Clarifying your business for tax purposes
When you start your own business, you will be classified into one of four categories for tax purposes. The category is key in determining the deduction value of your expenses, and whether you have to pay labour market contributions and whether loss is deductible.
If you have several activities, each one is assessed separately. For example, you may be an employee with one activity and at the same time be a fee-based employee or run your own business in relation to your other activities.
In each case, the actual conditions form the basis of our assessment. An employee, for example, is not self-employed simply by issuing an invoice instead of receiving a payslip.
The diagram below shows the key factors used by the Danish Tax Agency to determine the category of a given activity.
Are you running a financial risk?
Generally speaking, you are categorised according to whether your activity involves a financial risk.
Financial risk is taken to mean the risk of incurring a loss from the activity because your expenses outweigh your income - including expenses as a result of liability for damages.
The time you invest in the business does not constitute a financial risk even though you may not be paid for it.
A financial risk may, for example, result from selling goods whose purchase or manufacture incurs expenses, which may not be reimbursed. Your product liability may also result in a liability for damages. You may be forced to exchange the product, take it back, repair any damage to the product and bear the cost of this or pay compensation to your customer.
If you sell a service, for example if you are a lawyer assisting with a sales contract and preparing a deed in connection with the sale of a house, your work expenses are usually limited. However, you risk being liable for damages if, for example, the seller of the property is not registered in the Land Register as the owner of the property.
Expenses associated with getting to and from work, work clothes and lunch at work are seen as typical employee expenses and not as a financial risk associated with your activity.
As an employee, you work according to your employer’s instructions, at his expense and risk and as part of a contractual agreement. This is typically an employment contract, but no written contract needs to exist.
Employees also include freelancers, consultants and staff in outsourced functions.
Even if you issue invoices instead of receiving a payslip, you may still be an employee for tax purposes. If that is the case, you should talk to your client or employer about the possibility of getting an employment contract. Íf permanent employment is not possible, please contact us for a clarification of how to pay tax on your income.
It will always be an overall assessment.
As an employee you need to deduct your expenses from your taxable income.
Employees are not be registered for VAT. If you are registered for VAT or if you have a central business registration no. (CVR), we recommend that you contact us as you will probably need to deregister and close your business at www.virk.dk.
What to do as an employee
- You need to check whether your salary income is stated in box 11 of your tax assessment notice once it is released in the middle of March. If it is not, you need to contact your employer.
- You are entitled to a deduction for transport between home and work if you travel more than 12 kilometres to work.
- You are entitled to certain deductions for work-related expenses. Read more about work-related deductions.
Criteria for employees
| Conditions determining you as an employee | Characteristics of the individual parameter |
|---|---|
|
You do your job according to your employer’s instructions |
There are set rules as to how and when you do the job, and your work is checked and supervised. |
| You do your job at the risk of your employer | You do not bear the costs associated with the job. You bear no real financial risk. The income is mainly net income, i.e. there are no costs associated with purchases and advertising your services, for example. |
| You do your job as part of an agreement |
You have entered into an agreement regarding ongoing services. You mainly work for one principal. |
Flexible working hours
Freelancers and consultants often enjoy flexible working conditions, for example flexible working hours with the option of working from home, but that does not change the fact that they are employees or fee-based employees if they do not bear a financial risk.
Usually, IT consultants do not bear a financial risk and will therefore be either employees or fee-based employees, depending on whether they have an employment contract.
Outsourcing
If a business subcontracts tasks such as an answering service, bookkeeping, IT assignments, etc., it is considered outsourcing.
If you start your own business and your former employer outsources your former assignments to you, you may still be considered an employee in respect of this activity.
Our assessment will depend on whether the collaborative framework with your former employer has changed, including whether you continue to do the assignments and whether you bear a financial risk.
You are considered a fee-based employee if, for example, you perform a service in your spare time for which you are paid a fee or a one-off payment, even if you are primarily an employee or self-employed.
Generally, you do not need to register for VAT as a fee-based employee. However, if your annual revenue exceeds DKK 50,000 before VAT, you should contact us.
Some forms of fee-based activities are VAT exempt, including lectures and literary activities. Contact us if you are uncertain about your activities.
Deductions for expenses
You can deduct expenses associated with the earning of the fee. You need to be able to document such expenses and they must not exceed the fee itself.
If you receive fees which constitute B-income (tax not deducted from income at source), you cannot get a tax-free travel allowance or an allowance based on the standard rates. Instead you can deduct your documented, actual travel expenses.
If you have incurred transport expenses associated with earning your fees, you can deduct your documented, actual expenses, or you can get an allowance based on the rates for business driving determined by the Danish Tax Assessment Council (a tax-free transport allowance).
You need to deduct your documented expenses from your personal income.
Use box 29 in your tax assessment notice.
Use field 425 in your preliminary income assessment form.
Transport rates (click the ’Transport’ tab)
Check your tax assessment notice
Your fee must be declared as personal income. You need to check to see whether the fee is declared on your tax assessment notice in box 12. If not, you need to ask you employer to enter the figure.
Check your tax assessment notice
Change your preliminary income assessment if you have a paid secondary job
If you have a paid secondary job, you will often have to change your preliminary income assessment. The reason is that fee income is not taxed on an ongoing basis as is the case with A-income.
You change your preliminary income assessment by entering your total fee income in box 210 on the preliminary income assessment form.
In some cases, some of the tax must be paid as B-tax (not taxed at source) in instalments by means of giro transfer forms. When you change your preliminary income assessment, you can see whether you need to pay by means of giro transfer forms.
The forms will automatically be sent to you by post.
Change your preliminary income assessment (link in Danish)
A business is considered to be commercial when it is operated at the owner’s risk with a view to making a profit. This does not mean that your business is only considered commercial if you make a profit, but that it must be planned and run in such a way that it is likely to become profitable.
How to register your business
You need to register your business at indberet.virk.dk (Danish only) no later than eight days before your business begins to operate. This also applies if you register as an employer at the same time.
If you employ staff after your business begins to operate, you need to register as an employer no later than eight days after you have run your first payroll.
If you run your business as a sole proprietorship, you can use your private MitID to log in.
Business operating requirements
When we assess your business, we focus on whether it is run professionally and responsibly.
| Conditions | Explanation |
|---|---|
| Is the business run customarily and responsibly? | In other words, is the business sufficiently stocked, have opening hours been properly advertised, is the necessary level of financial investments in place and are such investments likely to be recouped by the business? |
| Have you acquired the necessary professional skills to run the business? | In other words, have you taken courses or do you have the necessary training in the relevant line of business? |
| Is your business activity naturally linked with the rest of your commercial activity? | If, for example, your business operates at a loss producing and presenting haute couture dresses, you will be eligible for tax relief if the purpose of running the business is to market your name in the industry and promote your designer fashion sold through your other business - a clothing boutique. |
| Have you operated your business regularly over an extended period and does it have a certain scope? |
The scope of the business is assessed according to the size of the production machinery and the revenue of the business. |
| Do you run an agricultural business? |
To determine whether a farm is run in a technically/agriculturally proficient manner, we assess whether the farm is run professionally in terms of its type, location and size. |
Business profitability requirements
When we consider the profitability of your business our primary focus is whether it makes a profit or shows the potential to do so.
Typically, a business is considered profitable when it generates sufficient profit to accommodate accounting depreciation and amortisation (deduction for actual impairment), return on investment and remuneration for your work effort.
| Conditions | Explanation |
|---|---|
| Past/present | Is the business showing a profit? We assess your profit or loss over time and the profit or loss in relation to your accounting depreciation and amortisation, your financial investment and your work effort. Your business must have existed for a certain period before we can assess whether it is commercial. Two businesses with the same accounting results could be deemed both commercial and non-commercial. If the assets of one of the businesses do not depreciate in value and few working hours are invested in the business, the profitability requirement will be lower for this business. For example, it could be an online shop selling quality vintage wines compared with a traditional wine shop operating from rented premises, open eight hours a day, six days a week. |
| Future | Does the business have the potential to become profitable? It is not uncommon for a business to make a loss at the outset, as there are special start-up costs and it takes time to build up a customer base. It is impossible to establish a set time frame for a business to become profitable, as it will always depend on the type of business. A kiosk, for example, would be expected to become profitable quicker than a specialist shop, which is unlikely to have a sufficient number of customers in the immediate local community. |
| Expectation and expectation adjustment | Have you done market surveys prior to business start-up and have you prepared realistic budgets? Have you tried to adjust the budgets if they have proved unrealistic? Realistic budgets are taken to mean that your expectations in terms of income and expenses are based on market surveys and industry knowledge. You must be able to explain budget deviations, and it may be necessary to change the way you run the business to achieve potential profit. |
| Explanations | Are there any particular reasons why your budgeted results have not been achieved? Water damage to stock, for example. As a general rule, we do not take personal reasons into account such as a lack of access to loans, family illness, etc. |
Your business is non-commercial when its primary aim is not to make a profit but to pursue a hobby such as painting or horse riding.
Non-commercial businesses that run a financial risk must pay VAT if the activity is subject to VAT.
You need to declare profit from your non-commercial business in box 20 in your tax assessment notice. This applies no matter the size of your profits.
Loss is not deductible.
Non-commercial business, even where the aim is to generate a profit
Even if the aim of your business is to make a profit, it is not certain that it is considered a commercial business. If you do not run your business customarily and responsibly, or if it has a limited scope, it is considered non-commercial. You may run a financial risk, but the manner in which you run the business means that it is considered non-commercial.
If you are uncertain whether your business is considered a commercial business, you can request a binding ruling from us against a fee of DKK 400.
For further legal information in Danish see our legal guide .