The final date for avoiding an interest charge of 4.3% on underpaid tax for companies, branches and foundations is approaching

The final date for making voluntary payment of tax on account for the income year 2022 is 21 November 2022, in order to avoid paying an interest charge on underpaid tax. The interest charge on underpaid tax for 2021 was 4.3% and is expected to be at the same level for 2022.

Why is this relevant?

Voluntary payment of tax on account is often relevant - also if your company has the same earnings as in the past years.

Since ordinary instalments of on account tax are calculated as 50% of the average income tax for the past three years, a voluntary payment of tax on account is relevant, even if the expected taxable income is identical with the average (or just exceeds 50% of the average) for the past three income years. Instalments of on account tax for 2022 are calculated based on the income years 2018-20.

If your earnings have changed as a result of e.g. COVID-19, it may also be relevant to adjust the tax on account, so neither too much nor too little is paid.

We therefore recommend that before the deadline for payment of both ordinary and voluntary on account tax instalments on 21 November 2022, you obtain an overview of the expected tax payable for the income year 2022. Following this, one of the following scenarios may apply:

1. You expect the two ordinary instalments to cover the expected tax and do not pay any additional amounts.
2. You expect that the two ordinary instalments are significantly lower than the expected tax for the year and you report and make a voluntary paymennt of tax on account on 21 November 2022. However, please note that an expected 0.1% (2021 rate) surcharge is paid on voluntary instalments by 21 November 2022.
3. You expect that payment of the two instalments of ordinary on account tax will exceed the estimated income tax for the income year and you therefore want a partial or full reduction of the second instalment of ordinary tax. In special circumstances, also the first instalment of ordinary tax can be reimbursed ahead
   of time. However, this possibility is not discussed further.
4. In addition, you may always consider paying a third instalment of voluntary tax on account for the income year 2022 on 1 February 2023 at the latest, but of this amount, an expected 0.8% (2021 rate) non-deductible surcharge will reduce the tax on account payment.

Mandatory national joint taxation or voluntary international joint taxation

Since Danish group companies, branches, permanent establishments and properties in Denmark are subject to mandatory national joint taxation, the above-mentioned considerations apply at joint taxation level.

In addition, you may have opted for voluntary international joint taxation, which means that the foreign entities concerned are also to be included when estimating the expected joint taxable income for 2022.

The ordinary instalments of on account tax are also determined on the basis of the historical income of the jointly taxed group for the past three years, and it is the Danish management company which is obliged to report and pay both ordinary and voluntary instalments of tax on account on behalf of all the jointly taxed entities.

As this may require both extensive collection of information and complex calculations based on the Danish rules on tax loss limitation and interest deduction limitation, we recommend that the process be initiated well in advance of 21 November 2022 that way the tax payment can be considered in the best possible manner.

If there have been changes in the group structure during the income year 2022, attention must be drawn to the fact that taxes paid on account accrue to the current management company at the end of the year.

There may therefore be a need to reallocate taxes paid on account in order to avoid an interest charge on underpaid tax on the interim statements.

The deadline for notification of reallocation is no later than 1 February in the following income year or 3 months after the change in the group structure.

Newly established companies or companies that have only recently become profit-making

If your company is newly established or has only recently become profitmaking, you should be particularly aware of whether the ordinary instalments of on account tax are sufficient to cover your expected tax for the income year.

This is due to the fact that the company’s ordinary instalments of on account tax are calculated on the basis of final tax assessments for the past three income years. The ordinary instalments of prepaid tax for the income year 2022 are therefore based on tax assessments for the income years 2018-20. If the company did not exist during the entire prior three-year period, the calculation is based only on the years where the company existed. If the company was only established in 2021 or 2022, no ordinary tax on account is triggered.

Moreover, you should be aware if your company is in a position where it has previously been loss-making or has been able to set off tax loss carry-forwards without limitation, but where this will not be the case in 2022.

When is it beneficial to make voluntary payment of tax on account?

The rates for interest charge on underpaid tax etc. for the income year 2022 have not yet been published, but are expected to be published in December 2022 at the latest. Last year, the interest charge on underpaid tax was 4.3%. The interest rate on underpaid tax which is non-deductible for tax purposes therefore corresponds to a deductible interest rate of 5.51% p.a.

If the company’s borrowing rate to the bank or the return on excess liquidity is less than 5.51% p.a. it should therefore be considered making a voluntary payment corresponding to the expected final tax reduced by the ordinary instalments of on account tax and any voluntary payments of tax on account made for the income year 2022. If the payments exceed the final tax, overpaid tax is refunded with an interest allowance which is expected to be 0.2% similar to the 2021 level. The interest allowance is tax-exempt and is therefore not recognised in the calculation of taxable income. Please note however, that there is no return on overpaid tax attributed to payments made in the period 22 November 2022 to 1 February 2023.

However, if the company’s borrowing rate to the bank or the return on excess liquidity exceeds 5.51% p.a., it is not beneficial to make a voluntary payment of tax on account. Instead, we recommend to postpone payment until the ordinary deadline for payment of underpaid tax on 20 November 2023.

If the company’s interest rate on bank deposits is negative, it will also – from an interest point of view – often be beneficial to make a voluntary payment.

What should you do?

Before making a payment of either ordinary or voluntary tax on account, you should make sure that there is no other overdue debt on the company’s tax account, because at present an interest rate of 0.7% per month is charged on the tax account, corresponding to 8.73% p.a. This interest is non-deductible and it therefore corresponds to a deductible interest rate of 11.19% p.a.

If the two ordinary instalments of tax on account match the expected final tax, the only thing you should do is to pay the second ordinary instalment of tax on account into the company’s tax account on 21 November 2022 at the latest. Please note that if the ordinary tax on account is paid more than five weekdays prior to the payment deadline, the payment may be refunded, meaning that interest will be charged on the still due balance on the tax account.

If you conclude that the two ordinary instalments of on account tax are insufficient to cover the expected final tax, you should consider if it is beneficial to make a voluntary payment of on account tax. If you then wish to pay tax on account, you first need to report the amount of the voluntary tax on account at TastSelv Erhverv (E-tax for Businesses) before making the actual payment. If the amount is not reported prior to making the payment, the voluntary payment will be refunded and it will therefore not be set off against the final assessed corporation tax, and interest will be charged on the underpaid income tax.

Note, however, that if you have opted for the opportunity that allows deposits of up to DKK 200,000 (the maximum limit for deposits in the tax account has been reduced from DKK 350 million to DKK 200,000 as of 15 June 2022), the voluntary payment of on account tax will not be reimbursed if the balance does not exceed DKK 200,000. However, the voluntary payment of on account tax will still not be set off against the final tax, if the amount has not been reported.

On the other hand, if your estimate shows that the ordinary instalments of on account tax are too high compared to the expected corporate tax for the income year 2022, you may consider requesting a reduction of the second ordinary instalment. The request should be made via TastSelv Erhverv (E-tax for Business) before 21 November 2022. The Danish Tax Agency (Skattestyrelsen) may ask for the necessary documentation for the reduction such as the most recent financial information, e.g. projected interim financial statements and information on any losses from previous years. In special circumstances, the first instalment of ordinary tax can be reimbursed ahead of time. However, this possibility is not discussed further.