Tax of compensation schemes
If your business has received COVID-19 compensation, it should be included in the taxable income. of your business. It should be included and reported in the year when your business obtained the final right to compensation (also called final settlement). The Danish Business Authority (Erhvervsstyrelsen) has informed you, if your business obtained that right.
If your business compensation was finally settled in 2022, you have to report the amount of compensation in your tax return for 2022 with the deadline of 1 July 2023.
We regularly receive information from third party on paid compensation and such compensation will be considered in our check of the business taxable income.
You have to include the compensation in the taxable result of your business in your tax return if you obtained right to compensation.
If your business closed down in 2022 and you have not included the compensation at any time, you have to included it in your personal income in box 15 in your tax return.
You will have to pay tax on the amount in 2022, if you have not done so already.
You have to pay tax on the additional compensation or the entire approved amount in the year it was paid to you, if you have not done so already.
You will have to pay tax in 2022 on the compensation that was approved for you if you have not already done so. If you have already been taxed on the compensation, you can choose one of the following options for unapproved compensation:
- Get a deduction for the compensation in the year when repayment was decided
- Apply for revision of the income year in which you were taxed.
You don't have to act unless you have already been taxed on the compensation. If you have already been taxed on the compensation, you can choose one of the following options for unapproved compensation:
- Get a deduction for the compensation in the year when repayment was decided
- Apply for revision of the income year in which you were taxed.
The basis of Danish tax law is that income is taxed in the income year when the business obtained the right to the relevant compensation. Often, this right will be obtained in the income year when the compensation was paid. In such case, tax liability takes effect at the time of payment.
In many COVID-19 compensation schemes, the compensation that was paid was provisional, meaning that the final decision came at a later point in time by the providing authority.
In such cases, the time of taxation may differ from the time of payment as the final right to compensation was not decided when the compensation was paid. Typically, a compensation scheme includes conditions that are first met at a later point in time and documented to the paying authority.
A business may have applied for and received compensation in October to cover fixed costs or pay in the period of 1 October to 31 January the following year. In this case, the final settlement can't be made until the following year whether the estimated fixed costs or pay corresponded to the compensation that the business applied for and received.
Tax liability takes effect once the compensation habe been finally decided
As a result, the final right and thereby tax liability take effect at the earliest when the paying authority has examined the documentation and made a final decision. This can be done at the earliest at the expiry of the compensation period.
As many businesses have applied for compensation, you can't expect that the authority is capable of making a final decision at the end of the compensation period.
Below, you can read a little more about the various tax liability situations.
See the conditions of the compensation scheme if you are in doubt
If you don’t know if you have obtained entitlement to compensation at the same time as the payment or as a provisional payment, you can look up the conditions that apply to individual compensation scheme. The conditions are stated in the guidance that you received along with the compensation, the executive order on the compensation scheme or similar.
Some compensation schemes require documentation that the business is/was entitled to the compensation at the time of application.
The paying authority can then make a decision and payment to the applicant based on this information.
In such cases, the tax liability takes effect at the time of compensation payment. This is why you have to include the compensation in the financial statements of that specific year.
Some compensation schemes pay out a provisional amount requiring that you at a later point in time document that the business meets/met the various conditions during the compensation period.
This could be an expected fall in turnover or the size of the expected fixed costs that are different in the final statements, which is why the paying authority cannot make its final decision on the compensation entitlement and the compensation size until afterwards.
Therefore, the time of taxation will be postponed. This means that you do not include the provisional compensation in the financial statements of your business until the time when the paying authority has made its final decision.
The compensation of the final decision may not be the same as the compensation you have received provisionally. It could be that your business has been given a larger og smaller compensation that the provisional payment. You can read more about this further down on this page.
Compensation for pay is solely financial support or subsidies offered to businesses with employees during periods when they were subject to COVID-19 restrictions. As a result, compensation for pay must be included as taxable income like other types of COVID-19 compensation.
Pay for employees, however, is not affected by any compensation for pay received by your business, and you should therefore treat salaries as usual.
To avoid uncertainty about when provisional compensation should be taxed, the Danish Parliament passed an act on 28 December 2021 to clarify the time of taxation of the various COVID-19 schemes.
The act only covers compensation paid as a result of COVID-19, including compensation schemes paying provisional compensation, as these schemes have a delayed entitlement and thereby also postponed time of taxation.
The act does not cover compensation schemes where the compensation entitlement is obtained at the time of payment. In such cases, there is never a provisional compensation to cause doubt about the time of taxation.
See the conditions of the compensation scheme if you are in doubt
If you don’t know if you have obtained entitlement to compensation at the same time as the payment or as a provisional payment, you can look up the conditions that apply to individual compensation scheme.
The conditions are stated in the guidance that you received along with the compensation, the executive order on the compensation scheme or similar.
The choice of taxation time applies to the schemes where the paying authority at the time of provisional payment has not finally decided if the recipient is entitled to compensation.
This means that the recipient has not obtained entitlement to the provisional payment. This is why a provisional payment is not taxable. It will not be taxable until the authority makes a final decision on the compensation.
The new act allows you to choose if your provisional compensation should be included in your taxable income for
- the year of payment
- the year when you receive the final decision from the paying authority
- any year in between those two.
If you want to pay tax on provisional compensation, you have to make that choice before the reporting deadline for the relevant year. If you want to make use of your option to choose the time of taxation and include provisional compensation based on one of the three options, you will be bound by that choice.
However, this does not apply to provisional compensation paid in 2020 and 2021 as you may change your choice for these years.
Please see below for further information on how to do this.
If you received provisional compensation in 2020 or 2021, you had until 30 June 2022 to include the compensation in calculation of your taxable income in another income year.
However, you need to know that you can only change your choice for provisional compensation for the income years 2020 and 2021.
If you change your mind
Please note that if you change your mind, you will not be able to choose differently at a later point in time.
When the paying authority has finally decided the size of your compensation, the actual amount you are entitled to may be different from the provisional compensation.
If the provisional compensation was higher than the compensation you are entitled to, you have to repay the difference and for tax purposes you have to:
- deduct the amount in the income year when the final decision was made and when you have to repay the difference
- deduct the amount in the income year where the provisional compensation was included in your income (this option requires that you have chosen to include the provisional compensation in an earlier income year).
If you choose the last of the two options above, you also have to apply for a reopening of the relevant income year. Read more in Danish in sections 26 and 27 of the Danish Administration Act (Skatteforvaltningsloven).
If the provisional compensation is too low compared with the compensation you are entitled to, you will be offered a payment of the difference. If you accept such a payment, the amount should be included in the business income year that you accept the amount.
Provisional compensation should be included no later than in the year you obtained the entitlement
If you have not yet included provisional compensation in your income, you can always include it in a later income year, but no later than the year in which the final decision is made.
If the final decision is made in 2023, you can choose to include the compensation in either 2022 or 2023. If you decide to include the compensation in 2022, you are bound by your choice. If you include the compensation in 2023, it will be included with the consequences of the final decision which means that the final compensation will be fully taxed in 2023.
Please read more about compensation entered in your tax assessment notice in the section ‘Taxation of recipients of B-income and freelancers’ below.
Examples of compensation schemes that allow provisional compensation
- Executive order no. 1116 of 2 July 2020 om en midlertidig lønkompensationsordning til virksomheder i økonomisk krise som følge af COVID-19 (temporary pay compensation scheme for businesses in financial crisis as a result of COVID-19).
Read more in Danish about Executive order no. 1116 of 2 July 2020 at www.retsinformation.dk - Executive order no 1178 of 27 July 2020 om midlertidig og målrettet kompensation for faste omkostninger til virksomheder i økonomisk krise som følge af COVID-19 (temporary and specified compensation for fixed costs for businesses in financial crisis as a result of COVID-19).
Read more in Danish about Executive order no. 1178 of 27 July 2020 at www.retsinformation.dk
For compensation schemes not covered by the option of taxation time, the applicant will have to document that he meets the conditions for the amount requested at the time of application. This means that applicants of this group do not have to provide subsequent documentation that the conditions were met.
A payment has therefore been finally approved.
These schemes are taxed at the time of payment, meaning in the income year when the money is paid to the recipient. If the compensation payment was made in the income year 2022, the amount should be included in the income statement for 2022.
Examples of schemes where the amount is final when the compensation is paid
- Executive order no. 1556 of 26 October 2020 on compensation schemes to meet financial issues for restaurants, cafes and bars as a result of COVID-19 (om en kompensationsordning der skal imødekomme økonomiske udfordringer for restauranter, cafeer og barer som følge af COVID-19).
Read more in Danish about Executive order no. 1556 of 26 October 2020 at www.retsinformation.dk
- Executive order no. 449 of 16 March 2021on funds for partial coverage of certain seasonal costs as a result of COVID-19 (om puljer til delvis dækning af visse sæsonbetonede omkostninger som følge af COVID-19).
Read more in Danish about Executive order no. 449 of 16 March 2021 at www.retsinformation.dk
If you receive B-income, you have to include any compensation in your personal income. You have to pay labour market contribution (AM-bidrag) on the compensation amount.
Read more about B-income
If you carry out freelance work, you will be taxed in the same way as recipients of B-income.
If you run an independent commercial business, you will be taxed as a personally owned business. You therefore have to take the below into account.
Some recipients of compensation - such as freelancers and sole proprietorships with a fall in turnover - have been paid based on their CPR no. (civil reg. no.). If this applies to you, your compensation may have been reported to us and if so, it is entered in your tax assessment notice for 2021.
Such amounts that have been entered may be provisional or final amounts. This is why you have to comply with the rules described above about final taxable amounts and paid provisional compensation.
If you have received compensation in the form of B-income and the compensation is not entered in your tax assessment notice, you have to include the amount in box 15.
Call us on (+45) 72 22 12 39 if you would like further information.
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