The Ease of Forming a Company in Denmark

Introduction

Denmark offers one of the most efficient and transparent environments for forming a company. With its streamlined digital registration system, flexible business structures, competitive tax rates, and strong government support for innovation, Denmark ensures a smooth and straightforward process for entrepreneurs. This process involves selecting a business entity, registering through the online Virk portal, obtaining a CVR number, and ensuring compliance with tax and labor regulations, all backed by advanced digital infrastructure and a pro-business culture.

1. Business Environment and Advantages

a. Global Rankings

Denmark's position in various global indices reflects its commitment to ease of doing business:

• World Bank Doing Business Index: Denmark ranks 4th globally (2020) for ease of doing business, scoring high in:
• Corruption Perception Index (CPI): Denmark consistently ranks 1st or 2nd globally in the CPI by Transparency International, with a score of 90/100 (2022), indicating minimal corruption and a high level of business trust.
• Global Competitiveness Report: Denmark ranks 10th in the Global Competitiveness Index by the World Economic Forum (2022), driven by strong institutions, infrastructure, and macroeconomic stability.
• Human Development Index (HDI): Denmark ranks 6th globally in the HDI with a score of 0.940, reflecting high standards in education, healthcare, and living conditions, contributing to a productive workforce.

b. Business Culture

• Trust-Based Economy: Denmark’s economy operates on a trust-based system, reflected in its business culture. This trust extends to both interpersonal business relations and trust in public institutions. A World Values Survey indicated that 78% of Danes trust others, significantly higher than the European average of 36%.
• Flat Organizational Structures: Danish companies typically adopt flat hierarchies that promote innovation and fast decision-making. This is particularly advantageous for SMEs and startups, where agility is a competitive factor.
• Work-Life Balance: Denmark offers some of the best work-life balance conditions in the world, with average working hours of 37 hours per week and a focus on employee well-being, contributing to high productivity levels. In 2020, the OECD Better Life Index rated Denmark highly for work-life balance, scoring 9.8/10.

c. Innovation and Technology

• R&D Expenditure: Denmark ranks 7th globally in terms of R&D expenditure as a percentage of GDP, investing 3.03% of GDP in 2022. This is significantly above the EU average of 2.1%.
• Public and Private Collaboration: Denmark fosters strong partnerships between private enterprises and universities or research institutions. The Technical University of Denmark (DTU) is a leading hub for innovation, consistently ranked in the top 50 globally for engineering and technology.
• Patent Filings: Denmark ranks 17th in the world for patent filings, with 7.5 patents per 10,000 inhabitants (2022). High levels of patenting indicate a strong focus on innovation, particularly in biotech and clean technologies.
• Renewable Energy Sector: Denmark is a global leader in renewable energy, particularly in wind power. In 2022, wind power accounted for 47% of Denmark’s total electricity production. This dominance in green energy presents opportunities for businesses focusing on sustainability.

2. Types of Business Entities

Denmark offers several business entities to meet the needs of different investors and entrepreneurs, each with distinct advantages and requirements.

a. Sole Proprietorship (Enkeltmandsvirksomhed)

• Advantages: Simple and flexible structure with no capital requirements, making it ideal for freelancers, small businesses, or individuals testing the market.
• Disadvantages: Unlimited liability, meaning that personal assets are exposed to business debts. This can be risky if the business faces significant financial obligations.

b. Private Limited Company (ApS – Anpartsselskab)

• Advantages: Limited liability for shareholders, which protects personal assets. The ApS model is the most popular for SMEs.
• Requirements:
• Taxation: Subject to 22% corporate tax on profits, plus withholding tax on dividends (typically 27%).

c. Public Limited Company (A/S – Aktieselskab)

• Advantages: Suitable for larger enterprises with plans to raise capital through public or private markets. Shares can be traded on the stock exchange, providing greater access to capital.
• Taxation: Corporate tax rate of 22%, with dividend taxation applicable to shareholders.

d. Branch Office

• Advantages: A branch office allows foreign companies to establish a presence in Denmark without creating a separate legal entity, reducing the complexity of compliance in certain cases.
• Liability: The foreign parent company bears full liability for the branch's operations.

3. Registration Process

The Danish company registration process is highly efficient, largely thanks to Denmark’s advanced digital infrastructure.

a. Central Business Registration (CVR)

• CVR Number: Every business entity in Denmark is assigned a unique CVR (Central Business Register) number, which is the company’s identifier for taxation, legal, and administrative purposes. The Virk portal facilitates quick, digital registrations.

b. Step-by-Step Registration Process

1. Business Name Selection: The name must be unique and approved by the Danish Business Authority (DBA). Names that are too generic or violate Danish language rules may be rejected.
2. Digital Signature (NemID/MitID):
3. Company Registration:
4. CVR Number Issuance: Once all required documentation is submitted and reviewed, the Danish Business Authority issues the CVR number, usually within 24-48 hours.

c. Post-Registration Steps

• Corporate Bank Account: After receiving the CVR number, the company must open a corporate bank account to manage finances. Denmark’s Danske Bank, Nordea, and Jyske Bank are popular choices.
• Employment Registration: Businesses that plan to hire employees must register with SKAT (Danish Customs and Tax Administration) for withholding income tax and social security contributions.
• VAT Registration: VAT registration is required for businesses with an annual turnover above DKK 50,000 (€6,700). The VAT rate in Denmark is 25%, and companies must file returns on a monthly or quarterly basis depending on turnover.

4. Taxation and Legal Requirements

Denmark has a transparent and efficient tax system, with competitive rates for businesses and comprehensive legal requirements.

a. Corporate Income Tax

• Corporate Tax Rate: Denmark has a 22% corporate tax rate, which is competitive within the EU. The tax rate applies to all taxable income generated by businesses within Denmark. Notably, this rate is lower than other Nordic countries like Sweden (20.6%) and Finland (20%).
• Taxable Income: Companies are taxed only on profits derived from Danish sources, following a territorial tax system. Losses can be carried forward indefinitely, allowing businesses to offset future profits, but carrybacks are not allowed.

b. Value-Added Tax (VAT)

• VAT Rate: Denmark has a standard VAT rate of 25%, applicable to most goods and services. This is one of the highest VAT rates in Europe, although certain sectors (such as newspapers) benefit from a reduced rate.
• VAT Compliance: VAT-registered businesses must submit quarterly or monthly returns, depending on their turnover. For companies with a turnover above DKK 5 million annually, monthly submissions are mandatory.

c. Employment and Social Security Taxation

• Personal Income Tax: Denmark operates a progressive income tax system, with marginal rates ranging from 37% to 52%. Employers are responsible for withholding taxes and social contributions.
• Social Security Contributions: Denmark has relatively low social security contributions compared to other EU countries, with employers contributing 1.58% towards employee pensions and unemployment insurance. The rest of the social benefits, including healthcare, are funded through general taxation.

d. Transfer Pricing and Anti-Avoidance Measures

• Denmark adheres to OECD transfer pricing guidelines. Companies must maintain detailed documentation of intra-group transactions to ensure they are conducted at arm’s length.
• Thin Capitalization Rules: Interest deductions are limited to prevent tax avoidance through excessive borrowing. Companies are allowed to deduct interest up to 30% of earnings before interest, taxes, depreciation, and amortization (EBITDA).

5. Labor Regulations

Denmark's labor market flexibility is a key factor contributing to its high business rankings. The "Flexicurity" model allows businesses to hire and fire with relative ease while ensuring a robust safety net for employees.

a. Hiring Employees

• Ease of Hiring: Denmark’s labor market is open and competitive. There are no statutory minimum wages, but wages are typically governed by collective bargaining agreements (CBAs). These agreements vary by sector, but generally ensure fair compensation for employees.
• Probationary Period: Danish employment law allows for up to 3 months of probation, during which time employees can be terminated without notice. This gives businesses the flexibility to assess employees before committing to long-term contracts.
• Employment Contracts: Denmark mandates that written employment contracts are provided to employees within 30 days of hiring. Contracts must outline key conditions, including wages, working hours, holiday entitlements, and notice periods.
• Average Salary: The average monthly salary in Denmark is around DKK 45,000 (€6,000) before taxes.

b. Work Permits for Foreign Employees

• EU/EEA Nationals: Citizens from the EU/EEA countries can live and work in Denmark without a visa or work permit, benefiting from the EU’s freedom of movement laws.
• Non-EU Nationals: Non-EU/EEA nationals must apply for a residence and work permit before employment. Denmark offers several work visa schemes, including:

c. Work-Life Balance and Employee Rights

• Work Hours: The standard workweek is 37 hours, though flexible working hours are common. Employees are entitled to 5 weeks of paid vacation per year, in line with the Danish Holiday Act.
• Employee Representation: Companies with more than 35 employees must allow employees to elect a representative to the board, ensuring a voice in corporate decisions.
• Parental Leave: Denmark offers 52 weeks of parental leave, with 14 weeks specifically reserved for the mother and 2 weeks for the father immediately after the birth. The remaining leave can be shared between both parents.
• Employee Protections: In case of dismissal, employees have legal protections, including a notice period that varies based on seniority. For instance, employees with over 3 years of service are entitled to 3 months of notice.

6. Government Support and Funding Opportunities

The Danish government offers an extensive range of funding programs, grants, and support services to promote innovation, entrepreneurship, and sustainability.

a. Public Funding and Grants

• Innovation Fund Denmark: This government-backed fund provides grants and co-financing for projects in innovative industries, including biotech, cleantech, and digital technologies. In 2021, Innovation Fund Denmark allocated €150 million to innovative startups.
• V?kstfonden (Danish Growth Fund): V?kstfonden is a state investment fund that provides risk capital to Danish companies. It offers:

b. Tax Incentives for Innovation

• R&D Deductions: Danish companies can deduct up to 150% of their research and development (R&D) expenses. This is among the highest in the EU, encouraging companies to invest heavily in innovation.
• Patent Box Regime: Income from patents and intellectual property can be taxed at a reduced rate of 13.5%, incentivizing companies to develop and commercialize IP within Denmark.

7. Digital Infrastructure and Administrative Efficiency

Denmark’s digital infrastructure is among the most advanced in the world, providing businesses with quick and efficient administrative processes.

a. Online Systems

• Virk Platform: The Virk platform handles all business registrations, tax filings, and other administrative tasks. Denmark’s focus on e-government services has significantly reduced bureaucracy, with most filings handled online.
• Metrics:
• E-Government Readiness Index: Denmark ranks 1st in the UN’s E-Government Development Index, highlighting the country’s leadership in digital public services.

b. Data Protection and Cybersecurity

• GDPR Compliance: Denmark complies with the EU’s General Data Protection Regulation (GDPR). Companies are required to implement robust data protection measures, including secure storage, regular audits, and timely reporting of data breaches.
• Cybersecurity: Denmark is ranked 1st in the Global Cybersecurity Index (2021) due to its strong national cybersecurity policies, high levels of digital literacy, and resilient infrastructure.

c. NemID/MitID Authentication

• NemID: Denmark’s NemID digital identification system is required for both individuals and businesses to access government services, banking, and legal documentation. As of 2023, MitID is gradually replacing NemID to provide stronger security features.

8. Costs of Forming and Running a Business

Forming and operating a business in Denmark comes with competitive costs, especially in comparison to other high-income countries in Europe.

a. Initial Registration Costs

• Sole Proprietorship: Registration is free, with no minimum capital requirement. Entrepreneurs can set up sole proprietorships within 24 hours via Virk.
• ApS and A/S Registration:

b. Ongoing Compliance and Filing Fees

• Annual Report Filings: All companies must file annual reports with the Danish Business Authority. Small companies can file simplified reports, but larger companies must submit audited financial statements.
• Auditing Fees: Mandatory for larger companies. Audit fees can range from DKK 20,000 to DKK 100,000 annually, depending on the company’s size and complexity.
• Accounting Costs: Hiring accountants to manage tax filings and compliance is common. Annual accounting costs for an SME in Denmark typically range from DKK 30,000 to DKK 100,000, depending on the business's complexity.

General summary

Denmark is one of the most attractive countries for forming and running a business due to its efficient, transparent, and digitalized processes. The combination of a competitive tax regime, flexible labor market, high levels of trust, and government-backed support makes it an ideal location for both startups and established enterprises. With its leadership in innovation, sustainability, and digital infrastructure, Denmark continues to foster a dynamic environment for businesses to thrive.

Kjeld Friis Munkholm

Vejle - China Business Center

? 2024Kjeld Friis Munkholm. All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means without the prior written permission of the author