Danish Tax Commission Publishes Reform Proposals

by Ulrika Lomas, Tax-News.com, Brussels

10 February 2009

The Danish Tax Commission has published proposals a comprehensive set of changes to the tax system, aimed primarily at lowering Denmark's high taxes for individual taxpayers.

The Commission, formed last year and headed by former Minister of Taxation Carsten Koch, has proposed about DKK35bn (EUR5bn) in tax cuts to be partly offset by a future reduction in mortgage tax relief, higher environmental taxes and the elimination of certain corporate tax breaks.

Personal taxes in Denmark are both high and complex. Currently, state income tax consists of three brackets from 5.25% up to 15%. However, there are also a local municipal taxes, which vary by locality and range from 22.7% to 27.8%, and an optional 'church tax'. Furthermore, an 8% health care contribution is levied, in addition to an 8% labour market contribution. As a consequence, taxpayers earning as little as EUR40,000 face a top marginal rate of around 60%.

To alleviate the tax burden on employment income, the Commission has suggested that the top rate of state tax be lowered to 13.5% from 15%, the lower rate be reduced to 3.75% from 5.25% and the middle 6% tier be abolished altogether. The report also proposes that the income threshold for the top rate be increased by approximately EUR5,000 to about EUR55,000, and that the top combined rate of tax be lowered to about 54.5%.

A reduction in tax on share income is also proposed by the Commission. This would entail reducing the income tax brackets from three to two and would mean share income up to EUR6,500 would be taxed at 25% (currently 28%) and anything over this threshold would be taxed at 40% (currently share income between EUR6,500 and EUR14,100 is taxed at 43%, and income in excess of EUR14,100 is taxed at 45%). The harmonization of corporate tax rules for capital gains and dividends has also been proposed by the Commission.

However, in return for the tax cuts on employment income, the panel recommends that certain employee fringe benefits be repealed. The tax cuts would also be financed by a reduction in mortgage tax relief, although this would not begin until 2012 by which time it is hoped that the property market would have recovered. In addition, certain goods and services currently zero-rated for value-added tax purposes would be brought into the VAT net, including property management and public transport.

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