Working in Denmark: What Are The Key Tax Implications?

Will your employees soon commence working in Denmark? Before embarking on an international assignment to Denmark it’s essential to ensure careful planning and consideration, especially when it comes to your UK-resident employees. We explore the factors surrounding income tax implications for employees dispatched to work in Denmark. Understanding these considerations is essential for ensuring a seamless transition and maintaining compliance throughout the assignment. If you have UK-resident employees who are being posted to work in Denmark, there are a number of important factors to consider concerning their income tax and social security/National Insurance liabilities in both the UK and Denmark. 

Working Offshore in Denmark

Firstly, as with most other European countries, if employees are working on the Danish Continental Shelf, they will be liable to pay Danish tax from the first day of work in Denmark. Normally, when working offshore, the tax payable is at a different rate from the Danish tax paid by Danish nationals. There is also a separate set of simplified reporting arrangements in place to declare the income and tax attributable to each employee, whose activity in Denmark falls under the Hydrocarbon regime. The tax rate will normally be a flat rate of 35.6% and any employees included in this simplified submission should not be required to submit a Danish income tax return. 

Double Tax Treaty

The double tax treaty in place between, Denmark and the UK, is different from most other treaties when employees are working offshore. The impact of this unusual tax treaty is that earnings paid for duties offshore in Denmark are not taxable in the UK, although they remain liable to UK National Insurance. 

When a UK resident works overseas and incurs a liability to overseas tax, the normal method to claim credit for the double taxation is to offset the overseas tax against their UK tax . Very broadly, the UK tax payable is reduced by the amount of the foreign tax. 

However, this is not the case with Danish tax payable when the duties are offshore in Denmark.  

Credit is claimed, by exempting the portion of Danish offshore earnings from UK tax. This very subtle difference makes a significant practical difference, which can cause a lot of confusion for payroll departments. Getting it wrong can lead to an HMRC enquiry as well as difficulty in correcting the position at a later date. 

In addition, if the employees you are sending are going to be UK basic rate taxpayers (i.e. 20%), then consideration must also be given to whether their net pay is going to be impacted by the higher Danish offshore tax rate, or if the company will ensure they are no worse off, due to working in Denmark. If the Company decides to compensate its employees for any net pay impact that has occurred, gross-up calculations are required at the UK tax year-end, or at the point the employee leaves the company to work out the differential and the additional payment due, to bring them back to the same position had they only worked in the UK. 

What about working in denmark onshore?

If employees are working onshore in Denmark, there are many variables to consider before it can be established whether employees are taxable or not. Most of the considerations relate to the employer and not to the employee even though the answers determine the employee’s liability to income tax. 

In many cases the employees may not be taxable, however, if they are found to be liable to Danish tax, the Danish income tax rates are some of the highest in the world, and a tax credit claimed through the UK payroll, would not likely cover all Danish tax, and so the same net pay position as for working offshore would need to be agreed. 

Additionally, a Danish payroll would have to be operated, bringing about further costs. 

Finally, consideration must be given to the social security position, and in most cases, we would recommend looking to keep employees within the UK National Insurance system rather than Danish Social Security. 

HOW CAN AAB HELP?

As you prepare to send your UK-resident employees off so they can begin working in Denmark on international assignments, it is crucial to grasp the complexities surrounding income tax implications and compliance requirements.  Understanding these nuances is paramount for ensuring a smooth transition for your employees while maintaining compliance with tax regulations in both jurisdictions.  

We are experts in advising companies & individuals that have or are considering work in overseas locations, particularly in Denmark. Across the team we have decades of experience supporting companies & individuals, in assessing what their Danish reporting obligations may be. We can offer support in making all necessary registration, tax filings and payment requirements, ensuring the process is as seamless and painless as possible. 

By partnering with AAB, you gain access to expert guidance and support to navigate the intricacies of sending employees to work in Denmark. This will safeguard your company’s interests and ensure a seamless experience for your employees abroad. 

If you are looking to send employees to Denmark or are already in the country and want to ensure you are compliant and as efficient as possible, please do not hesitate to get in contact with Carol Sim, or a member of our Overseas Employment tax service team.