Taxation in Denmark
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.
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 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. 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% 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. 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. These, along with expansion of the public sector 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. In recent years, public sentiment 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. 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." 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. According to the World Happiness Report, 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.Taxes on income
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" or colloquially a "gross tax". The funds levied through this tax support the functions related to the labour market including subsidising the semi-private salary insurance called Dagpenge.Income below DKK 50,543 is income tax-free, but subject to the gross tax.
The state income tax has two income brackets. In 2016, around 10% of all tax payers had sufficiently high taxable incomes to be eligible for the top-bracket tax.
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:
- First bracket: the so-called “Middle tax” of an additional 7,5% on the margin levied on income between 618.400 and 750.000 DKK
- Second bracket of 7,5% additional marginal tax levied on income between 750.000 and 2.5 million DKK
- Third bracket: the so-called “Top-top tax” of an additional 5% marginal tax on income above 2.5 million DKK. However this has been criticized for being easily evadable by the individuals it is supposed to target
There is also a municipal income tax varies from municipality to municipality, with rates varying from 22.5% to 27.8% in 2019. Interest paid is deductible in the municipal tax. Interest expenses up to DKK 50,000 per individual 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 receives a tax deduction. For most commutes exceeding, the rate is reduced to above that threshold. 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% the so-called "tax ceiling". Including the labour market contribution of 8%, the maximal effective marginal tax rate on labour income in 2019 is 55.9%. For capital income, there is a separate, lower maximum tax rate of 42%.
The following table displays a summary of taxes paid to the national government, although the tax bases for each may be different.
| Income | Gross | State Tax | Effective Marginal Rate |
| 050,542 | 8% | 0% | 8% |
| 50,543544,799 | 8% | 12.16% | 8%18.15% |
| 544,800+ | 8% | 15% | 18.15%22.99% |
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.
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 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.
| Income Tax | Labour Market Contributions | Effective Rate |
| 27% | 8% after tax | 32.84% |
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:| Fund | Employer Contribution |
| Mandatory Pension Scheme | DKK 2270 |
| Educational Scheme | DKK 2780 |
| Occupational Injury | DKK 2155140 |
| Pension Finance Scheme | DKK 590 |
| Maternity Leave Fund | DKK 1150 |
| Industrial Injury Insurance | DKK 103523470 |
| Total | ~ DKK 14900 |