VAT liability

VAT liability arises when the following conditions are met:

• The business conducts independent economic activity;
• Goods or services are supplied for consideration (with a specific recipient and payment);
• The supply is made by a taxable person acting in that capacity;
• The supply is not exempt from VAT;
• The supply is made within the European Union; and
• The taxable turnover exceeds the registration threshold (currently DKK 50,000 pr annum).

Accordingly, one is under a legal obligation to register for VAT and to submit VAT returns if, in the ordinary course of business, one supplies taxable goods or services.

Some businesses provide both VAT-liable and VAT-exempt services, making it critical to determine when VAT liability applies. This consideration is not limited to private enterprises but may also apply to other entities.

It may appear obvious that a business would seek to minimize its VAT liability. In some cases, this may be achieved by establishing that a particular supply is not subject to VAT or by structuring operations to optimize output VAT.

This is frequently seen, for example, in relation to exemptions on transfers of real property, municipal subsidy models, or cross-border trade arrangements.

However, it is not uncommon for businesses to have an interest in becoming VAT-liable at an early stage. While this may seem counterintuitive, one must bear in mind that VAT can also represent liquidity flowing into the business. This may be particularly relevant during the establishment phase, when turnover is still limited. Unlike tax deductions, VAT input deductions can generally be claimed if one intends to establish a VAT-liable business and incurs VAT-bearing expenses in that process.

In practice, this can apply to investments in VAT-liable real property or machinery well before VAT-liable turnover is generated. In such scenarios, substantial VAT refunds may be obtained before the first invoice is issued to a customer.

Thus, VAT liability can translate into cash flow for startups. It is not uncommon for VAT disputes to center on businesses seeking to be recognized as VAT-liable to receive VAT refunds.

In other circumstances, however, there may be a clear interest in keeping an entity entirely outside the VAT system – for example, in the case of a holding company, a non-profit organization, a foundation, or an association.

Please feel free to contact us for advice on VAT liability – whether the matter concerns ordinary, straightforward VAT issues or requires more in-depth and specialized counsel.