Taxation in Agriculture

Chapter 13. Denmark

Abstract

This chapter contains a description of tax provisions applied to agriculture in 2019, unless otherwise specified. They include taxes on income and profit, property, good and services, environmental taxes, and tax incentives for R&D and innovation.

13.1. Overview

Denmark places great emphasis on personal income taxes as approximately 50% of public income comes from direct personal taxes. Individual taxes are paid to the state and local authorities (municipalities). Corporate taxes are paid to the state, but 15% of these taxes are distributed by the state to the local authorities.

Agriculture accounts for 61% of land use in Denmark. In total, there are approximately 35 000 farms with an average farm size of 76 hectares and 9 800 full-time farms (with a threshold of minimum 1 665 working hours per year) with an average farm size of 191 hectares.

Municipal land taxes on farms are levied at discounted tax rates and are based on a lower than market valuation of the land. Diesel used in the agricultural sector is levied a lower energy tax than the general energy tax for processing purposes in other sectors. Farmers pay taxes on their use of pesticides and fertiliser in order to internalise the environmental costs. There is no reduced value added tax rate applied for agricultural products and farmers pay the full carbon dioxide tax on their use of fossil fuels.

13.2. Income taxation

Individuals are subject to state and municipal taxes. Collection is carried out by the state. Income from capital is also taxable and includes capital gains on the sale of shares, net interest income or expense; capital gains from real estate investments under some circumstances; and capital gains and income from certain other investments in financial assets.

The agriculture sector primarily consists of self-employed individuals. A self-employed individual can choose to be taxed according to the Business Taxation Scheme. The Business Taxation Scheme enables the self-employed to be taxed at a rate of 22%, the same rate as the corporate taxation rate. Only when the income is withdrawn from the business savings it will be taxed as personal income. Interest is fully deductible under the Business Taxation Scheme.

Companies pay a flat rate state tax on income and capital gains of 22%. The determination of a corporation’s taxable income is based on the accounts prepared detailing a company’s income and expenses. Generally business expenses incurred in acquiring, securing and maintaining taxable income are deductible. Interest expenses are generally deductible regardless of the purpose of the loan, subject to Danish interest restriction rules. Machinery and equipment are generally depreciated using the declining-balance method at a rate of up to 25%. Buildings and installations are generally depreciated at a rate of up to 4% using the straight-line method.

Goodwill and other intangibles may be amortised over seven years using the straight-line method. However, the acquisition costs of patents and acquired know-how may, as an alternative to the straight-line method, be fully deducted in the year of acquisition. The possibility of writing-off the value of patents and know-how immediately postpones the payment of corporate taxes and thereby reduces the real rate of taxation.

13.3. Property taxation

Danish property taxation includes a national property value tax on owner-occupied housing and a municipal land tax.

The national property value tax is based on the value of the property (the aggregate value of both owner-occupied real estate and land). The amount is reassessed every other year with the public valuation. Property value tax is collected by the state and is progressive. The tax rate is 1% of the taxable value up to DKK 3 040 000 and 3% on the value above that threshold. Reductions in property tax are available to those who bought their property before 1 July 1998 and to senior citizens.

The municipal land tax is based on the public valuation of the land. The tax rate is collected and determined by the municipalities and must be between 1.6% and 3.4%. Agricultural land receives a “discount” on the tax rate of 1.48 percentage points when the municipal land tax rates are 2.2% or below. For example, if land tax rate is 1.6%, the agricultural land tax rate will be 0.12% (i.e. 1.6% – 1.48% = 0.12%). When the land tax rate is above 2.2% the agricultural land tax rate is capped at a maximum taxation rate of 0.72%. Furthermore, the public valuation of agricultural land is calculated so that it is lower in comparison to the market value of land in general.

In 2002 a freeze was introduced on property value tax along with a limitation on the annual increase of the land tax base. The Danish government is expected to propose new legislation regarding property taxation (that will change both the property value tax and the land tax) in 2019 to enter into force from 2021.

An inheritance tax is payable on the market value of the asset if the value exceeds a certain amount. Spouses are exempt from paying the tax. Gifts with a value above a certain base value are also subject to a tax. There is no special legislation for farmers and their families.

Stamp duty is levied at the registration of ownership of real property, ships and planes. There are no special concessions for agriculture.

13.4. Tax on goods and services

The standard value added tax (VAT) rate is 25% and this is the rate applied to agricultural products.

Denmark levies an energy tax of DKK 56 per GJ on energy products plus a carbon dioxide tax of around the DKK 175 per tonne CO₂ emitted from the use of energy products. Electricity consumption in households is levied a tax of DKK 0.884 per kWh. VAT-registered companies can claim a rebate for the energy taxes levied on energy used for process purposes, resulting in an effective tax of DKK 4.5 per GJ on fossil fuels and DKK 0.004 per kWh for electricity for process purposes. The full energy tax is levied for heating purposes, whereas electricity used for heating is levied at a rate of DKK 0.26 per kWh. Meanwhile the full carbon dioxide tax is levied on business as well as private use of fuels in the non-Emission Trading Scheme sector.

Farmers (including horticulture producers) can claim a special deduction in energy taxes levied on fuels for the operation of machinery. Farmers pay 1.8% of the ordinary energy tax, which corresponds to an effective tax rate of DKK 1.4 per GJ. The tax rebate relative to paying the process energy tax of DKK 4.5 per GJ has an estimated value of DKK 40 million (EUR 5 million) per year.

13.5. Environmental taxes

The use of pesticides is subject to a quantity-based tax differentiated according to health and environmental criteria. The revenue generated from the levy is approximately DKK 550 million (EUR 75 million) per year which is quite high compared to other EU countries.

Users of fertilisers are subject to a tax based on the nitrogen content. The purpose of the tax is to decrease the use of fertiliser outside of the agricultural sector (e.g. gardens, parks and golf courses). Most livestock farmers and crop producers are exempted from the tax and their use of fertilisers is regulated instead through the Fertiliser Register. The revenue generated from the tax based on nitrogen content is DKK 20 million (EUR 3 million) per year.

A tax on feed phosphate has been abolished as of July 2019, as other environmental regulation will regulate the sector in the future.

13.6. Tax incentives for R&D and innovation

Denmark provides tax concessions for all companies undertaking R&D. Tax deductions for R&D expenditures are set to increase gradually from 101.5% in 2019 to 110% in 2026. There are no special tax concessions for R&D expenditure for the agricultural sector. Depreciation for R&D capital assets (machinery and equipment in general) is accelerated so it can be deducted within the year of acquisition. Denmark also offers companies in a tax loss position the possibility to earn a refund for deficit-related R&D expenditures. Companies receive tax credits corresponding to 22% of any deficit related to R&D expenses. The maximum tax credit that can be given is DDK 5.5 million per year (22% of DKK 25 million).

13.7. Other taxes

There is no special treatment for farmers under Denmark’s social security system which is characterised as being relatively open with general access for all relevant groups. Membership of the voluntary unemployment insurance scheme is, however, required in order to receive unemployment benefits, but self-employed people can join. The basic public pension system is open for all, only requiring an age qualification and a certain length of stay in the country.

In comparison with most other EU countries, only part of the social benefits in Denmark are based on employers' contributions and direct contributions from the insured, and the right to financial assistance is only partly dependent on earlier employment. About 66% of total social expenditure is financed by the state via taxes and duties as opposed to an average of 33% for other EU countries.