Denmark offers a special expatriate tax scheme aimed at attracting highly skilled workers and talent from abroad. The scheme provides significant tax benefits to foreign nationals relocating to Denmark for work. Expats can thereby enjoy a lower tax rate on their income for a specific period.
Key Points
- Additional Welfare and Living Benefits in Denmark: Expatriates gain access to extensive welfare benefits like health care, education, social security, child benefits, and enjoy one of the world’s best work-life balances, making Denmark an attractive destination for expatriates.
- Prevention of Double Taxation: Denmark has tax treaties with many countries and offers foreign tax credits to prevent double taxation, with specific steps for expatriates to claim treaty benefits and credits.
- Benefits and Risks of the Scheme: Benefits include lower tax rates and tax-free employer benefits, while drawbacks involve a potential tax increase after 7 years and strict eligibility criteria that must be maintained.
- Eligibility Requirements for the Scheme: To qualify, expatriates must have at least 10 years of work outside Denmark, hold specialized jobs or research qualifications, meet income thresholds, and apply within three months of arrival.
- Denmark’s Expatriate Tax Scheme: Denmark offers a favorable tax scheme for highly skilled expatriates, providing a reduced flat tax rate of 27% on income for up to 7 years, aimed at attracting international talent.
This article describes the benefits of the scheme and the requirements to be fulfilled. The problem of potentially being taxed twice when moving from one country to another can most often be prevented. This article also outlines the tax rules in this area and steps to take for expatriates to avoid double taxation.
The expatriate tax scheme offers significant tax benefits to expatriates
The expatriate tax scheme in Denmark allows qualifying expatriates to pay a reduced flat tax rate of 27% on their income for a maximum of 7 years (84 months). It is aimed at researchers and highly skilled professionals with high salary levels. The mandatory labor market contribution of 8% also applies. So the effective tax rate usually totals 32.8%. This is significantly less than Danish employees pay in taxes under the ordinary taxation rules. No deductions are allowed against the flat-rate taxed income.
Under the ordinary rules, the marginal tax rate for higher incomes can be up to 56%. Besides, there is a tax ceiling rule in place. This rule means that the overall tax rate as a share of total personal income can not be higher than 52%. If the overall tax rate is higher than 52%, then the marginal tax rate is reduced below 56%. So the scheme offers significant tax benefits to expatriates compared to the taxation rules for Danish citizens. You can read about income taxes and the tax system in Denmark in this article: Income taxes in Denmark
Requirements that expats must meet to be taxed by the scheme
Here are the key requirements that expats must meet to be eligible for the expat tax scheme:
- The expatriate must have worked outside Denmark for at least 10 consecutive years.
- The position in Denmark must be considered highly specialized or requiring certain qualifications.
- The monthly salary, including pension contributions, must be at least 75,000 DKK (in 2024). Included in this statement is cash salary, employer-provided telephone, internet, and company cars, plus employer-paid health insurance. Bonuses are not included. The tax rate of 27% plus the 8% in labor market contribution is taxed on salaries and these additional benefits.
- For researchers specifically, there is not a requirement of a minimum salary for the position in Denmark. Instead the research qualifications of this type of expatriate shall be assessed and approved by university or the research institution.
- Expatriates can be taxed according to the scheme for a maximum of 7 years. Thereafter, the employee’s income is taxed at ordinary rates. The conditions described must be fulfilled throughout the period of working in Denmark. If the expatriate, as an example, shifts to another job with a salary below the minimum requirement during these 7 years, the scheme can not be used for taxation anymore.
- The expatriate must have a valid work and residence permit if coming from countries outside EU/EEA and Switzerland.
- Expatriates must apply for the scheme at The Danish tax authorities (“SKAT” in danish) within three months of their arrival in Denmark to be eligible.
Benefits and potential drawbacks of the expatriate tax scheme
As is often the case when assessing advantages and disadvantages from a specific initiative, both of these are present here. And so there are many benefits, but also some potential drawbacks to the expatriate tax scheme.
Benefits of the expatriate tax scheme
The expatriate tax scheme offers a very favorable taxation of labor income for expatriates. Multiple benefits beyond the lower tax rate are also present. One notable component is the expatriate’s ability to receive certain tax-free benefits from the employer, thus enhancing their overall compensation package. These benefits can include coverage for housing expenses and travel allowances. And most employers in Denmark provide health insurance as a benefit for its employees – besides the public health care services.
Moreover, the simplified tax structure can ease the transition for expatriates adjusting to life in Denmark. The clarity of knowing exactly what is owed each month allows individuals to better manage their finances without the complexities often associated with progressive tax systems.
Potential drawbacks of the expatriate tax scheme
After the maximum period of seven years, expatriates will transition to the standard Danish tax rate. The marginal tax rate can then be up to 56% depending on income level. This is a sudden increase and requires financial planning for the tax increase coming in the future. On the other hand, it also illustrates the favorable taxation for the expatriate in the first 7 years in Denmark.
Additionally, expatriates must maintain their qualifications and their employment to retain eligibility. Any changes in employment status or job roles could potentially jeopardize their tax benefits.
Double taxation can in most cases be prevented
Expatriates are considered residents for tax purposes in Denmark when living in Denmark for more than 6 months. This is called full tax liability, and the so-called global income principle applies: Income is then taxed by Danish taxation rules even if the income is earned outside Denmark.
To prevent double taxation, Denmark has tax treaties with numerous countries, including the United States, Germany, France, China, the United Kingdom, and many others. These treaties specify how income is taxed, generally ensuring that income is taxed only in one country. All double taxation treaties (DTTs) are listed and described on the homepage of The Danish Ministry of Taxation (in Danish language). List of countries with DTT’s
Denmark provides a foreign tax credit relief in case there is no DTT with the country of origin. And so expatriates can claim a credit for taxes paid in another country against Danish taxes owed on the same income. But the tax relief available in the DTTs is often more favorable.
Steps for expatriates to avoid double taxation:
- File for treaty benefits: If your country has a treaty, file the necessary paperwork with the Danish tax authorities (“SKAT.dk” is the official website). The expatriate can thereby avoid being double-taxed.
- Document foreign taxes paid: Keep records of foreign taxes paid to claim credits.
- Apply for foreign tax credit relief: This is relevant when there is no tax treaty with the expat’s country of origin. For application details, again, “SKAT.dk” is the website to use.
Taxation of other types of income
The favorable tax rate only applies to income from the main employment of the expatriate. And no deductions are allowed. For other types of income, such as capital income, the ordinary taxation rules apply. And some deductions to taxable income are allowed – such as net interest expenses or net capital losses.
The VAT is a flat rate at 25%. There are no wealth taxes. For details about property taxes and taxes on cars, see the article about income taxes in Denmark. Income taxes in Denmark
Expatriates must file annual tax returns to SKAT at the same procedures as Danish citizens. The deadline is typically May 1. The Danish tax system is highly automated, and most residents receive pre-filled tax forms, which they can adjust if necessary.
Benefits for expatriates in Denmark beyond the favorable taxation scheme.
When living and working in Denmark as an expatriate you have access to the welfare benefits and social security insurance. And at the same conditions as danish citizens. Besides, the work-life balance to expect in Denmark is quite favorable for employees.
Expatriates have access to Danish welfare benefits and the social security system.
The social security system covers expatriates from the time they take up employment. Denmark has a very extensive social security system. This includes health insurance, sickness benefits, maternity and paternity leave, pensions, industrial injury insurance and family benefits. The welfare benefits include free access to health care and education at all levels.
Important features are:
- Unemployment insurance. To be eligible, you must be a member of an (A-kasse) and pay the insurance fee for at least 1 year. Your income in your last employment must be at least 263,000 DKK in order to be fully insured. The amount provided per month is 20.359 DKK before tax.
- Financial insurance under sickness and maternity leave. Some specific criteria must be met. The amount provided is the same as for unemployment insurance.
- Child care services and income transfer for households with children.
- A tax-free child benefit of 20,496 DKK per annum is payable to the parent of children aged 0 to 2. For children aged 3 to 6, it is 16,224 DKK, and for children aged 7 to 14, it is 12,768 DKK. The benefit is paid on a quarterly basis. Besides, child care is a welfare benefit. The families can, as a maximum, be entitled to pay 25% of the actual child care cost. In some municipalities, the cost for families is lower than 25%. Furthermore, a study from OECD finds, that Denmark is one of the cheapest countries for households with children. Measured as child care costs of total household income.
Work-life balance in Denmark is quite attractive from the perspective of workers
The work-life balance in Denmark is quite attractive from the perspective of the employee. Denmark has one of the best work-life balances among the 38 OECD countries, according to a well-estimated study. Such studies compare average work-life balances in the countries. And so the actual work-life balance experienced among workers in a country will vary. But the work-life balance to expect in Denmark is generally favorable compared to other Western countries. OECD report Work-life balance.
Denmark has a relatively short working week as of hours worked compared to other Western countries. And 5 weeks paid holiday (for some groups even 6 weeks) besides the public holidays. Moreover, the conditions and financial insurance provided for absence caused by unemployment, sickness, or maternity leave are relatively generous compared internationally. You can read more about this in these articles: Work-Life Balance in Denmark – The Working Week in Denmark.
Conclusion
The expatriate tax scheme in Denmark is a strategic initiative aimed at attracting international talent and skilled professionals to the country. The scheme offers a reduced flat tax rate of 27% on the income of the expat for up to 7 years. And thereby provides significant financial relief to expatriates. To qualify, individuals must have relevant international work experience, hold specialized job roles, and meet the minimum required monthly salary. Some specific residency and application timelines must also be met.
The scheme’s advantages extend beyond the tax rate. Expatriates can also receive various tax-free benefits from their employers, such as housing, educational assistance and travel allowances. A potential drawback is the substantial tax increase that awaits after the seven-year period, which could reach up to 56%. Moreover, the expatriate must met the requirements throughout the period.
Expatriates have access to the same welfare benefits as all other residents in Denmark. This includes free health care services, education at all levels, and more. The social security system provides financial insurance for unemployment, sickness, or maternity leave. For households with children, a tax-free income transfer for each child is provided. Moreover, child care costs are very low compared international. And the work-life balance in Denmark is one of the best in the world, according to studies. So in the overall picture, Denmark is a quite attractive country to work and live in for expatriates. The expatriate tax scheme offered makes it even more attractive for foreign workers.
FAQ
How can expatriates prevent double taxation when working in Denmark?
Expatriates can prevent double taxation by filing for treaty benefits if their country has a tax treaty with Denmark, keeping records of foreign taxes paid, and applying for foreign tax credits when no treaty exists.
What are the potential drawbacks of the expatriate tax scheme?
Potential drawbacks are the tax rate increase after 7 years, potentially up to 56%, and the strict eligibility and ongoing qualification requirements necessary to maintain the benefits.
What are the main benefits of the expatriate tax scheme in Denmark?
Benefits include a lower flat tax rate of 27% on income for up to 7 years, tax-free employer benefits like housing and travel allowances, and access to Denmark’s extensive welfare and social security systems.
Who qualifies for the expatriate tax scheme in Denmark?
To qualify, expatriates must have at least 10 years of work outside Denmark, hold specialized or research-related positions, meet minimum income requirements, and apply within three months of arriving in Denmark.
What is the purpose of Denmark’s expatriate tax scheme?
Denmark’s expatriate tax scheme aims to attract highly skilled workers and international talent by offering significant tax benefits, such as a reduced flat tax rate of 27% on income for up to 7 years.
