Tax Guide for US Expats Living and Working in Denmark
Who Is Liable For Income Taxes in Denmark
Persons resident in Denmark are taxed on their worldwide income. Nonresident individuals are taxed on Danish-source income, including income from a permanent establishment in Denmark, salaries paid in Denmark, directors’ fees, real property in Denmark, dividends and royalties.
Individuals are generally considered to be resident if they permanently reside or are present in Denmark for more than six months.
Income subject to tax. Income is divided into personal income and net capital income. Taxable income consists of personal income plus net capital income (or less net capital loss), less allowable deductions. For a table outlining the taxability of income items.
Employment income. Personal income from employment consists of wages, salaries, directors’ fees, pensions, allowances and fringe benefits. In principle, all benefits are taxable at their fair market value. However, in practice, the value assigned to the personal use of a company car, the personal use of company-provided accommodation and certain other benefits are determined according to special tables.
School fees paid by employers on behalf of their employees’ children, such as international school fees, are deemed to be salary income and taxed accordingly.
A special expatriate tax regime applies to foreigners employed by a Danish-resident employer. Under qualifying contracts, salary income is taxed at a flat rate of 32%, including 8% social security tax, for five years, instead of at the ordinary rates of 39% to 56%. Two alternatives exist for individuals to qualify for the special expatriate tax regime. Under the first alternative, if the individuals are acknowledged as scientists by the Danish Research Council, no requirements for a minimum salary income apply. Under the second alternative, individuals must reside in Denmark and their cash salary must be at least DKK 69,300 per month in 2011 after deducting the social security tax. In addition, the individuals must not have been fully tax liable to Denmark within the last 10 years. Expatriates may participate in the regime for 1 or more periods totaling no more than 60 months during a 10-year period. After the 60 months, the expatriate is taxed according to ordinary income tax rules.
Self-employment and business income. Business income, also known as self-employment income, is taxed as ordinary income (personal income) of the business owner. Expenses are deductible to the extent they are incurred to obtain, secure or maintain business income.
Persons with business income may choose to have this income taxed under special rules contained in the Business Tax Act. Under these rules, taxable income from a trade and industry, including income from partnerships, is assessed in accordance with the principles used for companies, including rules for depreciation and write-offs.
Investment income. Net capital income includes interest income (less interest expenses), taxable gains on securities, rental income and other investment income, except dividends, which are taxed separately. Royalties received by residents are taxed as capital income. Royalties received by nonresidents are subject to a 30% withholding tax.
Dividends are subject to a final 28% withholding tax. If total dividend income in 2011 exceeds DKK 48,300 (DKK 96,600 for married couples), residents are subject to a supplementary 14% tax on the excess amount when they file their returns. Nonresidents are not subject to the supplementary tax.
Taxation of employer-provided stock options. Gains realized by an employee on the exercise of an option obtained under an employer-provided stock option plan are taxable. No tax is due at the time of vesting. In general, the gains are subject to the highest marginal rate of income tax, which is 51.5%. The gains are subject to social security tax at a rate of 8% in 2011.
Tax may be deferred until the disposal of the shares. In the event of such deferral, the employee is taxed at the lower rates for capital gains on shares and the Danish entity cannot claim a tax deduction for the costs. Several requirements have to be fulfilled to obtain a tax deferral, including the following:
- The employee and the employer must enter into an agreement on the matter.
- The accountant of the Danish entity must issue a statement certifying that the requirements for a tax deferral are satisfied.
Capital gains and losses. Capital gains tax is levied on individuals at rates of up to 51.5%.
Gains derived from the disposal of bonds are generally taxable, and losses are deductible.
Gains derived from the disposal of shares are taxable as dividend income at a maximum rate of 42%. On departure from Denmark, certain shareholders are deemed for tax purposes to have disposed of their shares at the fair market value and are taxed on the deemed gain. However, these shareholders may obtain a refund of the difference between the tax on the deemed gain and the tax on any subsequent lesser gain actually realized. The tax on the deemed gain applies only to individuals who are fully taxable for one or more periods totaling 7 years within the 10 years prior to departure.
Gains derived from the disposal of residential property are not taxable if the owner occupied the property. Gains derived from the disposal of other real property are taxable as capital income.
Deductions
Deductible expenses. Contributions to a capital pension scheme (a one-time payout of capital) are deductible, up to a maximum annual amount of DKK 46,000, at a rate of approximately 37%.
Contributions up to a maximum of DKK 100,000 to schemes with current payouts are deductible if a return is not scheduled to occur until contributions have been paid for at least 10 years.
Unlimited contributions to certain employee-administered life annuity schemes are deductible.
Interest paid on all types of debt is fully deductible from capital income. If this results in a negative amount, approximately 32.5% of the negative amount may be offset against tax payable on other income.
An employee may deduct from taxable income the following expenses necessary to generate income:
- Travel costs to and from work (special rates)
- Fees paid to trade unions and unemployment insurance
- Other employee expenses to the extent they exceed DKK 5,500
Personal deductions and allowances. Each taxpayer is permitted a personal allowance deduction of DKK 42,900. In addition, certain alimony payments are deductible. The personal allowance not fully used by one spouse may be transferred to the other spouse.
Business deductions. In calculating taxable income, interest expenses relating to business debt may be fully deducted for tax purposes. In contrast, under the ordinary rules for individuals, interest expenses are deductible from net capital income, thereby providing a tax relief of only 32.5%, although any profit is regarded as personal income and is taxed at rates of up to 51.5%.
Relief for losses. Trading losses and interest expenses may be offset against other income and taxable gains. Tax losses may be carried forward for an unlimited number of years, but carrybacks are not allowed. Losses from certain types of passive partnership interests, such as a business with more than 10 nonworking owners, may be offset only against income from the same business.
B. Other taxes
Home-ownership tax. Home-ownership tax is imposed if an owner of property is fully liable to Danish tax. Individuals fully liable to Danish tax must also pay tax on their properties located abroad. Home-ownership tax is not imposed if the property is rented out. The tax rate is 1% of the public value of the property up to DKK 3,040,000, and 3% of the value exceeding DKK 3,040,000.
Net worth tax. Denmark does not levy a net worth tax.
Inheritance tax. Assets inherited by a spouse or registered partner are not subject to inheritance tax. Inheritance tax at a rate of 15% is levied on the total value of estates exceeding DKK 264,100. No additional tax is levied if the beneficiaries are closely related to the deceased (for example, descendants, stepchildren and their descendants, parents, sons-in-law and daughters-in-law and divorced spouse). For other beneficiaries, an additional tax at a rate of 25% is levied on their part of the inheritance. For these beneficiaries, the total effective tax rate is 36.25%.
Nonresidents are subject to inheritance tax only if the estate includes property situated in Denmark or if a Danish probate court administers the estate.
Denmark has entered into estate tax treaties with Finland, Germany, Iceland, Italy, Norway, Sweden, Switzerland and the United States.
Gift tax. Gifts to a spouse or registered partner are not subject to tax. Gift tax at a rate of 15% is levied on gifts to descendants, step-children and their descendants, sons-in-law and daughters-in-law, the spouse of a deceased child or stepchild, and parents. Gift tax at a rate of 36.25% is levied on gifts to stepparents and grandparents. Gifts to less closely related persons and to unrelated persons are subject to ordinary income tax, not gift tax. Gifts of up to DKK 58,700 a year may be donated free of gift tax to descendants, the spouse of a deceased child or stepchild, parents, stepparents and grandparents. A yearly tax-exempt gift of DKK 20,500 may be donated to sons-in-law and daughters-in-law.
Nonresidents are subject to gift tax if the donor or donee is a resident of Denmark or if the gift is Danish real estate.
C. Social security
Contributions. Effective from 1 January 2011, employees must make monthly contributions of DKK 90 to the Danish Supplementary Pension Scheme. Danish employers pay DKK 180 monthly to the Danish Supplementary Pension Scheme. In addition, they must pay small amounts for compulsory work-related insurances and certain other items. The total cost for a clerk per year is DKK 5,000.
Social security tax is levied at a flat rate of 8% on most types of personal income, including employment and self-employment income. No ceiling applies to the amount of income subject to the tax. Social security tax is fully deductible for income tax purposes.
Effective from the 2011 income year, the 8% social security contribution is considered to be an income tax (social security tax).
Consequently, for inbound scenarios, exemption from the tax is not possible even if the person is covered by foreign social security. Accordingly, the social security tax is no longer “protected” under totalization agreements. Instead it is “protected” according to tax treaty provisions for outbound scenarios from Denmark.
Totalization agreements. To provide relief from paying double social security contributions and to assure benefit coverage, Denmark has entered into totalization agreements, which usually apply for a period of 12 to 36 months, with the following countries.
EU member states
Israel
Serbia and
Australia
Liechtenstein
Montenegro
Canada (Quebec)
Macedonia
Slovenia
Chile
Morocco
Switzerland
Croatia
New Zealand
Turkey
Iceland
Norway
United States
India
Pakistan
To learn more about the history, culture, economy and other information about Denmark
We have been preparing US income tax returns for US Citizens and permanent residents living in Denmark for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Denmark and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the Denmark tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Denmark Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed while working in Denmark, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Denmark.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email