Improved tax depreciation rules

The threshold for small assets is increased with immediate effect, while the depreciation base for certain machines and inventories are increased to 116 % of the cost price. The increased deduction for R&D expenses is extended until and including 2022.

It follows from a Danish political agreement of 8 December 2020 about a so-called “green tax reform” that the special arrangement concerning increased tax deductions for expenses related to research and development will be extended to include the income year 2022. 

The publication of the agreement happened in the same period in which the Danish parliament debated a bill about increased deductions in 2020 and 2021 for those very same expenses. The bill was enacted just before Christmas. 

The current situation is therefore that in the income years 2020, 2021 and 2022 super deductions can be made by an amount corresponding to 130 % of the incurred R&D expenses actually incurred. In the act now adopted for the income years 2020 and 2021, it is decided that for the income year 2020 a limit applies to the deduction in the amount of 845 million Danish kroner per company and for the income year 2021 a limit of 910 million Danish kroner per company. For the income year 2022 the limit is expected to be 910 million Danish kroner according to the presented draft legislative proposal of 18 December 2020.

The rule only applies to Danish companies and foreign companies who have a permanent establishment in Denmark to which R&D expenses can be allocated. This means that Danish companies with R&D expenses who has a foreign permanent establishment will not benefit from the rule due to the territorial principle applicable to Danish companies. This incentivizes the option to place R&D activities in Denmark.  

For jointly taxed companies, including companies who are part in an international joint taxation, the limit applies for all the jointly taxed companies in total. The limit is to be proportionately allocated between the companies based on the amount of the actual development cost. 

The circumstance that a company has access to a deduction of 1,300 Danish kroner for each 1,000 Danish kroner of research and development expenses, corresponds in fact to a tax-exempt refund on 22 % of the excess deduction. When converted into Danish kroner the refund constitutes 66,000 Danish kroner for each million Danish kroner that is used on research and development. The arrangement primarily benefits the large companies, as among the small and medium-sized companies, there are relatively few that have development significant expenses in combination with a taxable income. This does not change the fact that the bookkeeping by these companies should be organized so the extra deduction can be used, specifically by identifying the R&D expenses qualifying for the super deduction regime. 

It is notable that the super deductions do not affect application of the Danish tax credit scheme, which allows companies to convert the tax value of any tax loss up to 25 million Danish kroner insofar as such tax loss relates to R&D expenses. The companies will get the tax value (equaling a maximum of 22 % of up to 25 million Danish kroner) paid as money in hand from the Danish tax authorities. 


Temporary tax incentive for operational investments 

Furthermore, it follows from the political agreement – and the proposed bill – that for a period, an additional super deduction will be granted to investments in new machinery machines and inventory. Accordingly, it will be possible to make depreciation for tax purposes of an amount corresponding to 116 % of the cost price. 

This regime will apply to brand new acquisitions in the period 23 November 2020 to 31 December 2022. The rule will apply also to delivery of new vehicles like vans and trucks, but not to passenger cars, ships or machines, that are powered by fossil fuels.

The increased depreciation base will grant the companies a tax saving of just over 3,500 Danish kroner for each 100,000 Danish kroner invested, but the savings will be allocated over a longer period of time due to the fact that the depreciation is made in accordance with declining balance method where the balance is depreciated by 25 % per year. Like the increased deduction of R&D expenses, it is primarily the large companies who will benefit also from this regime. 


Depreciation threshold for small assets

Finally, it is decided that the threshold for immediate tax depreciation of expenses for so-called small acquisitions permanently will be raised from 14,100 Danish kroner to 30,000 Danish kroner (2020 amount limit), thus allowing de facto deduction for the acquisition of such assets as an expense. This change also applies to acquisitions made on or after 23 November 2020.

The increasement of the threshold do not trigger tax saving for companies availing of the new option, but only a time interest, as the immediate depreciation replaces the possibility to depreciate such assets according to a declining balance method.

The above article is taken from tax:watch, our electronic English newsletter on Danish Tax and VAT matters. tax:watch is issued on the last Friday of each month and is free of charge. Please sign up here.