Peter Madsen, 46, denies the killing, saying he had dropped the woman off in Copenhagen before the sinking.
Kristian Isbak, who had responded to the Navy’s call to help locate the ship, sailed out immediately Friday and saw Madsen standing wearing his trademark military fatigues in the submarine’s tower while it was still afloat.
“He then climbed down inside the submarine and there was then some kind of air flow coming up and the submarine started to sink”, Isbak said.
Prosecutor Louise Pedersen said Madsen faces the preliminary manslaughter charge “for having killed in an unknown way and in an unknown place Kim Isabell Frerika Wall of Sweden sometime after Thursday 5 p.m”.
Thirty-year-old freelance journalist Kim Wall was doing a story on the submarine.
A salvage vessel, the Vina, on Saturday raised the submarine, which was seven meters (23 feet) under water off Copenhagen’s south island of Dragoer.
“Whether the woman was on board the submarine at the time of her disappearance is unclear”, police said.
Wall had been writing about Madsen and his submarine and was reported missing by her boyfriend, Danish tabloid Ekstra Bladet reported.
However, when she failed to return home later that day, her anxious boyfriend contacted the authorities, which led to a full-scale search for the submarine in the early hours.
Nautilus, named after the ship from the classic science fiction novel Twenty Thousand Leagues Under the Sea, was built by Mr Madsen after raising $200,000 (£154,000) online.
Two helicopters and three ships scoured the Baltic Sea waters between Copenhagen and the island of Bornholm.
The authorities have not yet been able to access the vessel, known as the Nautilus, which lies on the seabed in Koge Bay, south of Copenhagen.
“He told us that the journalist who also had been on board had been dropped off Thursday evening”, navy spokesman Anders Damgaard said.
Before his arrest, Madsen told TV2 that the submarine sank when a minor ballast problem rapidly escalated and sunk the boat.
“I am fine, but sad because Nautilus went down”. “But I guess that was pretty good, because I otherwise still would have been down there”.