Denmark 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) . 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 .
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 . 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:
- The individual cannot have been a taxpayer in Denmark in the 10 years prior to entering the regime.
- 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).
- 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.
- 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:
- own or have owned 25% or more of the share capital
- 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?
- 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.
- 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%)
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.
 See http://stats.oecd.org/Index.aspx?DataSetCode=AWCOMP for more information about income tax levels in OECD nations.
 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).
 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.