Danish Expatriate Tax Rate Not Always Most Advantageous Option, BDO Says

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By Marcus Hoy 

Oct. 7 — Danish companies seeking to utilize a special 26 percent tax rate for skilled foreign labor should take care when drawing up employment contracts, a lawyer at accounting firm BDO International told Bloomberg BNA.

In the aftermath of a recent Western High Court ruling, BDO tax consultant Anders Kiaerskou noted Oct. 7 that some types of remuneration are ineligible for the favorable rate.

In effect since 1992 in various forms, the special income tax rate is designed to reduce a shortfall in skilled foreign labor by taxing qualifying expatriates at 26 percent for up to five years. When labor market contributions are added, the rate amounts to 31.9 percent, which compares favorably to a standard top marginal rate of 56 percent.

While all professions are eligible, employees must be earning more than 70,600 kroner ($12,000) per month after labor market and pension contributions. No minimum salary requirements exist for approved researchers.

The special rate is not only used by domestic companies, but also tax-liable subsidiaries of foreign multinationals whose employees have, in the past, been reluctant to relocate due to the nation's high income tax rates.

Court Ruling on Foreign Company Director

The Western High Court ruling (SKM2014.652.VLR), published Sept. 19 by the Danish Tax Authority (SKAT), demonstrates that “careful consideration” should be applied when drawing up foreign employees' salary packages, BDO said in a Sept. 26 statement.

The case, which dates to April 2014, concerned a foreign company director who had been offered share options by his company following a takeover. After declining these options, he subsequently received a cash bonus. While bonuses are generally subject to the preferential rate, SKAT, a district court and ultimately the High Court held that the bonus did not qualify for this rate, as it was paid in lieu of share options, which receive no preferential tax treatment.

“Cash salary, including bonuses, can usually be taxed according to the special 26 percent tax scheme” BDO said. “However, in this case, the bonus was calculated based on the share options awarded to the employee during the employment.”

According to BDO, the progressive nature and personal allowances under the general tax system mean a benefit will not always be gained by subjecting all employee remuneration to the 26 percent rate. Examples of nonqualifying remuneration include tax-deductible contributions to Danish pension schemes and the taxable value of free housing, BDO said.

Payment as Regular Salary ‘Advantageous'

“Generally, it is advantageous to pay a large percentage of the employee's remuneration package as a regular salary, as such payments generally qualify for the 26 percent rate,” Kiaerskou told Bloomberg BNA. “Therefore, it may be appropriate to choose to give the employee a higher cash wage instead of providing fringe benefits that cannot be taxed under the 26 percent rate. This practice could also help employees achieve the minimum salary requirement.”

“If the employee does not have any taxable income other than salary and his or her personal allowance is not used, it may be more advantageous to provide the employee with fringe benefits that are taxed under the general rules instead of salary” he said. “Companies should seek specific advice on optimizing their use of the 26 percent tax rate.”

In the future, he said, the minimum salary requirement is expected to fall, and a new bill allowing for such a measure is scheduled to be presented to parliament by the end of 2014. “The intention is to allow companies a greater opportunity to recruit a highly qualified workforce and thereby improve their competitiveness” Kiaerskou said.

“A reduction will undoubtedly lead to more individuals being taxed under the scheme” he said. “Whether it will improve the competitiveness of companies is, at first glance, rather doubtful.”

“If the aim is to strengthen the competitiveness of Danish companies through changing the tax system, then a reduction of the qualifying requirement for the special tax scheme appears highly unambitious considering that Denmark has one of the world's highest tax burdens” Kiaerskou said. “The very fact that we have such a scheme at all shows politicians are aware that high tax rates reduce competitiveness.”

To contact the reporter on this story: Marcus Hoy in Copenhagen at correspondents@bna.com

To contact the editor responsible for this story: Cheryl Saenz at csaenz@bna.com