SKAT’s tax scheme for foreign researchers and key employees: facts clarified and myths debunked

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SKATimageDenmark has the highest average income tax rate among OECD nations – 31.85% for a one-earner married couple with two children or 35.82% for a single earner without children (2013 figures) [1]. While the tax system is progressive and income tax revenues contribute to the services that all Danes benefit from at one time or another, including health care, education (up to and including university), child care, elderly care, and unemployment, the range of tax rates from zero to 55,38% can seem daunting, especially at the upper end of the range [2].

As I have written in previous posts, Danish companies lack highly skilled professionals and the government has passed several initiatives to make the country more competitive in attracting experienced foreign workers to Denmark. One of these is the ‘tax scheme for foreign researchers and key employees’, which gives researchers and highly paid foreigners working in Denmark a special tax rate of 26% + a labor market contribution (LMC) of 8% – an effective tax rate of 31.92% – for a period of maximum 60 months, without any other deductions allowed [3]. The tax scheme, which used to be for a period of 36 months, was extended to a general regime of 60 months on 1 January 2011.

Like many tax policies, however, the intricacies of this tax scheme are not necessarily easy to navigate. And misunderstandings about it abound. For example, on three separate occasions I have been told by other expats that my husband, who currently benefits from the initiative, will have to pay back all the money we have been ‘saving’ under the lower tax rate when our five-year period ends. This is not true and it made me wonder what other misconceptions there were regarding the scheme. Thus, I decided to address this topic in a post about what one should know about the special tax scheme.

This area – taxation and finances – is not a specialty of mine so to make sure I reported accurately I contacted the International Citizen Service in Aalborg and asked them to refer me to an expert who could answer my questions. They gave me Magnus Vagtborg’s name. Magnus is a Tax Manager at the Aalborg affiliate of United Tax Network, which provides a range of tax-related services to corporations and individuals, including advice, preparation of tax returns, payroll, and litigation. With tax advisors in more than 100 countries, they specialize in helping people and companies with cross-border tax issues, including expats. Last October he gave a seminar on the Danish tax system to new arrivals to Aalborg and he often deals with expat residents through this work so he is familiar with where the misunderstandings lie. (Incidentally, he will give another seminar on this topic today in Aalborg.)

I talked with Magnus in his office and asked some basic questions about how the special tax scheme works and what some of the misconceptions are. The following is an abbreviated version of our conversation. (Please keep in mind that this is only basic information about the scheme; people interested in more details and/or information regarding individual cases should consider professional guidance.)

Please note: Some of the calculations below – specifically, those under question 4 and in the table – are based on the 2014 minimum monthly salary of 70,600kr + ATP contributions. Thus, the discrepancy between those and the current monthly salary requirement for highly paid workers of 62,300 (2016 figure).

1)    Who qualifies for the ‘tax scheme for foreign researchers and key employees’? In other words, what is a foreign researcher? What is a key employee?

The first requirement is that the person is a person recruited from outside Denmark to work in Denmark (note: Danes living abroad also qualify for the scheme, as long as they meet the other requirements). The tax scheme does NOT apply to anyone hired within Denmark. Second, one must either fit within the researcher category and/or key employee, aka ‘high income earner’ category.

According to the section of SKAT’s website regarding the scheme, here is the description of a researcher:

“In order to obtain approval for his or her qualifications as a researcher, the taxpayer must be able to document qualifications which correspond to the level required to be appointed as an assistant professor (adjunkt) or at a higher level or as a researcher/project researcher (forsker/projektforsker) or at a higher level at institutions as mentioned under “public research institutions.” Such employment requires scientific qualifications equivalent to those required at PhD level or a similar level.

To be covered by the rules of the researcher scheme, it is required that the employee, in addition to having his/her qualifications as a researcher approved, engages in research. This must be stated in the employment contract, which is included in the application of approval as a researcher. It must be a proper research position. Positions which do not contain the usual research obligations do not qualify for the special tax rules for researchers. This does not mean that the position cannot contain teaching obligations, but the research obligation must amount to an extent which is usual for a research position at a university or a research institute.”

Please note that researchers can be employed by the private or public sector but a Danish government research council must approve the application if the person is not employed by a public research institution. Thus, it is not only university-based researchers who qualify but also those working for, e.g. the pharmaceutical industry or IT companies.

In terms of key employees/high income earners, they must make a minimum of DKK 62,300/month (2016 rate), guaranteed in their work contract. Bonuses cannot make up for a lower monthly salary under the scheme.

2)    What other conditions must a person meet in order to pay the lower tax rate?

There are a number of criteria the individual (employee) and the employer must meet in order to qualify for the regime. Some of the more elementary ones are:

  1. The individual cannot have been a taxpayer in Denmark in the 10 years prior to entering the regime.
  2. The employee must be employed by an employer that is taxable in Denmark. This generally applies to companies that are resident in Denmark and foreign companies with permanent establishment in Denmark (i.e. corporate limited tax liability).
  3. The employee must become and maintain his/her status as a taxpayer in Denmark when entering into the regime. This may seem obvious but the regime relies on the fact that the salary earned is taxable in Denmark. As such the individual must enter into either full or limited tax liability when entering into the special tax arrangement and the taxation right cannot be changed due, e.g. to the content of a double tax treaty.
  4. The employee cannot have majority influence over the company employing him/her. This refers mainly to the degree of control the individual has over the company and one’s possession of stock in the company. SKAT’s web site states:

“As an employee, you must not have been directly or indirectly involved – within the past 5 years prior to your employment – in the management of or have had control or significant influence over the enterprise where you are being employed. This condition applies throughout your employment under the special tax scheme. If your employer’s enterprise is a company etc. and you are a shareholder in the company, you must not:

  1. own or have owned 25% or more of the share capital
  2. hold or have held more than 50% of the voting rights.”

3)    What must an employer do in order for their employee/s to benefit from the scheme?

  1. They must apply to SKAT, on behalf of the employee, for that person’s inclusion in the scheme. The employee does not handle the application process.
  2. To high income earners, the employer must offer a contractually agreed salary at a minimum of DKK 62,300 in 2016 + ATP (Danish social security) per month. If the agreement includes an employer administrated pension plan, the employee’s part of the contribution must be added on top.

4)    I have heard that the difference in the tax rate under the special scheme and the standard scheme is not that great. Can you explain?

This depends greatly on the individual’s circumstances and wages; for example, whether the individual has children, drives over 25km to their work place, or has an unemployed spouse. Individuals interested in knowing what they could save under the scheme – and whether it is worth it, considering the fact that they cannot take deductions – should seek professional advice.

Scenario 1: If we take the case of an individual (single, member of the Church) who earns the minimum wage to qualify for the scheme – DKK 70,700/month (70,600 + 100 ATP) – the calculated annual tax paid under the two schemes would be:

Special expat regime: DKK 270,809 (or an effective tax rate of 31,92%)

Standard regime: DKK 386,182 (or an effective tax rate of 45,52%)

Scenario 2: An example of an employee within the researcher category, however, who is married but whose spouse does not work, who is not a member of the Church, and who earns DKK 400,000/year (or DKK 33,333/month) would pay the following tax amounts (2014 tax rates):

Special expat regime: DKK 127,679 (or an effective tax rate of 31,92%)

Standard regime: DKK 128,251 (or an effective tax rate of 32,06%)

Examples

TaxExamples
The top two examples (Expat and Ordinary) refer to scenario 1 above while the bottom two (Expat and Ordinary, wife unemployed, no church) refer to scenario 2. Figure provided by Magnus Vagtborg of United Tax Network

5)    Under the scheme, do I have to pay back the money I ‘saved’ after my five-year period is up?

No, although this was true under the previous rules, which were abolished for researchers in 1998 and everyone else in 2002. The remaining elements of this requirement were finally removed in 2011 with some very few exceptions for individuals who have been out of the Danish tax system for three to five years. For the vast majority of people the rule no longer holds.

6)    If I leave the country during the five-year period and then return, can I continue to pay the lower tax rate?

Yes, the system is based on monthly tax reports made by the employer to SKAT, and there are a total number of 60 months to spend – even if the person leaves and returns to Denmark. However, he/she must not have paid taxes at the standard tax rate in Denmark for the 10 years prior to entering the scheme.

7)    Which deductions am I allowed under the scheme?

None. However, there are special rules for deduction of (Danish) pension and foreign (EU) mandatory social security, which are similar to ordinary taxation rules. Some allowances (travel, lodging and board) can, under certain circumstances, be offered tax-free.

8)    What if the individual earns other sources of income?

The amount of income possible to include under the expat taxation is rather narrow, as it only comprises payable wages from the employment accepted under the regime, including rights to a company car and mobile phone. All other income (even income associated with the employment, e.g. free housing) is taxed under the ordinary regime.

The individual’s year-end tax statement sent by SKAT will, in principle, contain two different statements: one will comprise all income that falls under the expat tax scheme and the other taxes on any sources of income that fall under the standard Danish tax system. If any of the individual’s deductions cannot be utilized through the latter they are “lost”, meaning they cannot be carried to a spouse or to the following year.

During our conversation, Magnus provided many additional details and exceptions that apply in specific cases. Due to the variability of individuals’ situations, I chose to focus on only the core issues and questions in this post. Please leave comments below or contact me if something is unclear or there is some information missing that you feel should be added.

[1] See http://stats.oecd.org/Index.aspx?DataSetCode=AWCOMP for more information about income tax levels in OECD nations.

[2] The rate of tax one pays in Denmark depends on one’s income; individuals who pay no tax are those who earn little or no income. Generally people pay between 36 and 45% in tax after labor market contributions (LMC).

[3] LMC (Arbejdsmarkedsbidrag in Danish, click here for more information) is a gross taxation and therefore deducted prior to the 26% calculation. For further clarification, please contact me.

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22 thoughts on “SKAT’s tax scheme for foreign researchers and key employees: facts clarified and myths debunked

    Sara said:
    August 7, 2015 at 4:36 am

    How are overseas sources of income treated, where those sources of income will be taxed in the location in which they are earned? For example, if one rents out a house temporarily in Australia while in Denmark, would one pay tax on that income in Australia. Must I also pay tax on it in Denmark as part of ‘any additional income’? Or is income generated and taxed overseas exempt from Danish tax for the first 5 years?

      sarahinjylland responded:
      August 7, 2015 at 5:48 am

      That’s a very good question, Sara. My gut reaction is that that income won’t be taxed in Denmark but I’ll ask Magnus, the accountant who checked my post before I published it and respond here when I get a response.

      sarahinjylland responded:
      August 10, 2015 at 9:35 am

      Hi Sara – I talked with Magnus and he explained to me that there are several variables that could affect one’s tax situation, which therefore makes it impossible to answer your questions as is. He would have to know more about the specifics. Please feel free to contact him (his company’s contact info/link to his company is included in my post) and provide more details about your situation. Good luck!

    Sara said:
    September 20, 2015 at 11:38 pm

    My situation is that I am employed by a large US company and they have an office in Denmark. I have enquired about transferring to that office and it is possible. I asked Skat about whether I would be eligible for the special tax scheme and they said no (I meet all other criteria). I would have to give up my secure job in the US and take a new job in Denmark. To me this does not make sense. If the aim is to have skilled people come to Denmark then surely the easiest way to do that is to encourage internal transfers within large corporates that have a Danish presence. If that is disallowed then Denmark would seem to be missing out on a large pool of skilled people that can most easily make the move, securing a job without the hassles of trying to find new employment with a different Danish company. Have you heard of anything around this kind of situation?

    It is a big ask to make someone give up a secure job and transfer to Denmark, paying almost double the tax, to see if they like it and want to live there permanently. Certainly beyond what I would be willing to do.

      sarahinjylland responded:
      September 21, 2015 at 9:56 am

      Hi Sara – The aim of the special tax scheme is to help Danish companies and organizations recruit workers from abroad; not to provide breaks for people who are transferred by their own company. The tax rate is high in Denmark because taxes pay for a lot of services that benefit the people who pay them, e.g. healthcare, education, child care subsidies, unemployment, family benefit, etc. If foreign companies were given a carte blanche to transfer their people over here and let them pay the lower tax rate, imagine the uproar in Denmark.

      The Danish government does not need to include staff transferred to Denmark in the scheme because foreign companies can presumably find enough people who are willing to come over despite the high tax rate. While it is true that Denmark needs qualified professionals, what they ultimately need are people who are going to move here and stay – which is part of the reason the government extended the special tax scheme from 3 to 5 years; research (and experience) have shown that individuals/families who live here for at least 3 years are more likely to remain. The point is not to offer people a five year low tax scheme, knowing those people fully intend to leave when their taxes go up. The Danish government has no interest in providing companies with tax breaks for rotating in and out expats. If companies had trouble rotating in expats because of the high tax rate they would have to pay them more.

        Sara said:
        October 14, 2015 at 10:23 am

        What an assumption-laden response but thanks for replying.

        My company is not wanting to transfer me – “The Danish government has no interest in providing companies with tax breaks for rotating in and out expats” does not apply. I am thinking of relocating to Denmark because my husband is Danish and we would like to give it a try. If we like it we would stay probably indefinitely. My husband is not 100% sure he would find moving back to Denmark ideal but also wants to give it a try. Unfortunately the rate of tax is a major issue in a “give it a try” situation. It effectively says “pay half of your previous take-home pay for the privilege of trying Denmark to see if you like it”. We basically would have half the amount of money we have now in our pocket to live in one of the most expensive countries in the world. If we like living in Denmark this goes down the list and we would stay beyond the 5 years.

        If you think about my options as

        1) keep my job and move and pay 59% tax (my company is not moving me, I want to move and they are accommodating it)
        2) give up my current job and find another job in Denmark (with either a Danish or foreign owned company) and pay 32% tax for 5 years then 59% from then possibly until we die.
        3) look at it as Denmark making things difficult just because I want to stay with the same company and don’t move and deprive Denmark of 2 highly educated, well paid, skilled individuals and a child that will someday pay tax too (and her children…).

        Yes, this is very narrowly focused on what is best for us, but it is good for Denmark to get such skilled people (we are both at the top of our fields) at the cost of lower tax for 5 years and I would suggest it is a bargain and a risk worth taking.

        I don’t see why 1) and 2) should be different. Could companies take advantage of it? Probably. Would it be done on a scale that matters? I doubt it (consider the recent $800m the Danish tax authority lost in a single fraud case to put it into perspective). Consider how few people actually fall into the non-research guidelines to get an idea of how little effect this could have as so few jobs would qualify anyway. Your statement that companies could take advantage of it makes little sense on the possible scale they could do so.

        My belief is that Denmark is cutting off a ready supply of skilled, highly paid individuals that could more easily move into a job in Denmark. Even if some companies use it to rotate staff as you suggest, some of those staff are likely to ask to stay after their assignment is up and so Denmark still benefits from more skilled workers. Asking people to give up perfectly good, high paying jobs, to move to a new company when their current company already has an office in Denmark is just not going to cut it as not just the tax but also the risk of working for a company you don’t like are too great.

    ED said:
    March 7, 2016 at 3:50 pm

    Hello. Thanks for this useful blog. Do you know if the individuals under the special tax regime are entitles to feriepenger?

    Andrea said:
    April 20, 2016 at 10:45 am

    Hi, this is a very good article. do you know what happens, if during the 60 months, all other conditions being the same, I change employer (i.e. I change job), same type of industry and same type of job.

      sarahinjylland responded:
      April 20, 2016 at 11:03 am

      That is a good question, Andrea. I do not know the answer. On SKAT’s website it says that ‘taxation under the special tax scheme ceases immediately if you as an employee no longer fulfil one or more of the conditions.’ (http://www.skat.dk/SKAT.aspx?oId=107038&chk=212078=)

      However, elsewhere on the same site it states that ‘if you switch to another contract of employment which is also covered by the special tax scheme, a maximum of one month may pass between your old employment and the new one. If more than one month passes, you must once more fulfil all conditions.’ (http://www.skat.dk/SKAT.aspx?oId=107039&chk=212078)

      The end result is I cannot advise you – the best thing would be to talk with a tax advisor in Denmark who is informed and up-to-date about the rules. Good luck!

    RC said:
    May 24, 2016 at 5:29 am

    Hi, I have a question on the calculations in the blog. The minimum salary for the scheme is DKK62,300, but in your calculations you have also said the minimum is DKK70,700. What accounts for the difference?
    Thank you for the article!

      sarahinjylland responded:
      May 24, 2016 at 7:29 am

      Hi RC – Thanks for your message, and for pointing out the discrepancy. In fact, the calculations provided in this post are from 2014, when the minimum monthly salary was 70,600kr + ATP contributions (in this instance calculated at 100kr). I have not asked Magnus, who did the calculations for the post in 2014, to redo them since the minimum salary went down, but thanks to your sharp eye, I will now include a note about the difference. I hope this helps! 🙂

    Hereiam said:
    August 23, 2016 at 5:52 pm

    Let’s assume I qualified for the expat tax in 2015. Now the income requirement went up for 2016 and my income is below the 2016 threshold. Would I still be eligible for the expat tax rate?

      sarahinjylland responded:
      August 23, 2016 at 6:44 pm

      I assume that you would not, but please ask your HR or payroll office about this. Good luck!

    nowherehere said:
    October 15, 2016 at 8:46 pm

    I’m wondering about unpaid holidays. What if my contractual salary is more that 62300 per month (in 2016), yet the actual pay is going to be an average pay of 60000 per month (in 2016) due to e.g. unpaid holidays. Would I still be eligible for the expat tax rate?

      sarahinjylland responded:
      October 15, 2016 at 8:55 pm

      I am not certain, but I would assume that the contractual salary is what SKAT bases its decision of whether to give you the special tax rate on…My advice is to talk with your employer and, if they can’t answer, ask them to talk with SKAT about it.

    KP said:
    November 4, 2016 at 5:04 pm

    Hi, I have a question: I have received an offer to move to Denmark. The salary is sightly below the minimum requirement, but I have been advised by their HR that the 53a pension contributions will count as part of my recognised salary. In this case, I would meet the requirement and I could receive expat tax treatment. Do you agree that the 53a pension (in which the contributions are taxed) will count? Any help appreciated! Regards, KP

      sarahinjylland responded:
      November 4, 2016 at 7:07 pm

      To be honest KP, I would ask your employer to call SKAT and verify this for you. They will have to apply for you to benefit from this scheme anyway. My sense is that the pension does count toward the salary requirement but again you should have your employer check.

    Margaret said:
    December 5, 2016 at 1:37 pm

    Hi! I am having the same problem. My husband would be able to qualify if you add his pension and bonus. So is the yearly bonus included? Thank you!

    Nasira Karim Audhuna said:
    June 1, 2017 at 8:01 pm

    Hi, nice article!! Thanks for sharing. May I please know what is the exact tax rate for single earning married couple (without children) in Denmark? I see you have said it’s 35.82%; Can you please suggest me some authentic source to find this answer, please?

      sarahinjylland responded:
      June 2, 2017 at 4:31 pm

      Hi Nasira – I put a footnote on that, which links to an OECD spreadsheet on tax levels. There you can find the information you are looking for, up to 2016. I hope this is helpful!

    Martin said:
    July 14, 2017 at 3:00 pm

    Hi all, I was just looking for some current facts on the expert tax scheme and came across this blog.
    Interesting discussion between Sara and Sarah regarding rationality and justice of the tax scheme.
    In fact, I was hoping to be covered by the expert tax scheme in case I moved to Denmark for a new job.
    Unfortunately, it seems this is not the case as I had lived in Denmark before and had been fully taxed in the period 2005 to 2011. This also seems unjust in comparison with somebody who has already benefitted from the low tax scheme >10 years ago and can then use it again…

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