Martin Henriksen of the anti-immigration Danish People's Party, which supports Denmark's center-right government, told The Associated Press that the government's move "is a signal to the world that Denmark is not attractive" for migrants.
The isolated island of Lindholm was until this summer a laboratory facility for the state veterinary institute researching contagious animal diseases.
From 1926 until earlier this year, cattle and pigs suspected of having contagious diseases were brought to the island, some 80 kilometers (50 miles) south of Copenhagen, to be tested.
The plan, adopted Friday by the government and the Danish People's Party that between them hold a majority in parliament, is to decontaminate the uninhabited island by late 2019 and open facilities for some 100 people in 2021.
The facilities would house migrants who have been denied asylum but cannot be deported, and those with criminal records.
Human rights activists have denounced the decision, calling it degrading and inhumane.
"We demand that the government and the Danish People's Party stop their plans (for the island) and improve the conditions for all rejected asylum-seekers in Denmark," said Steen D. Hartmann of the online movement "Stop Diskrimination."
Denmark has two deportation centers - north of Copenhagen and in western Denmark - which Hartmann called "inhumane and terrible."
Henriksen, an immigration hardliner, said Denmark's decision was somewhat inspired by Australia, which is paying neighboring Pacific island nations to hold asylum -eekers who have attempted to reach Australian shores.
In recent years, Denmark has tightened its laws for immigrants, extending from one year to three the period that family members must wait before they can join a refugee in Denmark, reducing benefits for asylum-seekers, shortening temporary residence permits and stepping up efforts to deport those whose applications are rejected.
In 2016, a law allowed the country's authorities to seize valuables from migrants to help finance the costs of their stay. Danish citizens also must sell valuables worth more than 10,000 kroner ($1,520) before they can receive any government welfare benefits.
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