Areas of Strength

• According to the European Commission’s estimates, Denmark has the lowest corporate income tax (CIT) gap among Member States for which estimates are available. Denmark has a comprehensive tax gap program in place and estimates CIT and personal income tax (PIT) gaps using a bottom-up approach. However, results are not published, limiting transparency on the matter.
• Denmark is well advanced in the digitalisation processes of its tax administration, with efiling rates at or close to 100% across all tax types since 2018 and a digital transformation strategy in place. The Danish tax administration also uses AI systems to detect risk and encourage compliance. This allows for more effective resource allocation within the tax administration and appears to have increased levels of voluntary tax compliance. Moreover, Denmark relies on machine learning and the use of algorithms for a wide range of functions, including for the risk assessment of taxpayers and property value evaluations.
• At 40%, Denmark’s VAT policy gap was significantly lower than the EU average of 51% in 2023. Moreover, Denmark has the lowest VAT rate gap in the EU which is the portion of the VAT policy gap resulting from revenues lost due to reduced VAT rates (at less than 1% compared to 12% EU average). Very few exceptions aside, Denmark does not have reduced rates in place, greatly simplifying the VAT system and minimising the related policy gap.
• The fiscal impact of tax expenditures is relatively limited. A total of 122 tax expenditures represented approximately 2.4% of GDP. While many underlying tax provisions are evaluated and occasional reports examine the effectiveness of specific tax expenditures, a formal and standardised process for regular tax expenditure evaluations is not in place.

Areas for Improvement

• While tax arrears are below the EU average, recoverable tax arrears in Denmark have only slightly increased by 4.9 percentage points between 2018 and 2023 to 29%. There is also a significant delay in settling tax disputes for corporate tax assessments, with an average time of 326 days (no change between 2021 and 2024) which likely has a negative impact on tax recovery.
• The PIT gap is highly concentrated in self-reported income in Denmark. 62.8% of undeclared work comes from self-employed. There is scope for Denmark to tackle this issue by developing a coordinated national approach, continuing to conduct inspections on sectors prone to undeclared work e.g. construction, agriculture and home repairs, and providing more incentives to make declared work easier, especially for sectors where self-reported income is common.

Tax Complexity

Denmark ranks 12^th out of the 27 Member States in the Tax Complexity Index (‘TCI’), where a higher rank corresponds to lower tax complexity. The TCI is based on the Global MNC Tax Complexity Project, a joint research project of Deborah Schanz (LMU Munich) and Caren Sureth-Sloane (Paderborn University). The TCI measures tax complexity for CIT and in 2024 ranked Denmark 6^th among the Member States with regards to Tax Framework Complexity, and 23^rd with regards to Tax Code Complexity. This may indicate that whereas the tax processes carried out by the tax authorities are rather efficient (notably in the area of payment and filing, according to the authors of the TCI), there is room to improve the structure of the tax regulations (particularly in the area of general anti avoidance, according to the authors of the TCI).

The full Commission Staff Working Document of the Mind the Gap Report - Challenges and opportunities for tax compliance and tax expenditure in the EU regarding Denmark can be found here.

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