Expats relocating to Denmark usually face challenges to understand the Danish tax system. The Danish welfare state is, among other things, based on the concept of citizens having equal access to the different services paid for by taxes.
That being said, in a progressive tax system (as applied in Denmark), the higher your income, the more taxes you have to pay.
Expats who are tax residents of Denmark will be taxed on their worldwide income. An individual qualify for tax residency simply by being resident in Denmark. Those who are not Danish residents but who live in Denmark for six consecutive months, also qualify for Danish tax residency.
The tax system in Denmark is automatic, which means that tax will be deducted from an expat’s salary before they are paid. Expats should register with the Central Tax Administration (SKAT) before they receive their first salary, when they will receive a tax card that is sent directly to their employer, which will ensure that they are taxed correctly.
Tax rates in Denmark start at 36 percent and can be as high as 51.5 percent, depending on income. The tax year in Denmark is the same as the calendar year and tax returns must be filed before 1 May to avoid penalties.
When considering Denmark as one of your potential relocation options, it is very important to proactively negotiate with the company all the terms regarding salary, pension and taxes. Some companies don’t have an expat framework to provide support to foreigners employees, so it might be advisable to seek for advice in the individual case.
Since the high tax rate on personal income is always a major factor when attracting talents from abroad, Denmark grants a tax scheme for foreign researchers and highly-paid employees who are recruited in other countries and who are employed by a Danish enterprise or research institution. The scheme applies to all sectors and to both Danes and foreigners.
- Researchers are the ones engaged in research at an university or in a private enterprise and with scientific qualifications equivalent to those required at PhD level as a minimum.
- Highly-paid employees are employees who meet the minimum salary requirement of DKK 62,300 + labour market supplementary pension fund (ATP) contributions in 2016.
- The salary requirement is adjusted every 1 January and if there are problems with fulfilling the salary requirement, the solution could be to change the salary package composition.
- There are no qualifications requirements for key employees.
The tax authorities (SKAT) have to be notified about the choice of the expat scheme, and it means that the employment income, other cash allowances, value of company car, free phone and health care insurances are taxed by a flat rate of 31.92% for up to 5 years, whereas the ordinary tax system’s marginal rate is up to approx. 55.8% (excluding church tax). The tax rate of 31.92% is a result of 8% AM-tax and a flat tax rate of 26%.
It is not possible to deduct expenses such as commuting, travel expenses and union membership fees. All other income such as free accommodation and other private income are taxed according to the ordinary tax system, which is up to 51.95% (excluding church tax), however only up to 42% for dividends and gain on shares and ca. 42% (excluding church tax) for capital income (interest income etc.).
Contributions to private pension schemes and interest expenses are deductible in the ordinary tax system. If the deduction cannot be used in the calendar year, there are certain limitations for carrying forward of deficits to coming years.
The employee may benefit from the expat scheme whether is fully or limited tax liable, provided that tax liability must commence when the employment starts in Denmark. This means that the employee can for example live in Sweden and work in Denmark and still use the expat scheme. However, if the employee is fully tax liable to Denmark (lives in Denmark) and another country gets the right to tax the income, then the employee will not be permitted to use the expat scheme any longer.
When the period under the expat scheme expires, all future income is taxed according to the ordinary tax system. There is no limit of stay in Denmark after the period under the scheme, remaining valid work and residence permits for the time granted.
With careful planning and composition of the salary package, the total taxation can become even more advantageous. Not only it implies a higher net income for the employee, but also lower costs for the employer. Strategic decisions on how to optimize the use of the 26 percent tax rate might include the balance of the employee’s remuneration package as a regular salary and the payment of fringe benefits.
To find out more, consult SKAT.