Many people dream of buying a vacation home abroad, and some of them are serious about it. A few years ago, the demand for vacation homes in Denmark increased significantly, with prices rising by double-digit percentages in some areas. This trend has also been seen in some popular foreign vacation destinations, such as the Cote d'Azur. But what should you pay extra attention to when buying a vacation home abroad?
You need to be careful when buying a vacation home abroad. Legislation varies from country to country, so it's important to seek competent, local advice from trusted advisors with knowledge of the real estate market, property law and financial matters. It's also necessary to seek insight into applicable tax rules, including property value tax, taxation of rental income and taxation on the sale of the property, both in Denmark and in the country where the holiday home is located.
It is the use of the holiday home that determines the tax consequences of home ownership in Denmark. Therefore, it's important to have the purpose of the vacation home purchase clearly defined to avoid unpleasant surprises.
If the holiday home is acquired for business purposes and is used exclusively for rental purposes, no property value tax is payable in Denmark. This is because the holiday home is categorized as a rental property for tax purposes. However, the profit before interest from the rental must be included in the personal income.
If you are self-employed, you can use the special business tax scheme. This means that interest expenses on loans for the purchase of a home have a higher deductible value than otherwise, and the profit from the rental can be saved for a provisional tax on account of only 22%.
The homeowner must be able to document that the holiday home is not used for private use in order for the business tax scheme to apply. In order to meet the documentation requirements, it is normally required as a minimum that the holiday home is rented out through a rental agency and where the contract with the homeowner clearly documents that the homeowner neither can nor will use the home themselves.
If the homeowner rents their own home through the rental agency, this is considered private use and the corporate tax scheme cannot be used.
If you only use the home privately, Danish rules do not allow tax deductions for operating costs.
Interest expenses on loans for the purchase of a holiday home are tax deductible as long as the loan can be accommodated within the value of the home. This also applies even if the loan is through a bank outside Denmark. If the loan is in foreign currency, any exchange losses are generally also deductible, while exchange gains are taxable.
If you wish to use the holiday home both privately and for rental, the profit from the rental must be included in the income statement in Denmark as capital income. The corporate tax scheme cannot be used for mixed use.
Profit can be calculated using two methods; the accounting method and the so-called 40% rule.
According to the accounting method, the profit must be calculated on the basis of actual income and expenses. You must pay property value tax for the period in which the property has not been rented out.
If you use the 40% rule, there is no tax deduction for any operating expenses related to the property. However, the first DKK 11,900 (2022) is tax-free, and you only need to include 60% of the excess gross rental income when calculating your income. You must pay property value tax for the entire year.
If the rental is done through a rental agency that reports the rental income to the Danish Tax Agency, the basic deduction is DKK 43,200 (2022).
If the acquisition of a foreign holiday home is purely for business purposes, you can consider buying it through a Danish or foreign company. If a main shareholder uses the property, it will generally trigger taxation in Denmark of an amount corresponding to an annual tax of 16.25% of the market value of the holiday home. The amount is reduced by the rent paid to the company for the use of the property. It is therefore very rarely an advantage to buy a privately used foreign holiday home through a company.
In France, special rules apply to homes owned through a transparent company called an SCI (Société Civile Immobilière). This can result in savings on transaction taxes and inheritance and gift taxes on succession and, in some cases, wealth tax if the acquisition is structured and financed correctly at the time of purchase.
Similar rules may apply in other countries, which emphasizes the importance of researching rules and options before purchasing a holiday home.
If you want to sell the holiday home, the taxation of any profit from the sale will depend on what the home has been used for.
If the property has been used in whole or in part for private purposes, a profit can generally be tax-free in Denmark. In practice, the so-called semi-detached house rule also applies to foreign properties. You should therefore be aware that taxation may apply if the plot exceeds 1,400 square meters and the plot can be subdivided.
If the property has been used exclusively for business purposes, the profit must be included in the income statement and taxed as capital income. If the property is included in the corporate tax scheme, the sale is included in this, and the tax consequences are slightly more complicated.
Regardless of the country in which the holiday home is located, local property taxes and in some countries also wealth tax corresponding to the Danish property value tax will usually be payable.
If the property is used wholly or partially for rental purposes, tax will generally be payable on the profit. If the property is sold, in many countries tax will also be payable on any profit. In some countries, the gain is tax-free if the property has been owned for a number of years.
As stated above, there may be cases where profits from rentals and gains from sales will have to be declared and taxed both in Denmark and abroad. However, Denmark has entered into double taxation treaties with more than 80 countries on how to proceed in such cases. When it comes to real estate, the primary right of taxation almost always belongs to the source country. Under the treaty, Denmark grants a rebate for the tax levied in the source country.
In addition, the Tax Assessment Act allows for relief for tax paid abroad. In 2007, Denmark unilaterally terminated the double taxation treaties with France and Spain, but from January 1, 2023, a new treaty with France will enter into force. If you were fully taxable in Denmark on November 28, 2007 or earlier and owned a holiday home in France, you were covered by a transitional rule under which you were still exempt from paying property value tax in Denmark on this property. If you acquired a holiday home in France after this date, the general rules in the Danish Tax Assessment Act on reductions apply until January 1, 2023, when the new treaty comes into force.
Danish property value tax must be paid according to the same rules that apply to Danish holiday homes. If local wealth tax has been paid on the property, this can be offset against the Danish property value tax. The change in future housing taxation will therefore also affect the property value tax on foreign properties.
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