The Three Taxation Schemes for Businesses

The Personal Income Scheme – The Simple Solution

How Are You Taxed?

The company’s profit is taxed as personal income under the ordinary personal tax rules.

Advantages

If the business generates a loss, this can often be offset against your other personal income – e.g., salary from employment.

Disadvantages

No deduction for the company’s interest expenses.

This solution is often most relevant for small businesses with low interest expenses and relatively stable earnings.

The Business Tax Scheme (VSO) – Flexibility and Savings

How Are You Taxed?

You can retain profits within the business, taxed at a preliminary 22% corporate tax rate, instead of paying full personal tax immediately.

Advantages

Full deduction of the company’s interest expenses.

Option to smooth taxation over several years.

If the business generates a loss, this can often be offset against other personal income – e.g., salary from employment.

Disadvantages

Requires more administration and separate bookkeeping.

VSO is particularly attractive for businesses with high earnings, significant interest expenses, or a need to build capital for investment.

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The Capital Return Scheme (KAO) – Lower Tax on Part of the Profit

How Are You Taxed?

Part of the company’s profit is converted into capital income, which is often taxed at a lower rate than personal income.

Advantages

Can reduce total tax if capital return exceeds interest expenses.

Up to 25% of the annual profit can be retained under the scheme.

If the business generates a loss, this can often be offset against other personal income.

Disadvantages

Less flexible than the Business Tax Scheme (VSO).

No option to defer taxation through savings at a low rate.

KAO is often used by individuals who do not wish to retain profits in the business – for example, if the business is temporary or if the owner plans to move abroad.

Corporate Taxation – ApS or A/S

How Is the Company Taxed?

The company pays 22% corporate tax on profits. The owner is taxed on salary as a regular employee and separately on dividends.

Advantages

Deduction for interest and salary expenses at the company level.

Losses can be carried forward indefinitely to offset future profits.

Dividend distributions are taxed at 27% up to the top tax threshold.

Disadvantages

Losses cannot be offset against the owner’s personal income.

Strict rules apply to transactions between the owner (or related parties) and the company.

The corporate form is often chosen to limit liability and provide better opportunities for investment and growth. It is also useful in situations where the company will later be transferred to a new owner.