Favourable tax scheme for expats in Denmark
27 November 2014
Posted by: Author: International Law Office
Author: International Law Office
The Danish tax rules for expats are very advantageous, offering high earners and qualified researchers the option of paying a low tax rate of 26% (plus 8% in labour market contribution) on income tax for up to five years compared to the regular income tax rate of up to 55.6%.
Who can choose the tax scheme?
Under the special tax scheme, the person (Danish or foreign) must be recruited abroad and the employer must be subject to full or limited tax liability in Denmark from carrying on a business through a permanent establishment in Denmark. Further, qualifying high earners must, upon recruitment, earn an average monthly salary of no less than Dkr70,600.(1)
The minimum salary includes all salary income (A-income) and employee benefits such as a company car or telephone. Further, other private expenses paid by the employer, such as school fees, are included in the amount. Monetary, fixed bonuses paid over the year are also included. However, bonuses that rely on performance during the year are not included.
The minimum salary requirement does not apply for approved researchers at assistant professor level or above. However, their qualifications must be approved at the time of recruitment.
Due to the government's focus on attracting qualified workers to Denmark, it plans to ease the special tax scheme by reducing the monthly minimum salary requirement by Dkr10,000. The changes are expected to take effect from January 1 2015.
To qualify for the tax scheme, the employer's full or limited income tax liability must occur simultaneously with the person taking up employment in Denmark.
A person is fully liable to Danish tax when he or she acquires residence in Denmark. Residence is to be understood not only as an actual home, but also a person's indication of his or her intention to domicile in Denmark. For example, a person's residence in Denmark is assumed if he or she has acquired a house in Denmark and his or her spouse and children move to Denmark. However, tax authorities accept that an employee may move to Denmark up to one month before taking up employment in order to settle in.
No prior employment in Denmark or involvement with management
The scheme is applicable only if the employee has not had full or limited tax liability in Denmark in the 10 years prior to employment. Further, the employee must not have been (directly or indirectly) involved in management within the five years prior to employment. This condition applies throughout the employment under the special tax scheme. However, managers and directors who are not and have not been owners or co-owners of the employing enterprise may avail of the special tax scheme in practice.
The tax is levied on the total salary before the deduction of expenses (eg, trade union fees and deductions for transport between home and work). Expenses such as interest and payments to private pension funds cannot be deducted from income, but must be deducted from the ordinary taxable income that the person may earn from other income sources, if any. Income not covered by the scheme is subject to normal tax legislation, – for example, income on shares.
Notification and filing
An employee who elects to use the special tax scheme must inform the authorities by a particular deadline. The notification should include a copy of the employment contract and be filed on special forms. The tax authorities must also be notified of any changes to the employment relationship.
Upon termination of the contract, or due to the employee's desire to work under another employment contract, where the employee continues to qualify for the special tax scheme for expats, a maximum of one month can pass between the old and new employment. The employee must still fulfil all of the conditions. In addition, the tax authorities must be notified.
The Danish tax scheme for expats does not apply if these criteria are not fulfilled or if the right of taxation belongs to another country due to a double tax agreement.
This article first appeared on internationallawoffice.com.