans or do not pay the maximum tax, they can use the scheme to defer paying the tax, but this can have consequences if they want to close their sole proprietorship because they will then be obliged to pay the whole deferred tax immediately.
The profit can be kept as other assets, such as equipment or stock products, but the money must remain in the company. However, when it comes to stocks, using the tax scheme, one can only invest in them indirectly through investeringsforeninger, or special investment products. As the Danish corporate tax scheme can be complex, it is advisable to consult a certified accountant for assistance with necessary calculations.