The following tax planning points should be considered in connection with an assignment to Denmark:
- For foreigners who stay in Denmark for a limited period of time a special tax regime may apply, resulting in a flat 25% tax on income received from a Danish employer.
- Provided that an assignee working in Denmark has a foreign employer, it may be possible to avoid Danish income tax in the years of arrival and departure, according to a 183-day rule in relevant double taxation treaties. However, it is necessary that the assignee is considered resident abroad.
- For a short-term assignee, it may be possible to avoid Danish taxation of foreign income, if the assignee can be considered resident abroad in accordance with the provisions in a double taxation treaty regarding fiscal domicile.
- Investments in shares, bonds and real estate should be reviewed before the assignee goes to Denmark. The disposal of shares and real estate may be taxable if occurring during the assignment period in Denmark.
- The remuneration package should be structured in a tax-efficient way. Remuneration for work outside Denmark may entitle to reduced taxation. Company-provided housing is often taxed beneficially, except in the cases of managing directors and highly paid assignees. A free company car is a taxable benefit, and the taxable value is fixed as a percentage of the purchase price of a new car irrespective of the extent of private use of the car.
- Contributions to non-Danish pension schemes are generally not advantageous from a Danish tax point of view.
- A standard deduction calculated as DKK 8,000 plus 5 per cent of gross salary is available for a short-term assignee whose salary is received directly from a foreign employer, provided that the stay in Denmark is expected not to exceed three years.
- A foreign employee working in Denmark can often benefit from the low Danish social security taxes. A Danish resident working outside Denmark may also continue to pay Danish social security taxes provided that certain conditions are fulfilled.
II ENTRY AND DEPARTURE FORMALITIES
a) Residence
Citizens of Finland, Iceland, Norway and Sweden may enter and reside in Denmark without any permission.
Foreign residents subject to the EU regulations (including Austria) may without permission enter and reside in Denmark for up to three months from the entry. If the stay exceeds three months, a residence permit is required. The residence permit is granted upon application.
As a basis, all foreign visitors other than the above must have a visa in order to enter and reside in Denmark. A visa will normally grant an entry with the right to reside in Denmark for three months.
A required residence permit must be obtained prior to taking up residence in Denmark.
Anyone taking up residence in a Danish municipality must register with the municipal authorities within five days from the entry. Exempt from this are only individuals who will reside in Denmark for less than three months. Individuals entering from a Nordic country are only obliged to register if the residence is expected to last for more than six months.
Anyone giving up his residence in a municipality to go abroad is obliged to deregister with the municipality in which he resides before leaving Denmark.
b) Work
Foreign residents must, as a principal rule, obtain a working permit in order to have employment in Denmark.
However, citizens from another Nordic country, foreigners subject to the EU regulations (including Austria) and foreigners granted indefinite residence permits are exempt from the working permit requirement.
A required working permit must be obtained before taking up residence in Denmark.
III SCOPE OF TAXATION AND RESIDENCE
1. Introduction
Danish tax legislation distinguishes between full tax liability for resident taxpayers and limited tax liability for non-resident taxpayers. Residents are liable for income tax on their world-wide income, whereas non-residents are only subject to income tax on specific types of income from Danish sources.
2. Resident Taxpayers
A status as resident taxpayer will arise in any of the following circumstances:
a) An individual who takes up residence in Denmark. In determining whether this criterion is met, an important issue is whether the individual has indicated his intention of becoming a resident of Denmark, i.e. by having his family in Denmark, by renting accommodation in Denmark or giving up residence in his former country of residence, or by other means.
b) An individual who leaves Denmark and has been a resident for at least four consecutive years is subject to Danish taxation for up to four years after the departure, unless the individual can document that he is subject to income tax in his new country of residence, and that the system of taxation in that country is similar to the system of taxation in Denmark.
c) An individual who stays in Denmark for a period of at least six consecutive months without taking up residence.
3. Non-resident Taxpayers
Non-residents may be subject to Danish taxation if they receive certain types of income from Danish sources.
The types of income which may become taxable in this situation are further described in chapter V.
IV TAXATION OF RESIDENTS
1. Taxable Income
a) Earned Income
All types of income from employment whether in cash or in kind are taxable. Remuneration in kind includes e.g. free housing. The taxable value of a company car and telephone is subject to withholding tax along with the cash salary if provided by a Danish employer. The taxable values of these benefits are fixed annually by the tax authorities and are for 1995 stipulated as follows:
Housing: The imputed value of employer-provided housing is based on the estimated market value.
Telephone: DKK 3,000 per year.
Company car: 21 per cent of the list price of a new car with a minimum of DKK 150,000 and a maximum of DKK 400,000 irrespective of the extent of private use. In the third year after registration, 75 per cent of the new list price is used as basis. If the car is at the employee's disposal for just one day, the employee will be taxed as if he has used the car for one month.
If the car is purchased by the employer in the third year after the year of registration, the taxable value is calculated based on the actual purchase price of the car.
Contributions made by the employer to certain pension schemes with a Danish pension fund, insurance company or bank do not become taxable for the employee.
Tax reimbursements by the employer are taxed in the year in which the income is earned, i.e. a guaranteed net pay after tax will be grossed up.
Remuneration for accepting a redundancy payment may under certain circumstances be subject to a more favourable taxation than ordinary salary.
b) Rental Value
The owner of a one-family house or a freehold apartment must include a deemed estimated rental income in his tax return. The income is usually calculated as a percentage of the publicly assessed value. Presently, the income is calculated as 2.0 per cent of the first DKK 1,483,200 and 6 per cent of the remainder.
c) Share Schemes
When a share option is granted, the employee will become subject to taxation of the benefit which may occur. Increases in value of the option until exercise will also be taxable.
Taxation of a benefit under a share purchase scheme may be avoided if the scheme is approved by the Danish Central Customs and Tax Administration. In order to obtain approval, the following conditions must be fulfilled:
1) The shares must be held in trust and may only be sold after 5 years of ownership.
2) The share option scheme must be open for all employees.
3) The shares must have the same rights as other shares in the class of shares to which the employee shares belong.
d) Interest Income
Income on bank deposits, bonds, securities or other outstanding amounts is taxable. The amounts are usually taxable in the income year in which they fall due.
e) Dividends
Dividends are taxable in the income year in which the dividends are declared. Dividends are included in "share income" and taxed along with any capital gains on shares.
f) Capital Gains in general
Whether capital gains are taxable depend on the type of asset and the period of ownership.
g) Land and Buildings
Capital gains from the sale of land and buildings are in general considered taxable income if the assets are sold within a 3-year ownership period.
The taxable gain - calculated as the cash equivalent sales price less the cash - equivalent purchase price - is reduced gradually by 5 per cent from year four to year nine. Consequently, 70 per cent of the capital gain will be taxed if the building is sold in the ninth year of ownership or later.
A loss can only be offset against a capital gain from the sale of other land and buildings within the same year or the following five years.
h) Sale of Private House
Regardless of the rules described above, a gain from the sale of a private house or a freehold apartment which has served as the owner's private abode is in most cases tax exempt.
i) Shares
A gain on the sale of shares held for less than three years will be taxed as ordinary income. A loss on shares held for less than three years is tax-deductible if offset against taxable gains on the sale of other shares. A loss can be carried forward for five years.
A gain on the sale of shares held for more than three years is taxed as "share income" along with dividends.
Share income is taxed as follows:
DKK
0 - 32,900 30% *)
32,900 - 40%
*) From 1 January 1996 the rate is reduced to 25%.
For a married couple the lowest bracket is up to DKK 65,800. A loss from other income cannot be deducted in share income.
However, a gain on the sale of shares quoted on the stock exchange and held for more than three years will not be included in the share income unless the owner of the shares has a total holding of shares exceeding DKK 103,800 in nominal value. This minimum figure is adjusted annually.
If Danish tax liability ceases, an estimated gain or loss is computed on the shares as if the shares had been sold at the time of the cessation of the tax liability, provided that the tax payer has held the shares for at least three years. Only individuals who have been subject to taxation in Denmark for at least five years within the last ten years prior to the cessation of the Danish tax liability will be covered by this rule. It is not the intention to impose a heavier tax on the individual who ceases his Danish tax liability than if the individual had stayed in Denmark. The payment of the tax may be deferred until the shares are sold.
j) Bonds
Gains from the sale or repayment of bonds, debentures and similar instruments denominated in Danish kroner are tax-free. However, in order to be tax-free, it is required that the security - when it is issued - bears interest at a rate equal to or above an interest rate stipulated by the tax authorities. Currently, the minimum interest is 7 per cent.
If securities are issued at a rate below the stipulated interest rate, gains will become taxable, and will remain taxable for the entire life of the security even though the ownership or the interest rate changes at a later point in time. Losses are not tax-deductible.
Regarding bonds denominated in a foreign currency, any gains will in all cases be taxable.
2. Deductions
a) Business
1. An employee is entitled to deduct travelling to and from work within certain limits, unemployment insurance contributions and trade union subscriptions. Certain other expenses related to the performance of the job, including costs related to moving from one location to another for the same employer, are deductible provided that such expenses exceed a total of DKK 3,800 (1995).
2. Expatriates taking up temporary residence in Denmark may be granted an annual deduction for extra costs of living equal to 1) DKK 8,000 plus 5 per cent of gross earned income, or 2) 25 per cent of gross earned income, whichever is lower. This allowance is granted for the first 24 months. The deduction for extra costs of living is granted only if an expatriate intends to stay in Denmark for no more than three years. The foreign employer should submit to the tax authorities a letter stating 1) the number of years for which the employee has been in the employer's service, 2) the nature of the assignment on which he has been sent to Denmark, and 3) that the assignment is expected to last for less than three years. It is also a condition that the assignee continues to be paid by his foreign employer during the assignment in Denmark. The above-mentioned limitation of DKK 3,800 also applies to this deduction.
3. Individuals subject to full tax liability in Denmark who are assigned to another country for a period of at least two months are entitled to a standard deduction calculated as a fixed amount per day depending on the country in which the assignment takes place. If the actual expenses incurred in connection with the assignment abroad exceed the standard deduction, such actual expenses may be deducted instead. The limitation of DKK 3,800 also applies to this deduction.
b. Non-business
The following non-business deductions are available to individuals with full tax liability:
1. All interest paid is deductible against ordinary taxable income.
2. Contributions or premiums under certain pension schemes with a Danish bank, pension fund or insurance company are fully deductible against personal income.
3. Alimony to a former spouse, contributions to children under 18 years of age who are living away from the contributor, and certain other maintenance contributions are deductible against ordinary taxable income.
4. Negative taxable income from preceding years can be carried forward for five years.
3. Wealth Tax
Resident individuals are subject to a wealth tax of 1 per cent on their world-wide net assets. Net assets for wealth tax purposes are made up of most of an individual's belongings less liabilities. Personal belongings, such as clothes, jewellery or works of art, are not included in net assets for wealth tax purposes. Only 60 per cent of the value of certain assets used for business purposes are included in the net wealth tax base.
4. Special Tax Regime for Expatriates
A special tax regime applies to foreigners who work temporarily in Denmark if certain conditions are fulfilled. The rules imply that earned income is taxed at a flat rate of 25 per cent. This is a tax on gross income, i.e. no deduction can be offset against the income subject to the low tax. Compared to the normal tax rates, which are between 45-65 per cent, the expatriate tax rate is quite favourable. However, to qualify under the rules, the following requirements must be fulfilled:
The employment contract
The employment contract must be concluded with an employer registered in Denmark or a foreign employer with a permanent establishment in Denmark, and the contract must be for a period of at least six months and not more than 36 months. The employment may be prolonged by up to 24 months, but the employee must then pay ordinary taxes in the period of prolongation.
The cash salary - plus the imputed value of company paid telephone and car - is DKK 43,500 per month as at 1 January 1995. This figure is after deduction of any contributions to the Labour Market Fund and the Labour Market Supplementary Pension Scheme. This minimum is adjusted annually.
Requirements to be fulfilled by the employee
The employee must in principle be fully subject to Danish taxation from the commencement date of the contract. However, a short trial period is allowed, provided that the individual in question takes up residence in Denmark in connection with commencing the employment.
The employee must not have terminated a former full Danish tax liability in order to benefit from the expatriate tax regime. Furthermore, the employee must not have owned or controlled - fully or partly - the company with which the employment contract is made.
Upon termination of the employment contract, the employee must either:
a) - bring his full Danish tax liability to an end, i.e. by moving abroad,
b) - enter into a new employment contract which fulfils the conditions for using the expatriate regime. Please note that the expatriate tax regime only applies for a maximum period of 36 months over a period of ten years, or
c) - extend his employment period. The employment may be prolonged by up to 24 months, but the employee must then pay ordinary taxes in the period of prolongation. If the employee stays in Denmark for more than 60 months, a retroactive taxation will take place.
Requirements to be fulfilled by the employer
The employer must be a person or a company fully subject to Danish taxation or a foreign person or company with a permanent establishment in Denmark.
The employer is obliged to withhold the taxes to be paid by the employer on a monthly basis and pay the taxes to the authorities.
Tax Return
Tax returns are not to be filed on remuneration subject to the 25 per cent tax regime as the tax withheld by the employer is a final tax. Other income or staff benefits, e.g. free housing, are taxed according to the normal Danish tax rules, and tax returns must be filed accordingly.
V TAXATION OF NON-RESIDENTS
1. Limited Tax Liability
Individuals who are not subject to full tax liability and who receive one of the following types of income are subject to limited tax liability:
a. Remuneration for personal services rendered in Denmark under a contract of employment with an employer registered in Denmark.
b. Director's fees from a Danish-registered company, subject to the relevant provisions of a double taxation treaty.
c. Pensions and annuities paid by a Danish employer, a Danish insurance company or pension fund, subject to the relevant provisions of a double taxation treaty.
d. Income from business or professional services carried out in Denmark through a permanent establishment or a fixed base, and income originating from participation in such business or otherwise determined as a share in the profit or turnover of such business activities.
e. Income from real estate in Denmark.
f. Dividend income from Danish companies, with a withholding tax limited to 30 per cent and subject to the relevant provisions of a double taxation treaty.
g. Industrial royalties from Danish sources, with a withholding tax limited to 30 per cent and subject to the relevant provisions of a double taxation treaty.
h. Interest income from Danish sources if the individual has been subject to full Danish tax liability for at least five years within the last ten years before the full Danish tax liability ceases, with a withholding tax limited to 30 per cent and subject to the relevant provisions of a double taxation treaty.
Income items under (a) to (e) are included in the computation of taxable income, whereas (f)to (h) are taxed separately. Only expenses effectively related to income under items (a) to (e)may be deducted.
2. Workforce Hire (subcontracting of labour)
Under certain circumstances, non-residents who are made available to a Danish employer by their foreign employer may be deemed - for tax purposes - to be employed by the Danish employer (workforce hire).
The Danish employer who has hired the labour must withhold a tax of 30 per cent of the gross income including an allowance for board and lodging. The 30 per cent is a final tax, which means that no deductions or allowances are permitted.
The effect of these regulations may be limited due to provisions in many of the double taxation treaties entered into by Denmark.
For the time being, the Denmark-UK Tax Treaty and the Nordic Tax Treaty are the only tax treaties entered into by Denmark which include provision on workforce hire thus specifically allowing the host country to tax an employee according to the workforce hire rules.
3. Oil and Gas Exploration
Individuals participating in oil and gas exploration activities in Denmark, including off-shore activities, who are not subject to taxation according to the rules for full or limited tax liability are liable to pay Danish income tax according to the Hydrocarbon Tax Act. The tax is calculated as 30 per cent of gross remuneration. The employer is obliged to withhold the 30 per cent and remit it to the Danish tax authorities. Several double taxation treaties prevent Denmark from imposing this tax.
4. Wealth Tax
Non-resident taxpayers are only subject to wealth tax on real estate in Denmark and on the net assets of a business with a permanent establishment in Denmark.
VI CALCULATION OF TAXES
1. Taxable Income
The Danish income tax is composed of a four-tiered state income tax, a flat local income tax and a church tax.
Taxable income is based upon gross income less deductions. If the tax return covers less than a calendar year, the income is annualised in order to reflect the progressive tax rates.
Income and allowances which make up the ordinary taxable income are divided into the three categories shown below:
a. Personal income (e.g. salary, staff benefits less social security contributions and certain pension contributions).
b. Capital income (e.g. interest income less interest expenses, and tax value of notional rent).
c. Other allowances (e.g. employment-related expenses and alimony).
In the Appendix an example of a tax calculation is shown.
2. Tax Rates
A general tax reform which entered into effect from 1 January 1994 will reduce income taxation over a period of 5 years and introduce contributions to a social security system. Social security contributions are deductible in personal income. The net effect of the reduced income tax rates and increased social security contributions is a minor decrease of the tax rates up to 1998. (For further details on social security contributions, please see section VII below).
Income tax rates differ for personal (working) income, capital income and share and dividend income.
Net positive capital income is subject to the same tax rates as personal income, but not subject to social security contributions.
The below schedule shows the tax rates for 1995 for net personal income (personal income plus net positive capital income). The rates are for an average municipality and calculated for an unmarried person who is not a member of the Danish state church. (Church tax depends on the local municipality and varies between 0,4% and 1,4%. Foreign citizens are not subject to church tax unless they register with the Danish state church).
Net personal Tax rate Social security Effective Total tax amount income (after (pct.) contributions marginal tax (inc. social deduction of (pct.)* rate (pct.) security social (including net contributions) Security) (DKK) after tax social (DKK) security) 0-29,600 0 6 0 1,889 29,601-130,900 42,9 6 46,3 51,813 130,901-174,300 47,9 6 50,9 75,372 174,301-236,600 50,9 6 53,8 111,059 236,600 - 63,5 6 65,6 -* Deductible against personal income
The effect of the tax rate structure is that earned income may be taxed at a marginal tax rate of 63.5 per cent (excluding social security contributions), while the tax saving arising from most deductions is limited to 42 per cent.
Local taxes vary from municipality to municipality between 23.5 per cent and 31.8 per cent, and church taxes between 0.40 per cent and 1.46 per cent. Local taxes for selected municipalities are as follows (1995 figures):
3. Personal Allowance
A personal allowance is granted as a deduction from the tax payable. The tax value of the allowance will be approximately DKK 12,500 for a single person in 1995. If a spouse cannot utilise the personal allowance, the balance will be transferred to the other spouse.
4. Wealth Tax Rates
A wealth tax of 1 per cent is imposed on net wealth exceeding DKK 1,592,000 (for a married couple DKK 3,184,000) in 1995. A relief of 60 per cent is granted on the proportional part of the net wealth attributable to shares in closely held companies.
5. Tax Credits
An individual is entitled to claim tax credits and/or tax exemption in respect of income derived from foreign sources.
If an individual residing in Denmark is assigned to a foreign country for a period of at least six consecutive months, the salary earned abroad is wholly or partly exempt from Danish tax provided that certain conditions are fulfilled.
6. Tax Ceilings
a. Taxation of personal income cannot exceed 63.5 per cent (1995) plus church tax.
b. Total taxes, including wealth tax, cannot exceed 73.5 per cent, plus church tax, of taxable income. If total taxes exceed this limit, the wealth tax will be reduced by a maximum of 60 per cent.
7. Non-resident Taxpayers
The tax rates for non-residents subject to limited tax liability are identical to the state tax rates for resident individuals plus a fixed local tax rate of 29 per cent. This gives a total tax rate of 42 per cent for earned income up to DKK 130,900, 47 per cent from DKK 130,900 to DKK 174,300, 50 per cent from DKK 174,300 to DKK 236,600, and 63.5 per cent above DKK 236,600. The wealth tax rates for non-residents are also identical to the rates applying to resident taxpayers.
VII SOCIAL SECURITY CONTRIBUTIONS
Social security contributions consist primarily of a contribution to labour market fund (AMBI)and to a supplementary old age pension (ATP).
The contribution to the labour market fund is 6 per cent in 1995, 7 per cent in 1996 and 8 per cent in 1997 and onwards. The basis for this contribution is the gross salary of the employee, including the imputed value of company paid telephone and car.
The contribution to the supplementary old age pension is calculated as a fixed annual amount of DKK 64,80 monthly to be paid by the employee and of DKK 129,60 monthly to be paid by the employer. A part of the employer's contribution is refunded if the employer is VAT-registered.
Social security contributions are tax deductible against the personal income.
Tax contributions to the labour market fund are presently only paid by employees, but from 1997, the employer will be charged 0.3 per sent of the salary and in 1998 and onwards 0.6 per cent.
Anyone performing services in Denmark and who is resident for tax purposes, is liable to social security contributions unless a totalisation agreement between Denmark and the individual's home country states otherwise.
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.
For further information please contact Lars Lofthager Jorgensen on +45 39 47 00 00.
