Expat taxes in DenmarkPosted: June 14th, 2014 Helsingor
In Denmark personal tax rates are notoriously high, with a further levy for social insurance contributions. A person is subject to Danish tax if she is resident there and is presumed to be resident there if she spends more than 6 months in the country in the tax year. These tax rates are a great disincentive and provide a very real problem to employers who require foreign skilled labour.
Accordingly the government introduced a special expatriate tax regime, under which the personal income tax rate is fixed at 26% for up to five years and applies to all kinds of cash remuneration and reimbursement of private expenses, including relocation allowance and school fees, the taxable value of a company car and use of a telephone. All other income, including benefits-in-kind, are taxed at ordinary rates.
Social contributions of 8% of salary must also be paid on gross income in addition to the 26% income tax, regardless of whether the employee is covered by a foreign social security scheme, meaning that the effective tax rate paid by an expat employee is 32% (as against 51.5% normally).
After the expiration of the five-year period, the employee will be taxed at normal Danish income tax rates. If the employee has been utilising the tax scheme for a shorter period than 60 months and he leaves Denmark, he can return to Denmark at a later point and continue to utilize the 26% tax scheme for a total up to 60 months.
To qualify for the special tax regime, following conditions must be met:
1. The expat’s monthly salary must be at least DKK69,300 (2011) after deduction of pension contributions and Danish social security contributions. If the employee’s salary falls below the minimum monthly threshold, the salary requirement can be achieved by means of an annual bonus payment.
2. The employee must not have held 25% or more of the shares of the employing company, or had any active role in its management, in the five years prior to the start of the employment.
3. The employee must not have worked for the company, or for any group-related companies, in the three years prior to moving to Denmark or one year after the end of a previous period with tax liability to Denmark.
4. The employee must not have been a tax resident in Denmark or have been taxed in the 10 years prior to the taking up of employment.
However, many of these requirements do not apply to scientists or those in similar professions.
There is no requirement to file a tax return with regards income subject to the 26% rule. However, if there is income that falls out of the scope of the scheme and which is taxed at ordinary rates of Danish tax will mean that a tax return will have to be filed.