Expat Tax Schemes - Denmark Focus

ExpatBriefing.com Editorial, 04 September, 2018

Numerous countries in the European Union seek to attract skilled foreign workers by sheltering them from potentially high rates of income tax – often in excess of 50 percent – with special tax schemes offering lower overall rates of tax to those meeting certain skills, qualifications and salary requirements. This special feature looks at Denmark and its expat worker tax regime.

About Denmark

Located in north western Europe, Denmark is a modern, prosperous nation, and a member of the European Union (although it has opted out of many EU initiatives, notably the monetary union).

A 43,000 sq km peninsula north of Germany (known as Jutland), Denmark is bordered by the Baltic Sea to the east and the North Sea to the west. The landscape is largely low elevation, rolling farmland. The several major islands in the east of the country, including Bornholm, Fyn and Sjaelland.

Denmark's climate is temperate, with cool summers and relatively mild, but windy, winters.

The population is approximately 5.6m, the vast majority of which is made up by ethnic Danes. However, there are significant Turkish, German, Syrian, Polish, Iraqi and Romanian-speaking communities.

The capital city is Copenhagen, located in the east of Denmark on the island of Sjaelland and with a population of approximately 1.3m.

The CIA World Factbook describes Denmark as a "thoroughly modern market economy," which features advanced industry, particularly in the pharmaceuticals sector. Other leading sectors include the maritime industry, renewable energy, and high-tech agriculture. Significantly, it was reported that in 2017, there were shortages of certain skills in the Danish labor market, which government policy is now attempting to address.

Generally, the standard of living in Denmark is high. But with an extensive welfare state, so are taxes! Like most other advanced economies, personal income tax is progressive, with rates rising further up the income scale. However, unlike these other countries, top rates of tax can easily exceed 50 percent.

However, in order to attract skilled and highly-qualified foreign workers, Denmark has a concessionary tax scheme for qualifying expats, which is summarized below.

Expat tax scheme - summary

The Danish tax authority, the SKAT, released an updated guide to the special tax scheme for certain highly skilled and highly paid expatriate workers in March 2018.

The tax scheme applies to foreign researchers and highly paid employees who are recruited abroad and who are employed by a Danish enterprise or research institution.

Under the scheme, qualifying employees pay income tax at 27 percent (26 percent prior to 2018), in addition to labor market contributions, which covers unemployment and sickness benefits, among other items, for a total tax rate of 32.84 percent. The maximum duration of the scheme is 84 months.

Ordinarily, personal income in Denmark is taxed at progressive rates up to approximately 55 percent.

Requirements

To avail themselves of the scheme, researchers must be engaged in research at a university or in a private enterprise and have scientific qualifications equivalent to those required at PhD level.

In order to qualify for the scheme, an applicant must not have been liable to taxation in Denmark or for 10 years prior to commencing employment in Denmark.

Under the scheme, Danish tax liability must commence at the same time as the employment contract, although workers are permitted to begin their stay in Denmark up to one month prior to the commencement of the job.

If an employee switches to another job which is also covered by the special tax scheme, no more than one month must elapse between the former employment contract ceasing and the new one commencing.

Taxation under the special tax scheme ceases immediately if one of the qualifying criteria are not met.

Minimum salary

In 2018, those applying for the scheme as a highly paid employee must be paid a minimum salary of DKK65,100 (USD10,200) per month, plus labor market supplementary pension fund contributions. The amount also includes the value of employer-provided cars, internet access and health care.

Foreign social contributions and pension payments

Those still paying mandatory social contributions in a country other than Denmark may, however, be able to deduct these payments in the calculation of tax under the scheme.

If the employee pays contributions to a company pension scheme to which exemption of contributions has been granted, the contributions will not be included in the salary when SKAT assesses if the salary requirement has been fulfilled. This applies to the employer's contributions as well as to the employee's contributions to the pension scheme.

Work performed outside Denmark

It is not a condition that the work must be performed in Denmark. A special rule applies, however, to employees who are fully liable to taxation and resident in Denmark in accordance with a double taxation agreement. As a general rule, these taxpayers cannot use the special tax scheme if the right of taxation of the salary is transferred to the other country. This may for instance be the case if the employee is staying in the other country for more than 183 days within a 12-month period or if the salary is paid by a foreign employer or the Danish employer's permanent establishment abroad.

However, employees who are subject to full tax liability and resident for tax purposes in Denmark, and who are employed by a European Research Infrastructure Consortium are exempt from the rule that the right of taxation cannot be transferred to another country according to a double taxation agreement.

From January 1, 2017, it is possible for employees to still qualify for the special tax scheme if they perform work outside of Denmark, although this must be restricted to no more than 30 days in a calendar year. This is designed to help employees working for a foreign company who must carry out certain duties in the firm's home country. It is also intended to include situations where a foreign employee of a Danish business is hired to out to carry out work abroad for a foreign business.

Multiple contracts

If the employee has entered into several concurrent contracts of employment with different employers, the special tax scheme for the individual contract of employment may be used only if all the conditions are fulfilled in respect of the individual contract of employment.

It is also possible to combine several consecutive contracts of employment as long as the conditions are fulfilled in respect of the individual contracts.

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