Outline of Danish Tax System relevant to potential immigrants
General Remarks
In Denmark income is subject to direct taxation by the Government and by the Local Authorities. Net worth capital (assets less liabilities) is subject to taxation by the Government. This tax will be abandoned from 1997.
Individuals liable to assessment in Denmark will be granted a tax credit on income acquired abroad, provided tax has been paid on the same income abroad. The tax credit corresponds, with certain limitations, to the tax paid abroad or in accordance with relevant Tax Treaties.
In Denmark a person is subject to either full or limited tax liability.
Persons with full tax liability are residents of Denmark who are liable to tax on their entire income whether it originates in Denmark or abroad including revenue from their net capital whether it is placed in Danish or Foreign Assets.
Persons with limited tax liability are, however, taxed only on certain income earned in Denmark or from Danish sources, and, only on certain types of income.
Persons resident in Denmark are subject to full tax liability. In determining whether the residence criterion is met, account will be taken of whether the person has indicated his intention of becoming resident in Denmark by establishing a household, by renting or acquiring accommodation or by other means by which he has a permanent bed at his disposal.
Persons not permanently resident in Denmark will also incur full tax liability after staying for a period of 6 months. In such cases the 6 month period should be continuous, but tax liability will arise even if the person has interrupted his stay in Denmark within the 6 month period for brief holiday, etc., abroad.
Tax liability takes effect from the start of the period of residence or 6 month stay.
Persons taking up residence in Denmark as tourist or for the purpose of study do not incur full tax liability until residence, with or without interruptions, has lasted for more than 365 days within a given 2 year period.
In these instances tax liability does not become effective until the period of residence exceeds 365 days. To qualify for exemption from tax during the first 365 days, the person concerned must not engage in any independent gainful activity while residing in Denmark and must continue to be liable to the payment of income tax in his home country under the regulations applicable to residents of that country.
Tourist or students with paid employment will be subject to limited tax liability on the income earned.
Persons previously resident abroad who acquire accommodation in Denmark do not, however, become liable to tax until actually taking up residence.
A brief stay such as a holiday, etc., does not constitute grounds for the commencement of tax liability even if permanent accommodation is available.
According to case law uninterrupted stays in Denmark of a duration exceeding 3 months or stays within one year totalling more than 180 days will not be considered short stays by reason of holiday and consequently provoke tax liability.
By calculating the duration of a stay in Denmark, every part of a 24 hour period will be considered a full day and night. 3 month respective 180 days should be considered as an absolute maximum for stay(s) without tax liability for reason of residence here. Normally this maximum will be accepted when the persons staying are tourists staying here only for holiday purposes. The stay(s) must not be in connection with business or other income gaining activities, i.e. regular participation in the management of a business in this country. It will also be considered if the persons in question besides having a residence here has other vital life interest (i.e. near family, income producing activities, citizenship etc.) in another country so that the stays in Denmark has a bonafide character of pure holiday or the like from the country of residence.
In cases where these conditions are not met a more concrete judgement will be exercised by the authorities in assessing whether the stay(s) has the necessary character of holiday only.
If the necessary conditions are not met full tax liability will commence from the first stay after residence has been deemed acquired.
Tax liability could also be the result, even if the persons income producing activities take place abroad, particularly when there is no residence or another centre of vital interest in another country so that the person in question normally stays in this country because his business activities make this possible (examples are pilots, seamen, salesmen, artists etc. In these cases the authorities will not consider stays in Denmark as holiday seen from a country of residence. It is particularly clear if the residence here is a family dwelling or permanent marital relation (cohabitation).
Persons relinquishing their residence in Denmark will remain liable to tax for the first four years thereafter. This rule does not apply, however, where such persons can demonstrate that on leaving Denmark they be come liable to income tax in a foreign country, the Faroe Islands or Greenland under the regulations applicable to residents thereof provided these regulations are similar to the Danish Tax system.
This rule does not apply where tax liability in Denmark is based solely on a stay in Denmark. In such cases full tax liability in Denmark ceases immediately on departure.
A final declaration of tax can be made only after leaving Denmark and the final tax has to be settled after the expatriate has left. The final declaration has to be filed not later than the end of the month after the tax liability ceases.
The limited tax liability continues until the taxable type of income (see above) is no longer received. After the end of the final year the income must be declared and a possible capital gain may be taxed.
Where a person has had unlimited tax liability for five or more of the past ten years before leaving Denmark, the unrealised capital gains are taxed when the person's full tax liability ceases. The capital gains on shares, convertible bonds, investments in mutual funds or trusts and investment funds are taxed. The capital gain is calculated as the difference between the original cost value and the market value when the tax liability ceases. The cost value is applied even if the investment is made before the per son becomes liable to Danish tax.
The payment of the unrealised capital gains tax can be deferred until the shares, etc. are sold. If so, the tax is increased by an interest factor each year.
When the shares, etc. are sold, the capital gains tax is calculated once more and the lower of this tax and the tax as calculated above (including the interest factor) has to be paid. If the person returns to Denmark and again has full tax liability, the deferred tax is cancelled.
Persons who are not subject to full tax liability and who are in receipt of certain types of Danish source income shall be subject to limited tax liability on such income.
Limited tax liability attaches to persons who are in receipt of income from Denmark in the form of monetary remuneration (and any associated free car, board or lodging) in return for personal services rendered under con tract of employment with a Danish employer.
Such remunerations include salaries and wages, holiday pay, fees, bonuses, commission, tips and similar payments as well as directors fees, pensions etc.
Limited tax liability does not apply where income has been paid by per sons, companies and associations, etc., whose venue is outside Den mark. Even though the venue of the person in receipt of the income may be outside Denmark, the income will still be subject to limited tax liability if the payment is made by a duly authorised person whose venue is in Denmark.
Also subject to tax liability are persons conducting a business from a permanent establishment in Denmark or participating in a commercial enter prise from a permanent establishment in Denmark, and persons otherwise entitled to share in the profits of such activities. Persons owning property in Denmark or receiving income therefrom are also subject to limited tax liability.
The limited tax liability for commercial activities and property ownership also extends to capital tax liability in respect of the capital yielding the relevant income, and only debts and other encumbrances relating to the se assets are deductible.
Persons in receipt of income on which dividend tax is payable are also subject to limited tax liability. Shares, etc., yielding dividends, however, are not subject to limited capital tax liability.
Husband and wife file separate income tax returns and pay tax on their individual incomes, and they are both taxed on capital.
However, it is not a matter of completely separate assessments as the tax assessment takes the other partner's yield on capital and his/her capital into consideration so that the distribution of yield on capital and capital between husband and wife has, normally, no effect on the total tax burden of the husband and wife together.
Rental Value of Private Dwellings
Taxpayers who own their own dwellings (a single-family house or free hold flat) must include as income the deemed rental value of own dwelling. The rental value is calculated according to special rules.
All persons liable to payment of Government income tax are also liable to Local and County authority income tax.
Local and County councils fix their individual income tax rates.
Persons subject to limited tax liability only pay local authority income tax at the rate of 20 percent on their limited income.
is levied on certain capital gains at the ordinary income tax rates subject to certain exemptions or deductions.
Capital gains tax according to the type of assets in question is calculated either on the basis of historical cost or market value at a later date according to special provisions which can be very complicated.
Any emigrant must check, asset by asset, how his tax situation would be in case of disposing of the asset while being subject to Danish tax liability. Market value at the time of immigration will be relevant.
In some cases tax would arise on emigration even if no disposal of the asset took place. This is a very dangerous trap for short time residents of Denmark with special types of assets, i.e. shares and certain other types of financial assets.
There are special rules of tax relief for short time expatriates to Denmark. However, in most cases Danish taxation would still exceed personal income taxation in most other locations on the Globe.
Expatriate workers are not allowed to deduct payments to pension schemes in their home countries from their tax liabilities in Denmark unless provided by a tax treaty (for the time being, only tax treaties with the UK and Schwitzerland provide such deductions), and if payments are made by an employer or others to a pension scheme abroad, the payments should be included in Danish taxable income and personal income.
An expatriate working in Denmark should realise that he will be subject to capital gains tax on his world-wide assets unless exemption is allowed under a special double taxation agreement. This also includes tax on unrealised capital gains on shares and certain bonds if he leaves Denmark after 5 years or more (see section on emigration).
An expatriate worker in Denmark is subject to Danish gift tax.
An expatriate worker in Denmark was subject to wealth tax on his world-wide wealth while resident in Denmark. This tax has been abandoned from 1997.
The expatriate worker in Denmark contributes to the Danish social security system through his income tax payments in Denmark. He is fully entitled to the benefits of this system in terms of education and health. Normally, the expatriate will not stay long enough to be entitled to a Danish State pension.
There is a social security contribution of 6 percent raising to 8 percent on most Danish source earned income. Within the EU it is possible to have transferred social security coverage from the home country. In these in stances social security tax might be modified. These rules are extremely complicated, and demand individual advice.
In Denmark, the rules concerning inheritance tax have been replaced with a set of rules concerning estate tax.
Estate tax liability commences at the death of a person or at the delivery of a death decree or presumption of death order. When a married person dies and the surviving spouse chooses to retain undivided possession of the estate then the tax liability of the deceased's part of the estate commences when the undivided estate is divided. Undivided estates are always divided when the surviving spouse remarries.
An estate tax of 15 percent of the assets a deceased person leaves is to be paid to the state. An additional estate tax of 25 percent is to be paid on the part of the assets which accrues to others than the immediate family of the deceased. A basic deduction is allowed in the inheritance amount before the estate tax is calculated.
If the deceased person had venue in Denmark at the time of death then the tax liability embraces the entire estate of the deceased, no matter where it is located. If the deceased did not have venue in this country the tax liability embraces immovable property and its accessories and property associated to permanent establishments in Denmark. If the deceased's estate or a part thereof has been remitted to processing in Denmark then the tax liability embraces that part of the deceased's estate that is embraced by the division of estate in Denmark.
Gifts between spouses are tax free. A person may give gifts not exceeding a basic amount tax free to other members of the immediate family.
A tax of 15 percent is paid on gifts to the immediate family (excluding grandparents and stepparents) to the extent that the gifts in one calendar year exceed the abovementioned amount. A 36.25 percent tax is to be paid on gifts to stepparents and grandparents to the extent that the gifts in on calendar year exceed the amount mentioned. Payment in connection with a renunciation of expected inheritance and advance of expected inheritance are considered gifts.
Gift tax is to be paid if either the donor or the beneficiary has venue in this country. Even though the donor or the beneficiary does not have venue in this country gift tax is to be paid if the gift consists of immovable property and its accessories and property associated to permanent establishments in Denmark.
STAY OUT OF TROUBLE -
DO NOT ENTER DENMARK
- EXCEPT AS A TOURIST OR STUDENT
- WITHOUT RESIDENCE
- WITHOUT COHABITATION
- WITHOUT WORK PERMIT
- WITHOUT RESIDENT WIFE
unless careful advice is taken in advance!
The contents of this paper and the appendix should be taken as a general guide only. Actual situations should be handled on an individual basis and actual data. Tax legislation could be altered since last issue of this paper and we accept no responsibility for errors or con sequential damage or loss, which might occur from the use, including unauthorised use, of this information.
However, we would be pleased to advise you on your individual situation.
© Copyright 1996, 1998 Jens Høgsberg Kristensen
