Partial VAT deduction — when and how

The core rule of Danish VAT is simple: if you have taxable activities, you may deduct input VAT on purchases that relate to them. If you have exempt activities (e.g. financial services, education, healthcare), you may NOT deduct input VAT on purchases that relate to them. But what do you do if a purchase relates to BOTH — for example office rent, electricity, telephone, bookkeeping, accounting services? That's where Momsloven §38 comes in. It says: for purchases used for both taxable and exempt activities (shared costs), you may only deduct a proportional share of the VAT. The share is calculated as the ratio of your taxable turnover to your total turnover. A concrete example: a business sells 70% software (taxable) and 30% financial advisory (exempt). Their deduction percentage on shared costs is 70%. So for office rent of DKK 10,000 + DKK 2,500 VAT, they may only deduct DKK 2,500 × 70% = DKK 1,750 as input VAT. The rest (DKK 750) becomes a cost the business must bear itself. It sounds simple, but the complexity is in the details — and in the details, businesses typically make mistakes.

Many Danish businesses have mixed activity without thinking about it. Here are some typical examples: holding companies with service activities — a holding company that both receives dividends (exempt) and provides management services to subsidiaries (taxable). Course providers — that offer both professional/vocational training (taxable) and general/private teaching (exempt, Momsloven §13). Healthcare businesses — clinics where doctors and therapists both treat patients (exempt healthcare) and sell products, consulting or wellness services (taxable). Financial services — banks, mortgage institutions and insurance companies nearly always have mixed activity, since their core services are exempt while ancillary services and rentals can be taxable. Real estate — residential rental is exempt, but commercial-property rental can be taxable (via voluntary registration), and many property companies have both. Agriculture — with both farm production (taxable) and tourism/experiences (often taxable but under special rules) or leasing (which may be exempt). If you're unsure whether your business has mixed activity, look at your turnover: does it contain both Rubric A, B, C sales AND an 'exempt turnover' field or similar? If yes, you probably need to calculate partial deduction.

The formula is straightforward: Deduction ratio = Taxable turnover / Total turnover. But both numbers need explanation. Taxable turnover includes: ordinary domestic sales at 25%, zero-rated sales to EU customers (B2B, Rubric B), zero-rated sales to third countries (export, Rubric C), and reverse-charge sales to EU customers. All of these are taxable even if they don't charge 25% VAT — they count in the numerator. Taxable turnover excludes: exempt activities (Momsloven §13: healthcare, education, financial services, insurance, residential-property rental). These must NOT be included — that's the entire point of partial deduction. Total turnover is the sum of taxable and exempt turnover. Important note: financial activities as ancillary transactions (e.g. interest income from the company bank account) should not be included in the total unless they constitute a systematic activity. The rules on when financial activity is 'ancillary' vs. 'core business' are complex, and this is where MomsGate's automatic classification is particularly valuable. The result is rounded UP to the nearest whole percent. So if your calculated ratio is 67.3%, your deduction percentage becomes 68%. Rounding is always in the business's favour.

An often-overlooked aspect of partial deduction is that you don't know your final ratio until the year is over. So how do you file monthly or quarterly moms returns during the year? The solution is the preliminary rate. Practice is that you use the previous year's final rate as the preliminary rate throughout the current year. If your business's 2025 ratio was finally set at 72%, you use 72% as the preliminary rate on all moms returns during 2026. After year-end, you calculate the actual ratio for 2026 based on the full year's turnover. Say the final 2026 ratio is 68% (because the share of exempt activity rose slightly). The difference between preliminary (72%) and final (68%) must be adjusted. For every krone you deducted at 72%, you should actually only have deducted 68%. The surplus must be repaid to SKAT as a correction entry. This year-end adjustment typically happens in Q1 of the following year, once the annual accounts are closed and the numbers are certain. MomsGate tracks both the preliminary and the running current ratio throughout the year, so you can always see how much your preliminary rate deviates from your actual trajectory. If the deviation grows large during the year (e.g. if exempt turnover suddenly grows dramatically), MomsGate can warn you so you can adjust preliminarily or reserve liquidity for a large year-end adjustment. When the year ends, MomsGate automatically generates the adjustment entry and can file it directly with SKAT.

Partial deduction is a minefield of errors — here are the five most common we see: (1) Forgetting to include EU sales as taxable. Zero-rated sales to EU B2B customers ARE taxable, even though no 25% VAT is charged. They belong in the numerator. Many businesses exclude them by mistake and end up with too low a deduction ratio (and hence too little deduction, which they pay for themselves). (2) Ignoring reverse charge in the denominator. Service sales to EU B2B customers with reverse charge count as taxable turnover. Forgetting them skews the ratio. (3) Using gross turnover instead of net turnover. Turnover in the §38 formula must be exclusive of VAT (i.e. net). Using gross figures gives systematically wrong ratios. (4) Applying the ratio to energy tax. Energy tax deductions follow THEIR OWN rules (industry-based, not ratio-based). Applying the §38 ratio to elafgift or vandafgift is an error — these are deducted either fully, half, or not at all, depending on industry. (5) Forgetting the year-end adjustment. The preliminary rate is an estimate. Without year-end adjustment, you get either too much or too little deduction, and SKAT will always correct it at audit. MomsGate avoids all these errors systematically: EU sales and reverse charge are classified correctly automatically, turnover is pulled net from e-conomic, energy taxes are kept separate from the §38 calculation, and the year-end adjustment is generated automatically in January/February.