The plant will be located next to the company's existing protein facility in Jutland, and will produce 85,000t of lactose annually.
Arla Foods stated that the facility will meet the growing demand for lactose in the infant formula market, while following strict quality standards.
The construction is slated to be completed by October 2014, and the plant will go onstream in 2016.
The new facility, together with Arla Foods Ingredients' existing joint-venture lactose plants in Germany, is expected to boost the company's total lactose volumes to approximately 135,000t annually.
Arla Foods Ingredients CEO Henrik Andersen said that this investment indicates that the company remains committed to supplying high-quality products to the global nutrition and food industry.
"We have had a very constructive dialogue with a number of leading customers regarding their future demands for lactose quality, and our new plant will deliver on these demands," Andersen added.
Lactose, also called milk sugar, is a natural component from milk, and is extracted from whey by evaporation and crystallisation.
It is commonly used in foods such as infant formulas, chocolate, confectionery and bakery products.
Arla Foods Ingredients, headquartered in Denmark, develops and manufacturers milk-based ingredients including functional and nutritional milk proteins, bioactive phospholipids, minerals, permeate and lactose for the food industry.
The company operates a production facility in Denmark, with joint venture facilities in Argentina and Germany.
