Most people will probably experience taking out a loan in their lifetime. Whether for house, car, travel or anything else. A natural part of borrowing money is paying interest. An interest rate is the current cost of borrowing money. The interest rate is set based on
lender (banks and loan providers) risk. The greater the risk, the higher the interest rate.
Fortunately, in Denmark, it has been decided that all citizens have the opportunity to receive a tax deduction for their interest rates, ie an interest rate exemption.
What is interest deduction?
An interest deduction is a tax deduction. In other words, it means that you get a “tax rebate” if you have taken out a loan with interest payments.
You receive interest deductions for the following loans:
- Bank loans
- Mortgages (Both for interest and contributions)
- Consumption loans from a finance company
- Credit card scheme (Credit card for example)
- Interest on public debt
There are also few loan types that are not deductible. However, there are some very special types of loans that a few of the Danish citizens have.
How do you report your interest payments?
All banks, finance companies and mortgage lenders have disclosure obligations to SKAT. In short, this means that your interest payments will be reported automatically. So you do not have to do anything active to get your interest rate exemption.
There are a few cases where you have to report your interest payments yourself, such as
- Deductible interest on private debt
- Difference rates when you repay or reschedule a mortgage
- Interest on debt abroad
How is the interest deduction calculated?
When talking about interest deductions, there are two sastas you need to know.
If your total interest payments are less than DKK 50,000, the interest deduction is 33.6%.If your total interest payments are over DKK 50,000, the interest deduction is 27.6%.
When calculating the real value of one’s interest deduction, one talks here about the tax value. The tax value depends on how much you pay in taxes.
For example, if you pay top tax, the tax value of an interest deduction will be higher.
Example of calculating an interest deduction
To put it simply, you can say that if you had interest payments of DKK 25,000 in 2018, your tax deduction would be:
25000 * 0.336 (Deduction rate below 50,000) = SEK 8,400.
You will thus in effect have obtained a tax rebate of DKK 8,400 which will be deducted from your taxable income.