Danish Tax Changes to Benefit Expats and Business

On January 1, 2017, a legislative change came into effect in Denmark, relaxing tax regulations for many expats working in the country. The change concerns Denmark’s operation of a special withholding regime, known as the ‘Researcher Tax Scheme’ (or ‘Forskerskatteordningen’ in Danish), which allows ‘foreign researchers and key employees’ to pay a reduced rate of income tax for a maximum of five years.

Prior to the change, some foreign researchers based in Denmark would not qualify for tax benefits offered under the special regime if they worked abroad for a period long enough to trigger a legislative transfer of their tax status to the other country. Under the changes however, expat researchers may now retain their Danish tax benefits (for a certain amount of time) - even if working outside the country.

Tax Scheme Benefits

First implemented in 1992, the Researcher Tax Scheme incentivises skilled research & development professionals to work in Denmark - in turn strengthening the country’s academic and business institutions and increasing its profile on the international stage.

To qualify for the Researcher Tax Scheme, employees have to meet certain conditions which concern their place of work, their qualifications, their average salary (and average monthly salary), and the number of employment contracts they hold. Important details of the Researcher Tax Scheme are as follows:

• Foreign research employees may pay a special, reduced income tax rate in Denmark for up to five years.
• In 2017, the special rate is 26% of their salary - and includes certain taxable benefits such as company cars or mobile phones.
• The reduced rate translates to a gross tax of 31.92% with labour market contributions factored in.
• The Researcher Tax Scheme represents a significant potential saving: outwith the scheme, employees taxed at Denmark’s highest rate (salaries over DKK 521,300) would contribute at a rate of 55.6%.

Changes for Expats

The changes introduced in bill L82 are designed to accommodate foreign employees who meet every qualification criteria for the special rates - but miss out because they have to leave Denmark periodically to carry out aspects of their job. By leaving Denmark (for work) for a certain amount of time, these employees may see their special tax status (and its reduced rates) disappear under the rules of a double taxation agreement. The problem has previously restricted the movement of research workers based in Denmark, forcing them to consider their physical location when planning work trips or taking up professional positions.

To accommodate this group of skilled research workers, bill L82 introduces a 30-day rule to Denmark’s Withholding Tax Act. Specifically, the change applies to Section E, paragraph 2 of the act, and stipulates that from the calendar year of 2017, foreign research employees may continue to apply the special rates of the Researcher Tax Scheme when working abroad - as long as that work does not exceed 30 days in a calendar year.

Research & Development Boost

The Danish government’s efforts to support foreign researchers reflect wider efforts to boost the country’s R&D profile. Danish spending on research (across both public and private institutions) is amongst the highest in the world, and reached DKK 59,976 billion in 2015 - representing around 3% of GDP, and the third-highest amount in the EU.

Spearheaded by a range of industries, Denmark’s commitment to research and innovation seems to be having a positive effect. In June, the Global Cleantech Innovation Index ranked Denmark the best country in the world at promoting cleantech, while in September, the Center for Global Development announced that Denmark had topped its Commitment to Development Index, ranking policies from the world’s 27 richest countries. Beyond the attractive tax regime for expats, Denmark also offers a range of funding schemes and financial incentives for businesses aiming to invest in science, technology or any kind of innovative industrial project.

For any questions or comments in regards to the ability of utilising the regime, activpayroll remain available to assist in the evaluation and application process.