Capital Return Scheme

The capital return scheme is a tax scheme for personally operated businesses, which provides the possibility to move a part of the company’s profit from personal income to capital income through a calculated capital return. The capital return is calculated on the basis of the value of the company’s assets.

The scheme is relevant for you who want:

• Lower taxation of personal income, including less tax and labour market contribution
• Less administration than when using the business tax scheme (VSO)
• A flexible and simple way to handle taxation of profit in a personally operated business

The capital return scheme can be used by self-employed persons who operate a personally owned business – e.g. sole proprietorships or partnerships (I/S). The scheme is only for natural persons and cannot be used by companies such as ApS or A/S.

• Have a business character, i.e. that it is a real, ongoing business with the purpose of creating profit.
• Prepare accounts where the company’s assets and liabilities are stated correctly, so that the capital return base can be calculated.

The capital return is calculated as a percentage of the company’s capital return base at the beginning of the income year.
The base consists of the company’s assets (e.g. operating assets, inventory, properties) minus debt that relates to the business.
The formula can, simplified, be written as:

Capital return = Capital return base × Capital return percentage

The calculated amount is deducted from the business’s personal income and added to the capital income.

The advantage of the capital return scheme (KAO) gives self-employed persons the possibility to achieve a more balanced and often lower taxation of the business’s profit by moving a part of the income from personal income to capital income.

The most important tax advantages are:

• The capital return is taxed as capital income, which normally has a lower tax rate than personal income.
• The capital return scheme is less administratively demanding than the business tax scheme (VSO), which makes it more manageable for smaller businesses.

Although the capital return scheme (KAO) can provide tax advantages, it also has a number of limitations and potential disadvantages, which one should be aware of before choosing to use it.

• In contrast to the business tax scheme (VSO), you cannot leave the profit in the business and defer the taxation. The entire profit is taxed in the year it is earned, which can be a disadvantage for businesses with fluctuating earnings or a need for capital build-up.
• The capital return is calculated on the basis of the business’s assets at the beginning of the year, which requires a correct statement of assets and liabilities. Errors in this calculation can lead to incorrect taxation or problems in connection with audit and control by the Danish Tax Agency.
• If the business does not have large assets tied up in the operation, e.g. a consultancy business or service business, the capital return becomes low, and the advantage of the scheme correspondingly limited.

Yes, it is possible to switch between the capital return scheme (KAO) and the business tax scheme (VSO), but the transition must take place according to the applicable transition rules.

When switching between the schemes, as a starting point there must be a transition year where none of the schemes are used. Only after the transition year can the new scheme be chosen. The transition rules must be complied with to ensure correct taxation and to avoid unintended tax consequences.