What Are the Bookkeeping Obligations for Sole Proprietors (ENK) in Denmark?

Starting a business as a sole proprietor (Enkeltmandsvirksomhed – ENK) in Denmark is a popular choice due to its simplicity and low administrative burden. However, even though sole proprietors face fewer requirements than larger companies, they must still comply with Danish bookkeeping and tax regulations. In this article, we will explore the bookkeeping obligations for sole proprietors, including legal requirements, record-keeping rules, VAT obligations, reporting deadlines, and practical bookkeeping solutions.

1. Legal Framework for Sole Proprietors in Denmark

In Denmark, the accounting and bookkeeping obligations for sole proprietors are regulated by several laws, including:

• The Danish Bookkeeping Act (Bogføringsloven) – Specifies how businesses should record transactions.
• The Danish Financial Statements Act (Årsregnskabsloven – ARL) – Mostly applies to larger businesses but contains general principles that sole proprietors should follow.
• The Danish Tax Act – Governs tax reporting and financial record requirements.

While sole proprietors (ENK) have more relaxed financial reporting obligations than limited companies, they still need to maintain accurate records to comply with tax laws and avoid penalties.

2. Bookkeeping Requirements for Sole Proprietors

A sole proprietor is required to keep detailed and organized bookkeeping records that reflect the financial transactions of the business. The main bookkeeping obligations include:

• Recording all business transactions – Every income and expense must be documented with proper invoices or receipts.
• Maintaining a structured chart of accounts – This helps categorize different types of revenue and costs.
• Keeping financial records for at least five years – The Danish Tax Agency (Skattestyrelsen) may request old records for audits or tax assessments.
• Using electronic or manual bookkeeping systems – Businesses can use accounting software or spreadsheets, but records must be accurate and up to date.

Proper bookkeeping ensures that business finances remain organized and helps avoid legal or tax issues.

3. VAT (Moms) Obligations for Sole Proprietors

One of the most important financial aspects of running a sole proprietorship in Denmark is VAT (Moms) compliance. A sole proprietor must register for VAT if the business meets certain conditions.

When Does a Sole Proprietor Need to Register for VAT?

• If the annual turnover exceeds DKK 50,000, VAT registration is mandatory.
• If the turnover is below this threshold, VAT registration is optional, but many businesses choose to register to claim VAT deductions.

VAT Rates and Filing

• Standard VAT rate: 25% (applies to most goods and services).
• Reduced VAT rates: Some specific services or goods may qualify for lower or zero VAT rates.
• VAT reporting: Sole proprietors must submit VAT returns monthly, quarterly, or semi-annually, depending on their business size.

Failure to file VAT returns on time can lead to penalties and interest charges.

4. Income Tax and Personal Tax Obligations

Since an ENK is not a separate legal entity, the business owner is personally responsible for paying income tax on the business’s profit. The key tax obligations include:

• Advance tax payments (B-Skat) – Sole proprietors must make estimated tax payments throughout the year.
• Personal income tax filing – At the end of the financial year, the business’s net income is reported on the owner’s personal tax return.
• AM-bidrag (Labor market contribution) – A mandatory 8% contribution applied to all taxable income.
• Tax deductions – Business-related expenses such as rent, office supplies, and equipment can be deducted to reduce taxable income.

Proper bookkeeping ensures that tax calculations are accurate, preventing issues with the Danish Tax Agency.

5. Deductible Business Expenses for Sole Proprietors

One of the benefits of keeping good bookkeeping records is the ability to claim deductions. A sole proprietor in Denmark can deduct various business expenses, including:

• Office expenses – Rent, utilities, and maintenance costs.
• Work-related travel – Fuel, mileage, and public transport for business trips.
• Business meals and entertainment – Only a portion of these costs is deductible under Danish tax laws.
• Marketing and advertising – Costs for online ads, social media promotion, and printed materials.
• Professional services – Fees for accountants, consultants, and legal services.
• Equipment and tools – Computers, office supplies, and machinery.

By keeping accurate records, a sole proprietor can maximize deductions and reduce tax liability.

6. Payroll and Salary Considerations

A sole proprietor cannot pay themselves a salary in the traditional sense, as all profits from the business are considered personal income. However, if they hire employees, they must:

• Register as an employer with Skattestyrelsen.
• Withhold A-tax and AM-bidrag from employees’ salaries.
• Submit monthly payroll reports (eIndkomst) to the tax authorities.

For sole proprietors without employees, profits are withdrawn as personal income rather than salary.

7. Digital Bookkeeping and Accounting Software

Denmark encourages businesses to adopt digital bookkeeping solutions to streamline financial management. Many sole proprietors use accounting software such as:

• Dinero – A popular choice among small businesses for managing invoices and taxes.
• Billy – Easy-to-use bookkeeping software with automatic tax calculations.
• e-conomic – A more advanced system suitable for growing businesses.

Benefits of using bookkeeping software:

• Automated invoice generation
• Easier VAT reporting
  
• Real-time financial tracking
  
• Integration with bank accounts

Using digital tools reduces human errors and simplifies compliance with Danish bookkeeping laws.

8. Financial Reporting Deadlines

A sole proprietor must comply with several financial reporting deadlines throughout the year. The most important ones include:

• VAT Returns – Monthly, quarterly, or semi-annual submissions depending on business size.
• Personal Income Tax Return – Due by May 1st each year.
• Advance Tax Payments (B-Skat) – Scheduled payments throughout the year.

Failure to meet these deadlines can result in fines and interest penalties.

9. Common Bookkeeping Mistakes and How to Avoid Them

Many new sole proprietors struggle with bookkeeping. Some of the most common mistakes include:

• Mixing personal and business finances – Always use a separate business bank account.
• Forgetting to record small transactions – Keep all receipts, even for minor expenses.
• Not backing up financial records – Store digital copies of invoices and receipts.
• Missing VAT deadlines – Use reminders or accounting software to stay on track.
• Overlooking tax deductions – Keep records of all business-related expenses to lower tax liabilities.

By staying organized, a sole proprietor can avoid tax issues and maintain financial clarity.

10. Advantages of Hiring an Accountant

While bookkeeping for sole proprietors is generally simpler than for companies, many business owners choose to work with an accountant. The benefits of hiring a professional include:

• Ensuring compliance with tax laws
• Avoiding penalties for late filings
• Optimizing tax deductions and expenses
• Saving time on financial administration

For businesses with complex financial transactions, an accountant can be a valuable investment.