The Corporate Tax Scheme (VSO) is a tax scheme for personally owned businesses, such as sole proprietorships and partnerships.
In this post, we will explain what VSO is, the tax benefits of the scheme and the investment options available to you through the scheme.
The idea of VSO is to get a tax rebate on your business profits. It is a scheme that only sole proprietorships, partnerships and limited partnerships can make use of, as these types of businesses are categorized as personally owned businesses.
When you withdraw a profit from your business to your personal account, you will generally be taxed according to the general personal tax rules.
If you make use of VSO, you take a portion of the profits and instead of withdrawing the money to your personal account, you leave the capital in the business as savings. When you do this, the profit will only be taxed at a provisional corporate tax rate of 22%.
This way, you can defer the higher taxation resulting from the personal tax rules by leaving the money in your business. This can make sense if, for example, your income will hit the top tax threshold.
By not withdrawing profits, you can potentially avoid the top tax bracket. This means that you push the income to a future tax year where you have a smaller profit and can withdraw more of the savings before you hit the top tax threshold.
In addition, the top tax bracket is continuously being raised year by year, so there may also be money to be made by deferring income to a future tax year.
Overall, VSO enables businesses to save money by leveling the tax burden year by year.
There are a number of tax and financial benefits to using the corporate tax system. We can highlight the following benefits, among others:
As mentioned, with VSO you can leave some or all of your profits in your business, which is then taxed at a provisional corporate tax rate of 22%.
This means that your business will have better liquidity while you can spread your tax payment over several years - so if you have a bad year with low earnings, you can withdraw money from your VSO savings until you reach the top tax threshold for that tax year.
When you withdraw the money, your provisional corporate tax of 22% will be offset against your given income tax, so you won't be taxed unnecessarily.
In addition, the deductibility of interest expenses is significantly better through VSO than your personal income. The tax value of interest deductions in personal income is around 33.6%, while for VSO it is as high as 56.5%. This corresponds to a tax saving of up to 22.9%.
This can result in thousands of dollars saved. Under certain circumstances, you can even transfer your private debt to your VSO, allowing you to benefit from the high interest deduction of around 56.5%.
Henrik Hansen is the owner of a sole proprietorship.
During 2022, Henrik Hansen has earned 700,000 kr.
Therefore, he chooses to raise an amount corresponding to the top tax threshold for the tax year - DKK 552,500 (2022).
The remaining money - i.e. DKK 147,500. - he leaves in his business through the business tax scheme.
This way, Henrik Hansen avoids paying top tax in 2022 and instead pays 22% in provisional corporate tax.
Henrik Hansen can now choose to leave the DKK 147,500 (before tax) in his company to increase liquidity, which can benefit him and his company if he suddenly finds himself short of capital.
He can also choose to invest the money through the company scheme to generate a return on the saved capital.
However, investments through VSO must be 100% corporate. You will therefore be slightly limited in your choice of investment options. However, it can still be a smart and beneficial way to strengthen and grow a personally owned business.
You can
As mentioned, there are some limitations to the range of investment options available through VSO.
The investments must be 100% commercial. It will typically be a matter of judgment whether a given asset is considered to be of a commercial or private nature.
For example, you can invest in real estate through VSO if the property is rented out and is part of the company's business operations. These investments can provide portfolio diversification and potentially provide a stable income from the rental or sale of the properties.
It is important to note that the specific investment opportunities under VSO may vary depending on the applicable legislation and the approved projects or companies. It is always recommended to consult a tax advisor or accountant for detailed information on the available investment opportunities and the tax implications for the company.
Assets you can almost never invest in with VSO
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