Lawful tax optimisation for SMEs

What is lawful tax optimisation, and what is it not?

Tax optimisation is the lawful use of the tax rules to minimise your tax burden. It is not cheating, and it is not tax evasion. It is what every accountant helps their clients with daily.

Tax evasion is unlawful, that is hiding income, inventing deductions or moving money to avoid taxation. It is criminal and falls outside this guide.

For SME owners, there is a range of lawful optimisation options that many do not use fully. Most of them are about choosing the right business structure and making the right decisions about when and how you take money out of the business.

Note: Tax rates and thresholds are adjusted every year, and from 2026 the previous top tax has been replaced by a new structure with a middle tax, top tax and top-top tax. Always check the current rates and thresholds for the relevant income year with your accountant.

The foundation: the choice of business form

The first major tax choice is which business form you run. The choice has far-reaching consequences.

Sole proprietorship

All income is taxed as personal income, with a marginal tax of up to around 56% for most. There is no separation between your finances and the business's.

The business tax scheme (VSO): Owners of sole proprietorships can use the business tax scheme, which allows profit to be retained in the business against a preliminary business tax of 22% and interest expenses to be deducted from personal income. It requires a correct accounting separation and typically the help of an accountant.

ApS (private limited company)

The company pays 22% corporation tax on the profit. You draw a salary (taxed as personal income) and possibly a dividend (taxed as share income).

The big difference: In an ApS, you can leave profit in the company against only 22% corporation tax instead of drawing it all and paying the high personal marginal tax. This defers the personal taxation until the money is taken out.

Holding structure

A holding structure, where a holding ApS owns an operating ApS, gives further options:

• Tax-free subsidiary dividends: Dividends from the operating ApS to the holding company are as a rule tax-free when the holding company owns at least 10% (section 13 of the Corporation Tax Act)
• Sale of the operating company via the holding: A gain on the sale of subsidiary shares is as a rule tax-free for the holding company
• Retention and reinvestment: You can accumulate and invest funds in the holding company before they are taxed personally

The holding structure is not free, as it requires administration, bookkeeping and compliance for two companies. But for many SME owners with a decent profit, it is a clear advantage. Discuss it with your accountant.

Salary vs. dividend: the central optimisation

For owners of ApS companies, the question of when to take a salary and when to take a dividend is one of the most important.

Salary

• Taxed as personal income (marginal tax of up to around 56% including labour-market contributions)
• Gives a deduction in the company and reduces the company's taxable income
• Provides the basis for ATP, pension and certain deductions such as the employment deduction

Dividend

• Taxed as share income: 27% up to the progression threshold (DKK 79,400 in 2026) and 42% above the threshold
• No labour-market contribution is paid on a dividend
• The company has already paid 22% corporation tax on the profit before a dividend can be distributed

The rule of thumb

For many owners, it makes sense to take enough salary to:

1. Use the employment deduction
2. Contribute to a pension (giving a deduction in personal income)
3. Stay below the thresholds where the high marginal taxation (middle tax, top tax and top-top tax) begins

Profit beyond this can beneficially stay in the company and possibly be distributed as a dividend, ideally within the progression threshold for share income. As the middle-, top- and top-top-tax thresholds are adjusted annually, the specific split should be calculated with your accountant for the current income year.

Example (simplified): If the company has a profit of DKK 1.5 million and the owner draws a salary of around DKK 550,000, the company pays 22% tax on the rest, and the remaining funds can be retained in the company. Compared with taking the whole amount as salary in the same year, the taxation is typically deferred and reduced significantly. The precise saving depends on the year's rates and should be calculated specifically.

Pension as tax optimisation

Contributions to a pension are deductible, either in the company (as a salary cost) or privately (with a deduction up to certain limits).

Company pension: The company pays into a company scheme. It is a salary cost for the company and an advantage for you, because the taxation is deferred to the pension payout, where the marginal tax is often lower.

Instalment pension and lifelong pension: As a self-employed person or owner, it is crucial to prioritise pension saving actively, because you have no employer to do it for you. There is an annual limit for the deductible contribution to an instalment pension, while a lifelong (annuity) scheme has wider limits. Check the current limits with your accountant or pension provider.

Deductions you may not be using

Commuting deduction

Travel between home and work can give a commuting deduction. If you have a company car available, special rules apply that should be reviewed with an accountant.

Home office

Do you use part of your home for business? Under certain conditions, home-office costs can be deducted.

Entertainment and meals

Entertainment expenses as a rule only give a 25% deduction (section 8(4) of the Assessment Act). Staff benefits such as free lunch and internal meetings can under certain conditions be deducted in full as a staff expense.

Tax-free mileage allowance

If you drive your private car for business purposes, you can receive a tax-free mileage allowance from the company up to the state's rates. It gives the company a deduction and is tax-free for you, provided the conditions (including a mileage log) are met.

Enhanced deduction for research and development

Businesses with expenses for experiments and research can under certain conditions obtain an enhanced deduction of more than 100% (section 8 B of the Assessment Act). The rate has changed over the years, so check the current percentage. It requires correct documentation.

Business structure and legal documents

Many tax choices are closely linked to legal documents:

Formation documentation

If you form an ApS to switch from a sole proprietorship, the formation document and the articles are the foundation. Make sure the costs of the formation are documented.

Owners' agreement and dividend policy

An owners' agreement should set out the company's dividend policy, that is when and in what proportion a dividend is distributed. Be aware that a dividend must as a rule be distributed in proportion to the ownership share, unless otherwise justified and agreed, as an uneven distribution can have tax consequences.

Director's contract

As an owner-director, you should have a director's contract that sets out salary, pension, company car and other terms. It is the basis for the company being able to deduct your remuneration correctly.

What you should avoid

Shareholder loans

Borrowing money from your own company is only lawful under strict conditions in section 210 of the Companies Act, and regardless of its lawfulness, the loan is taxed at you as salary or dividend under section 16 E of the Assessment Act, as soon as it is paid out, and even if you later repay it. If you need money from the company, do it as approved salary or dividend, not as a loan.

Private use of the company's funds

Does the company pay for private expenses (holidays, restaurant visits, private driving etc.)? It can be regarded as a disguised dividend, which is taxed at you. It is one of the most frequent errors the Tax Agency finds on inspection.

Too infrequent bookkeeping

If you leave the bookkeeping to once a year, you increase the risk of errors in the VAT return, incorrect deductions and tax surprises. Ongoing bookkeeping is a prerequisite for good tax optimisation.

Employee shares and warrants: incentive and tax

Do you want to retain and reward key employees in a tax-efficient way? Employee shares and warrants (subscription rights) are two tools that combine incentive with favourable taxation, but they are taxed differently.

Warrants under section 28 of the Assessment Act: You grant the employee a right to subscribe for shares at a fixed price at a future time. Under section 28, the taxation is deferred to the time the right is exercised, but the value is then taxed as salary (personal income). A later gain on the shares themselves is taxed as share income.

Employee shares under section 7 P of the Assessment Act: This scheme gives more lenient taxation. As a main rule, shares can be granted for up to 10% of the employee's annual salary, up to 20% if the scheme is offered to at least 80% of employees, and up to 50% for certain smaller, newly started companies. The taxation is deferred to the time the shares are sold and is as share income instead of as salary.

Both schemes require a written agreement that meets the legal conditions and correct reporting. It is an area where an accountant or lawyer with experience in incentive schemes is indispensable.

VAT

Tax optimisation is not only about income tax, because VAT is at least as important for many SMEs.

Voluntary VAT registration: Businesses with certain VAT-exempt activities (for example letting of real property) can in some cases choose voluntary VAT registration for part of the activities, which can give the right to a VAT deduction for operating costs.

VAT settlement period: The period depends on the turnover. Large businesses settle monthly, medium-sized quarterly and the smallest half-yearly. Have you chosen the right period? Longer periods can improve liquidity.

Import and EU VAT: If you buy goods or services from abroad, special VAT rules for EU trade apply (including the reverse charge), which require correct handling in the bookkeeping.

Errors are costly: One of the Tax Agency's most frequent inspection points is a VAT deduction for expenses that are not deductible, for example the private share of a car, entertainment and certain services from abroad. Ongoing bookkeeping and clear internal rules reduce the risk significantly.

Conclusion

Lawful tax optimisation does not require you to be an expert. It requires you to have the right documents in place (business form, owners' agreement, director's contract), to talk to an accountant about the salary and dividend split for the current year, to prioritise pension contributions and to keep your bookkeeping up to date. The foundation is the legal documents and a tidy structure, and the accountant provides the specific calculations, which especially after the 2026 tax reform should be made on the current year's rates.

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This article is informative and does not constitute tax or legal advice. Legislation and rates change continuously. Contact your accountant for up-to-date guidance for your situation.