This report covers a bill moving through Denmark’s legislative review process that includes provisions amending the special expatriate tax scheme.
After having undergone a public hearing, a bill including significant changes to the Danish special tax scheme for expatriates was presented by Denmark’s government on 3 October 20181.
The bill includes several initiatives making it easier for employers and their employees to apply the Danish special tax scheme. The bill also makes it more “predictable” – considering the prior uncertainty from the tax authorities – for employers and their employees to determine if they will meet the requirements for applying the scheme.
The most recent interpretation of the Danish special tax scheme has been criticized as not being in line with the purpose of the scheme, which is to attract and maintain highly qualified workers. As such, the bill has been well received by the various parties concerned.
The bill is expected to enter into force on 1 January 2019.
The bill’s provisions aim to modernise the existing rules and promote mobility.
The bill – which directly addresses many of the situations having led to the above-noted discussions – is widely viewed as a step in the right direction, in other words towards a more appropriate version of the Danish special tax scheme as it was originally intended, but taking on board the nuances of 21st century cross-border business.
When meeting the conditions of the scheme, an employee can choose to be taxed at a beneficial tax rate (27% tax plus 8% labour market contribution, equating to 32.84% effectively) compared to taxation under the ordinary Danish tax rules (marginal tax rate of up to 55%-56%). (For prior coverage, see GMS Flash Alert 2017-176, 28 November 2017.) Following another recent amendment, the scheme can now be applied for up to 84 months (in contrast to only 60 months before 1 January 2018).
Given the number of cases where the Danish tax authorities have refused to grant employees the benefit of the Danish special tax scheme, many have taken a second look at the Danish Tax at Source Act ("Kildeskatteloven") section 48E-F.
Often, the discussions about the Act’s section 48E-F stem from advisers disagreeing with the decisions made by the Danish tax authorities in terms of whether or not – or to what extent – an employee qualifies for the Danish special tax scheme.
Currently, an employee who is hired by a Danish branch directly after his/her employment with the parent company is not considered eligible for taxation under the Danish special tax scheme. This is due to the fact that one of the conditions to apply the scheme is that the individual’s Danish tax liability must start in connection with the commencement of his/her Danish employment. As the parent company and the Danish branch are considered part of the same legal entity, the Danish tax authorities do not consider the employee in the above situation eligible for the special expatriate tax scheme. The same principle applies where an employee is hired by a Danish parent company directly after his/her employment with a foreign branch of the parent company.
If the bill is adopted in its current form, employees will be able to apply the scheme even when being hired by a Danish branch or permanent establishment within the same legal entity as the former employer.
One of the conditions of the Danish special tax scheme is that the employee – according to his/her employment contract – be guaranteed a monthly gross salary of DKK 65,195 per month (for 2018). If the salary requirement is not met, the employee's entire employment income for that income year is retroactively taxed according to the ordinary Danish tax rules. Employment income will also be taxed according to the ordinary Danish tax rules in following years.
Under the current regulation, the salary requirement cannot be waived – even if the reason for the salary requirement not being met is the taxpayer being on parental leave.
If the bill is adopted in its current form, a period where the employee – due to parental leave – has a reduced or no salary will be excluded from the calculation of whether the employee meets the salary requirement. The principle also applies where the parental leave stretches across two income years. The employee, however, might be required to document that he/she was on parental leave and therefore did not meet the salary requirement.
Currently, an employee can apply the Danish special tax for up to an 84-month period (7 years). A period with parental leave does not lead to an extension of the 84-month period.
A condition of the Danish special tax scheme is that the employee in question cannot have been tax liable in Denmark (as a resident or nonresident) in the past 10 years according to the ordinary Danish tax rules.
Consequently, if an employee terminates his/her Danish employment, leaves Denmark, and later receives a bonus payment that relates to the (special tax scheme) employment period, the bonus payment will be taxed according to the ordinary Danish tax rules and will thus disqualify the employee from applying any potential remaining period of the special tax scheme.
It has therefore been proposed that the distribution of such a bonus (or similar) payment should not disqualify the employee for applying what remains of his/her period under the Danish special tax scheme.
Over the past few years it has been common for many Danish tax advisers to question the decisions of the Danish tax authorities – primarily in cases where the question has been the branch/permanent establishment issue mentioned above.
Following a ruling from the Danish Tax Appeals Agency in the beginning of 2018, it was concluded that employees could not use the special tax scheme when hired by a Danish branch directly after having been employed by the foreign parent company of the Danish branch. As such, the KPMG International member firm in Denmark considers it a positive factor that the Danish government has now presented a bill to amend this practice, which has affected a number of employees and/or the employers that have guaranteed their employees a specific net salary.
KPMG in Denmark will endeavor to publish another GMS Flash Alert following up on the adoption of the bill.
1 For the bill (in Danish) on amending the Danish Tax at Source Act ("Kildeskatteloven") including provisions pertaining to the Danish special tax scheme as proposed, click here (PDF 183 KB)
The information contained in this newsletter was submitted by the KPMG International member firm in Denmark.
© 2020 KPMG P/S and KPMG Acor Tax P/S, both entities being Danish limited liability partnerships and member firms of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.
For more details about the structure of the KPMG global organisation please visit https://home.kpmg/governance.
Flash Alert is an Global Mobility Services publication of KPMG LLPs Washington National Tax practice. The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.