It now seems that the tax relief available under section 33 A of the Danish Tax Assessment Act will be abolished in the near future. This means that Danish businesses which send employees to work in other countries should review their secondment policies and contracts and cost accounts, and assess the business and tax implications of the change in tax law. Businesses should also identify and consider alternatives and decide how to brief affected employees.

Background

In connection with the tax reform agreed in June 2012, the Danish government proposed to abolish the special rule in section 33 A of the Tax Assessment Act which for many years has exempted Danish employees from paying Danish tax on income earned while working abroad for more than six months, subject to certain conditions.

In many cases, the foreign country has either not taxed the employee's income or taxed it at a relatively low rate compared to Danish tax rates. Businesses and their employees have therefore been able to profit from low taxes on salary income even in cases where the employee and his/her family were resident in Denmark.

This summer, a large number of businesses, employers' associations and trade unions have lobbied intensely for a preservation of the special rule. However, the bill abolishing the rule was introduced on 14 August 2012 and it seems that the change of law will become a reality.

The new rules

After abolishment of section 33 A of the Act, Danish taxpayers will be liable to pay Danish tax on all income, whether earned in Denmark or abroad. If the income is also taxed in the foreign country, a reduction of the Danish tax will, as a general rule, only be granted in respect of the tax actually paid on the salary abroad.

In practice, this means that salary income will always be subject to Danish tax at the general rate - or any higher rate applicable under a foreign tax regime (however only a few countries have a higher tax rate than Denmark).

Special rules may apply to persons working in Sweden, Norway and Germany as a result of double taxation treaties.

When?

The bill and a number of other tax reform proposals are expected to be passed on 13 September 2012 following a fast-track review process.

The bill contains a transitional rule allowing persons who are working abroad at the effective date of the bill to continue to benefit from the tax privilege until the end of 2013. Accordingly, any business contemplating the secondment of employees should consider accelerating the secondment so that it starts at the beginning of September 2012 at the latest if possible. However, the transitional rule will not apply after the end of 2013 even if the secondment commenced prior to the effective date of the bill.

HR challenges

In principle, employers do not have an obligation to compensate employees for the new tax rules. However, it may be a requirement in certain circumstances. Further, it may also be necessary to renegotiate remuneration packages to retain and provide an incentive for the right employees.

Some employers guarantee their employees a specified net salary in the secondment period and increased taxation will thus result in higher costs for the employer. If, for costs reasons, a business wishes to remove a net salary guarantee, it must notify the relevant employees of the change of the employment terms. The minimum notice period must correspond to the employees' usual notice of termination. Further, the employees may decide to consider themselves as being dismissed by the employer. The employer may seek to keep the employee by offering other (tax-exempt) benefits or other more favourable terms to achieve the employees' acceptance of the removal of the net salary guarantee.

Employers should also review and adjust their secondment policy in general. Will more favourable secondment terms be required to motivate employees to work abroad, or should the employer realise that only employees who are ready to fully give up their tax residence in Denmark will accept secondment on the terms offered by the employer?

Businesses should consider these issues now in order to be prepared for questions from seconded employees that are likely to arise when the bill has passed and there is additional media focus. Employers should determine how they will handle the change in law, how this should be communicated to the affected employees and prepare their managers for questions that may be raised.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.