The Danish flag, the Dannebrog, "is the most important national symbol", Justice Minister Peter Hummelgaard said in a statement, adding that "the flags of other countries cannot be freely flown".
Hummelgaard said foreign flags would not be banned, and could be used for sporting, demonstrations and other events.
The law will also not cover the flags of Nordic countries, Greenland, the Faroe islands, Germany and international organisations. Embassies will also be allowed to fly their countries' emblems.
The restrictions are due to take effect on January 1 after a parliament vote. There has been a debate on the issue since a court case was started against a Danish man who flew the US Stars and Stripes in his garden.
Denmark's supreme court ruled that he was free to do so as a 1915 ordonnance could not be applied. The government then scrapped the ordonnance, leading lawmakers to draw up a new bill.
