Expatriate tax ebook - Denmark

Basis of taxation

Charge to tax
Residence
Income from employment
Source of employment
Benefits (in kind)
Expatriate concessions
Relief for foreign taxes
Deductions against income

Charge to tax
An individual Danish resident is liable to pay taxes in Denmark based on his / her worldwide income (full tax liability).

An individual is liable to pay taxes in Denmark when he / she receives payment from a Danish employer in Denmark and does not obtain residence in Denmark (limited tax liability).

Limited tax liability may also arise when a foreign employee carries out paid work in Denmark for a foreign employer. If the conditions in the OECD Model treaty of hiring out of labour are met, a non resident is likely to be taxed in Denmark, despite the treaty exemption.

• The individual has a permanent residence in Denmark
• The individual’s stay in Denmark exceeds 6 consecutive months or more. However, short stays abroad due to vacation or the like do not interfere with the 6-month rule. Full tax liability arises when the stay commences.

Nonresident individuals are subject to pay national tax, including health care contribution and social security contribution, and an average municipal tax (currently 24.9 %) on Danish sourced income.

Source of employment
Salary paid for services performed in Denmark will usually be regarded as limited tax liable income if performed for a Danish employer. It is the actual work performed that is important and not the place where the contract has been signed.

Benefits (in kind)
The main rule is that benefits are subject to tax. It is the expatriate who is liable to pay tax on benefits.

Expatriate concessions

Under certain conditions, foreign executives (key employees) working in Denmark for limited periods may qualify for a flat 25 % or 33 % income tax rate on their earnings. This 25 % / 33 % tax scheme is an optional tax that the executive may choose instead of the normal Danish progressive taxation of personal income.

The 25 % taxation scheme can be chosen in one or more periods for a total of 36 months, while the 33 % taxation can be chosen in one or more periods for a total of 60 months. The tax is calculated on the gross salary after social security contributions have been deducted. No further deductions are granted.

In brief, the conditions are:

• The foreign executive must have a Danish employer (a foreign company’s permanent establishment in Denmark is also considered a Danish employer)
• The foreign executive must become fully tax liable to Denmark or limited tax liable at commencement of the employment
• Three years prior to the employment, the foreign executive must not have been subject to full nor limited tax liability to Denmark of cash salary, income from self-employment etc.
• Five years prior to the employment, the foreign executive must not have had direct or indirect control of or significant influence on the employing company
• The foreign executive’s salary amounts to a minimum of DKK 63,800 per month in 2010 (DKK 765,600 in annual pay) after social security contributions and ATP (labour market supplementary pension scheme) contributions. If the foreign executive is not exempted from social security contributions, the salary must amount to a minimum of DKK 69,348
• For a foreign executive who has previously been tax liable to Denmark, it is also a condition that he has not previously been employed by the employing company or by any affiliated company of the employing company, including employment in any foreign affiliated company, within a period of three years prior to and one year after discontinuation of his / her tax liability to Denmark. The condition will be considered met if the foreign executive has not been employed by the company or an affiliated company of the employing company within three years prior to employment under the 25 % / 33 % taxation scheme

Relief for foreign taxes
Denmark has signed agreements with a large number of countries to alleviate double taxation of income including remuneration. Some treaties also provide relief for pensions contributions.

Deductions against income
In Denmark, deductions in taxable income are granted if the expenses are held to gain, secure and maintain the income. In addition to this there are special rules regarding a number of deductions. Paid interest is fully deductible in income which is subject to the local taxes, but not in income subject to state tax. The average value of the deduction is 33.5% including church tax. In general, expenses related to salary income are only deductible for the amount that exceeds DKK 5,500 in total. Some expenses, i.e. transport, trade union contributions and unemployment insurance premiums are not reduced by the DKK 5,500. Under certain conditions, individuals only limited tax liable to Denmark may be treated as fully tax liable individuals and be granted the same deductions as fully tax liable individuals.

Information about Denmark: