Tax on account: Is it beneficial to make a voluntary payment of tax on account for the income year 2023?

20 March 2023 is the final date for making a voluntary payment of tax on account for companies during this spring. Below you can read about when it is beneficial to make a voluntary payment of tax on account.

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 2023 are calculated based on the income years 2019-21.

If your earnings have changed significantly, it may also be relevant to adjust the tax on account, so neither too much nor too little is paid.

We therefore recommend that you prepare an overview of the expected tax payable for the income year 2023 before the deadline for payment of both ordinary and voluntary tax on account instalments which is 20 March 2023 and 20 November 2023, respectively. 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 on account tax.
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 payment of tax on account on 20 March 2023 and/or 20 November 2023. However, please note that an expected 0.1% (2022 rate) will be reimbursed for payment by 20 March while a 0.1% surcharge is paid on voluntary instalments by 20 November 2023.
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 first or the second instalment of ordinary tax.
4. In addition, you may always consider paying a third instalment of voluntary tax on account for the income year 2023 no later than 1 February 2024. However, of this amount, an expected 0.9% (2022 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 abovementioned considerations apply at joint taxation level. In addition, you may have opted for voluntary international joint taxation, which means that the foreign entities are also to be included when estimating the expected joint taxable income for 2023.

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. It is the responsibility of the Danish management company, 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 20 March 2023 and 20 November 2023.

Please be aware of the short deadlines that apply for changes to allocation of already paid tax on account and generally for payment of tax on account in the event of changes to a joint taxation group. This is relevant for both entities entering into a joint taxation and entities leaving a joint taxation. We recommend that the specific circumstances are carefully examined if there have been changes to joint taxation group during the year.

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

If your company is newly established or has only recently become profit-making, 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 closed tax assessments for the past three income years. The ordinary instalments of prepaid tax for the income year 2023 are therefore based on tax assessments for the income years 2019-21. 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 2022 or 2023, 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 2023.

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

The interest charge rate on underpaid tax for the income year 2023 has not yet been published but is expected to be published in December 2023 at the latest. For 2022, the interest charge on underpaid tax was 4.4%. The interest rate on underpaid tax, which is non-deductible for tax purposes, therefore corresponds to a deductible interest rate of 5.64% p.a.

If the company’s borrowing rate to the bank or the return on excess liquidity is less than 5.64% p.a., it should therefore be considered making a voluntary payment corresponding to the expected final tax reduced by the ordinary instalments of tax on account for the income year 2023. If the payments exceed the final tax, overpaid tax is refunded with an interest allowance, which is expected to be 0.4% similar to the 2022 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 interest return on overpaid tax attributed to payments made in the period 21 November 2023 to 1 February 2024.

However, if the company’s borrowing rate to the bank or the return on excess liquidity exceeds 5.64% p.a., it is not beneficial to make voluntary payment of tax on account. Instead, we recommend postponing payment until the ordinary deadline for payment of underpaid tax which is 20 November 2024.

If the company makes a voluntary payment of tax on account in March 2023 you should be aware that the interest is calculated based on a period of 20 months opposed to a period of 12 months if the payment is made in November 2023.

As an alternative, the voluntary payment of tax on account may be deferred until 20 November 2023 or 1 February 2024.

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 for tax purposes, and it therefore corresponds to a deductible interest rate of 11.19% p.a.

If you expect that the two ordinary instalments of tax on account are sufficient compared to the expected final tax, the only thing you should do is to pay the first ordinary instalment of tax on account into the company’s tax account no later than 20 March 2023. 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 outstanding balance on the tax account.

Many companies are waiting to make a voluntary payment until November 2023, as the expected taxable profit or loss can be calculated more accurately, and because the money is only tied up for 12 months against 20 months when paying in March.

If you expect that the two ordinary instalments of tax on account are insufficient to cover the expected final tax, you should consider if it is beneficial making a voluntary payment of tax on account. If you then wish to pay tax on account, the first step is 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.

Note, however, that if you have opted for the opportunity that allows deposits of up to DKK 200,000, 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 tax on account 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 tax on account are too high compared to the expected corporate tax for the income year 2023, you may consider requesting a reduction of the first ordinary instalment. The request should be made via TastSelv Erhverv (E-tax for Business) before 20 March 2023. 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.

You will find guidance relating to both the reporting of voluntary payment of tax on account and requesting a reduction of instalments of tax on account here.

At PwC, we are of course always ready to assist you.