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This month the Danish-UK Chamber are proud to introduce a feature article made by Frans Thomsen regarding special tax benefits for Danes abroad.
Still more Danes resident abroad hear, that it may be possible to return to Denmark and within a period of 3 years, only pay a 25% tax.
Unfortunately it is not that simple but rules do exist!
What people hear about is the so called expert taxation where people who want to be taxed by the rule in the Tax at Source Act’s § 48 E are allowed to pay 25% in taxes when they fulfil certain requirements. The tax is a gross tax, as allowances cannot be obtained when the 25%-tax is calculated.
The conditions/requirements are:
- A requirement of tax liability including that you haven’t been tax liable to Denmark within the last 3 years
- That you haven’t been send out or employed in companies connected to allied companies
- The work you are paid for must be executed in Denmark
- You cannot have been part of management in the company where you will be employed
- A minimum compensation claim exist
As a main rule you have to become completely liable to tax to Denmark in connection with commencement of employment and the 25% tax system must be used from this time. In this way it is not possible to enter into contract of employment of e.g. a 12 months employment on ordinary tax terms followed by 24 months on 25%-terms. The complete tax liability to Denmark must also be abided to as long as the 25%-system is being used.
The prerequisite about entry of complete tax liability does, however, not apply to scientists etc., cf. “exceptions for scientists” mentioned below.
The complete tax liability to Denmark may commence in connection with acquisition of residence, or it may commence according to the special rule of residence in the Tax at Source Act. In this way it is possible for a person to stay in Denmark and commence employment using the 25%-system without an immediate acquisition of residence at commencement of employment.
If a person at commencement of employment, stay in Denmark without at the same time acquiring residence, the stay has to be of such duration that complete tax liability sets in. In this way the stay has to be of continuous duration of at least six months if residence is not acquired. According to practice, complete tax liability to Denmark commences from the beginning of the stay in cases where the stay in Denmark exceeds the 6 months period, which is treated in the Tax at Source Act, or where residence is acquired before the end of this period.
It is also possible to stay –without acquirement of residence- in Denmark in a period of time before commencement of employment, forming the basis of a 25%-taxation. However, in this time period it is not possible to receive Danish earned income or income from independent business in Denmark if you wish to use the special system of taxation. This is due to the fact that the condition about not having been tax liable to Denmark for at least three years previous to the employment will not be met, cf. “Not liable to tax to Denmark within the last three years” mentioned below.
If you stay in Denmark previous to commencement of employment without acquiring residence, residence must be acquired in connection with commencement of employment. In this case the requirement is regarded as fulfilled if employment is commenced after the shorter period of time it usually takes to move and furnish residence.
THE THREE YEAR RULE
It is a prerequisite of the 25%-taxation, that you within the last three years previous to employment in Denmark, haven’t been complete liable to tax to Denmark or have been limited liable to tax to Denmark of earned income or of income arising from business with permanent establishment in this country.
This prerequisite is also regarded fulfilled in cases where you stay in Denmark previous to the entering into or commencement of employment, and where you acquire residence in connection with commencement of employment, cf. above mentioned under stay previous to commencement of employment. In that case it is a prerequisite that, within the time period of the stay in Denmark previous to the commencement of employment, a Danish earned income or income from independent business in Denmark, is not received. The stay previous to commencement of employment cannot be of such duration that full tax liability arises according to the rule of residence in the Tax at Source Act.
The prerequisite that you haven’t been liable to tax to Denmark within the last three years, does not prevent a person who has been submitted to 25%-taxation for less than 36 months, from giving up his full tax liability to Denmark and return later to use the special system of taxation for the remaining part of the 36 month period. In such cases the time periods where 25%-taxation has been used are not included in the assessment of whether the person in question within the last three years has been liable to tax to Denmark. Any subsequent periods where the ordinary taxation rules have been used are, however, included to full extent. In this way for a person who has been subject to the 25%-system for a period of time shorter than 36 months with a subsequent continuance on ordinary terms of taxation, the full tax liability to Denmark must subsequently be interrupted for a period of time of at least three years before you can return to Denmark and use the remaining months on the 25%-system. The period of time under ordinary terms of taxation are deducted in the computation of the stated months.
The prerequisite that full tax liability must set in at commencement of employment, is regarded as fulfilled if a person in employment has been taxed according to the special system, enters into new employment on the same conditions, not later than one month after termination of the previous employment.
Other prerequisites of taxation after the special system must me fulfilled at the same time. It should be noted that the total period of time in which the 25%-system is used cannot be longer than 36 months irrespective of the number of employments.
EXCEPTION FOR RESEARCH WORKERS
The requirement that you have to become fully liable to tax to Denmark in connection to commencement of employment, does not apply to people that are going to carry out research and development in Denmark. Such people can also as limited liable to tax, make use of the system.
It is a prerequisite to this that your qualifications as a research worker are approved by a public research institute or by a research council, or that a research council certifies that the person in question will be carrying out research and development in this country.
NOT PART OF MANAGEMENT
It is a prerequisite for the 25%-taxation that you haven’t been, or at any time within the last five years, direct or indirect part of management (the group), control with the capital in the firm where you are employed.
Hence, when employer’s firm is a company, 25%-taxation cannot take place, if:
- you are a direct or indirect owner, or equivalently within the latest five years have owned 25% or more of share capital, or
- you have or have had more than 50% of voting value at your disposal in the company etc., where you are being employed.
Included are shares which at the same time belong to the person liable to tax and his/hers closest family. Shares which belong to a previous spouse to this circle and shares which a present spouse to this circle has transferred before marriage are, however, not included. In addition to this, shares are included that belong to companies etc. which you and your closest family have decisive influence on.
If the employing firm is privately owned it must be considered whether
- you own or have owned at least 25% of net worth or,
- you have or haven’t had decisive influence in the company
The prerequisite that you cannot directly or indirectly be part of management of control with or the capital in the employing firm, does not only apply backwards in time but equivalently applies in the time period of employment under the special tax system. If the prerequisite during employment discontinues to be fulfilled, the basis of 25%-taxation is no longer present.
STATIONING
It is a prerequisite for 25%-taxation, that the person liable to tax hasn’t been delegated service abroad by the research institution or the firm, or thus group related firm, where the person is going to be employed.
The provision aims at the situation where a Danish firm or research institution delegates an employee to service abroad for a number of years after which the employee is employed in the firm/research institution or in a group related firm in Denmark, possibly with the intention of delegating the person in question to service abroad again later on.
Furthermore, it is a prerequisite for 25%-taxation that the employee hasn’t been employed in a foreign group related firm within a time period of three years after ended tax liability to Denmark. With this it is ensured that the employee is in fact recruited abroad. Consequently, the provision isn’t of significance for people who for example haven’t been liable to tax in Denmark previous to employment in a foreign subsidiary company and who are subsequently employed in the Danish parent company.
According to present practice the prerequisites that you haven’t been delegated or employed in group related business, are regarded as fulfilled if conditions of employment between employee and the relevant firm, research institute or group related firm, haven’t existed within the last five years previous to employment with 25%-taxation.
It is a prerequisite for 25%-taxation that the person liable to tax hasn’t been delegated as PhD student paid by public funds from Denmark, previous to employment.
WORK MUST BE CARRIED OUT IN DENMARK
It is a prerequisite for 25%-taxation, that the person in question must carry out the work in Denmark.
In this provision there is no absolute requirement that all work must be carried out within the boundaries of Denmark. In this way there is nothing to prevent an employee who is taxed according to the special system, to go on the business trips that may be part of the normal attention to a position in Denmark. However, an employment contract after which a substantial part of work has to be carried out abroad, will not fulfil the prerequisites of 25%-taxation.
THE COMPENSATION CLAIM
It is a prerequisite for 25%-taxation, that the monetary compensation for people whose qualifications as researchers are not approved by a public research institution or by a public research council, constitutes a basic amount per month to which must be added labour market contribution, The Danish Labour Market Supplementary Pension, any compulsory foreign social contributions and payments to pension schemes with, in danish: “bortseelsesret”, which means that the company in which you are employed can use an amount from your salary to pay to a pension scheme. The basic amount is regulated annually and in 2006 amounts to 58,600 DKK per month.
”Monetary compensation” is to be understood as amounts which, according to the Tax at Source Act, is income taxed at source, however, except for free board and lodging.
It is important to notice that the wage claim is the wage after deduction of labour market contribution, The Danish Labour Market Supplementary Pension and any compulsory foreign social contributions. Therefore, the real wage claim is higher than the 58,600 DKK (income year 2006). Since a labour market contribution of 8% has to be paid, the real wage claim for 2006 is 63,696 DKK, but additionally must be added The Danish Labour Market Supplementary Pension. In 2007 we will reach about 70,000 DKK per month.
Compensation in the form of benefits in kind, which is not made into income taxed at source, and which is made available by the employer, is not comprehended by the special tax system. Such benefits must be taxed by the ordinary taxation rules.
For the compensation claim to be fulfilled, the amount has to be earned on a monthly basis. It is not sufficient that an amount, corresponding to the compensation claim, is paid out every month. It also has to be earned every month. In this way it is not enough that the compensation as an average over a period of time fulfils the minimum requirement. Periodic bonus payments and the like can only be included at assessment of the compensation claim’s fulfilment, to the extent that the earnings are made on a monthly basis.
Employer’s payment of private expenses of the employee, such as housing costs can, however, be included even if it isn’t a monthly payment but as an example, a quarterly payment. Such amounts are regarded as current earnings and can hence, be converted to a monthly basis by fulfilment of the compensation claim.
In cases where compulsory social contributions are paid abroad, and this is not in monthly but quarterly payments or in other intervals, the amount can likewise be converted to monthly payments by fulfilment of the compensation claim.
If compensation includes both compensation in cash and in kind only the part of the compulsory social contributions which, in proportion, corresponds to the compensation in cash is excluded.
The compensation claim covered above does not apply to people whose qualifications as researchers are approved by a public research institution or a public research council and who carry out research work. The compensation claim, however, does apply completely for people who, without being qualified as researchers, are going to carry out research and development in Denmark.
However, it also applies to researchers that only monetary compensation is covered by the special tax system. Compensation in kind must, as for non-researchers, be taxed according to the ordinary tax rules.
The problems can be summed up as follows:
Tax liability
The requirement that the person in question within the last three years previous to employment hasn’t been fully liable to tax or limited liable to tax of earned income, doesn’t give big problems, but you cannot carry on a trade with permanent establishment in Denmark either. An example is shipping shares or windmill shares, which is why such business has to be sold (to the spouse perhaps), three years before returning home.
Stationing and group employment
The main rule is that you haven’t been employed in the group or delegated by it within the last five years previous to employment on ”expert terms”.
For people who have been liable to tax to Denmark, the rule applies that within the first three years after ended tax liability you cannot be employed in the foreign group related company.
Work must be carried out in Denmark
There is nothing to prevent employing an ”expert employee” who carries out ordinary business trips abroad, but from and administrative point of view the starting point is, that 2/3 of the work is carried out in Denmark.
It is pointed out that the ”expert taxation” cannot be used if an agreement of overlapping of taxes results in transfer to foreign state or the rule of exemption in Ligningslovens § 33 A can be used.
As mentioned it wasn’t easy but there are actually many who can make use of the rules but it probably requires someone to help you check whether you fulfil the requirements. We will always be available to do that.
Frans Thomsen
State Authorized Public Accountant
Kristian Goth Vinther (31) is an Executive Director at Goldman Sachs which he joined in 2000. Kristian is a member of Goldman's Scandinavian Team within the Investment Management Division.
He is primarily responsible for the firm's high net worth clients in Denmark and Norway (individuals, family offices, foundations, small pension funds). Kristian works with his clients on tailor made investment strategy solutions and implementation.
Prior to his current position he was a member of Goldman Sachs' Global Investment Strategy Team. Before joining Goldman Sachs he worked in Nationalbanken (Central Bank of Denmark) for 2 years and as a teaching assistant in micro- and macro economics at the University of Copenhagen. Kristian has a Cand.Polit (MSc in Economics) from the University of Copenhagen and was one of the founding members and a board member of the Young Shareholders Association in Denmark.
Kristian hopes that his daily interaction with some of the most successful entrepreneurs and businesses in Denmark will help strengthen the UK-Danish network. He also expects to help further build the relationship with our Norwegian colleagues through his network and experience in Norway.
The US housing market is attracting a lot of attention in the financial markets at the moment. Existing and new home sales are plummeting and the so-called NAHB indicator from the National Association of Home Builders has almost collapsed over the summer. Many analysts now fear that US house prices are set to collapse, which will almost unavoidably have a ripple effect on the rest of the US economy and eventually send it into recession. Even in Denmark, where house prices and the economy have boomed over the last couple of years, we have seen incipient signs of a weaker housing market and some real estate agents are now talking about falling prices for high-end flats and properties. There are, however, as yet, no official statistics to support this more gloomy view of the Danish housing market, and we in fact doubt that prices will actually fall in Denmark or in the US for that matter.
The UK housing market appears to be a different story altogether. It seems the housing market has not been shaken by talk of higher interest rates and the surprise hike by the Bank of England that took the base rate to 4.75% in August.
On the contrary, it seems that the UK housing market is gaining further momentum. One of our favourite indicators for the UK housing market is the survey conducted by the Royal Institution of Chartered Surveyors, the so-called RICS indicator. In August, this showed that estate agents reporting higher home values outnumbered those reporting lower values by an impressive 35 percentage points. This is the highest level since May 2004. The RICS indicator normally forecasts actual price movements over the next six months.
Lending activity is also very high. The number of mortgage approvals rose 25% y/y in June and lending to individuals secured on dwellings rose more than 40% y/y in July. The strong lending growth and optimism is also being reflected in higher house prices. Rightmove house prices rose an impressive 9.8% y/y in September, which has to be compared with almost flat house prices a year ago.
Optimism is running high in the UK housing market. And judging by lending activity and the strong economy we see no reason why the UK housing market should not continue booming for the next six months or more.
10 October - Joint Noridc ICT Forum 2006
12 October - Denmark's Globalisation Strategy
26 October - Nordic Thursday Drinks
29 October - A tour at the Christies Auction House
14 November - MD Network Meeting: Dansk Industri
17 November - Regional Lunch in Manchester
20 November - Carnegie Art Award
22 November - Evening at Miller Rosenfalck LLP
30 November - Nordic Thursday Drinks
1 December - Annual DUCC Christmas Lunch
The Danish-uk Chamber of Commerce is proud to offers its members several benefits which are provided by members.
Georg Jensen is well known for high quality and impressive design. This Christmas Georg Jensen are offering a 10% discount to all the members for the Danish-UK Chamber of Commerce, if they order for more than £500 and order before the end of November.
For further information please contact Anna Tietze, ukat@georgjensen.com
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Miller Rosenfalck
Anglo-Scandinavian law firm in London with an expertise in English, Danish and European business law for UK and overseas based clients
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Offers Individual members a free half hour consultation at their offices with regards to legal matters.
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Subscriptions
Berlingske Tidende
The Danish newspaper Berlingske Tidende is launching a new universe on the internet Berlingske VIP
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Diplo Magazine
Having no political agenda and high standard content, Diplo is fast becoming "The Economist" of the future"
The Offer
DUCC members can get an Annual Subscribtion to Diplo Magazine for the reduced price of £25. Included in the offer are also a free original art poster and the chance of winning an original printed illustration.
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Hotels
Radisson SAS Portman Hotel
22 Portman Square
London, W1H 7BG
The Offer
The hotel offers rooms to special discounted rates to DUCC members. The discount range from 25 % to 55 %. For any specific enquires contact info@ducc.co.uk
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