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Amendment of 25% tax scheme for key employees and scientists

January 2009 - Tax & Private Client. Legal Developments by Norrbom Vinding Law Firm, member of ius laboris.

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24-06-2008 - On 3 June 2008, the Danish Parliament passed an amendment to s 48E of the Danish Tax at Source Act to make the 25% tax scheme for highly paid key employees and scientists more flexible and favourable on a number of points. The main features of the amendment include:

  • Instead of 3 years of paying 25% in gross tax (excluding labour market contributions), eligible individuals may opt for 5 years of paying 33%. Whether they wish to do so must, as a general rule, be decided on or before the filing date of the first tax return under the scheme. It is possible to revert to the previous tax rate until 3 years after taxation under the scheme began.

  • It is no longer a requirement that the employment must give rise to full tax liability, as individuals subject to limited tax liability are also eligible under the scheme. This has the practical consequence that eligible individuals may now reside abroad and commute back and forth. Before the amendment, only scientists were exempt from the requirement of full tax liability.

  • Up until now, eligible individuals were required to meet the income threshold each month (income threshold remains unchanged at DKK 61,700 per month, exclusive of labour market contributions and special pension contributions). This meant that they would lose eligibility if earnings fell below the threshold in any month (eg, because of a deduction in salary for unearned holiday). With the amendment, the income threshold is taken as an average over the months of the relevant calendar year. As a result, variables such as bonus and commission can be added to the base salary for the purposes of calculating income. The important requirement to bear in mind is that the average remuneration specified in the contract of employment must exceed the income threshold.

  • The starting point up until now was that the services or work must be performed in Denmark. This requirement was taken by the Danish Central Tax Administration as meaning that a maximum of one-third of the working time was allowed to be performed outside Denmark, thus reducing the scope for business travel. With the amendment, the one-third principle is abolished. In relation to tax residents of Denmark, however, it is important to note that the right to tax under a double taxation treaty may not transfer to another country, which generally means that eligible individuals are not allowed to stay in another country for more than a total of 183 days within any 12-month period and that their remuneration may not be paid by a permanent establishment abroad belonging to the employer or by a foreign employer.

  • Under the former rules, for individuals to be eligible, there must have been no tax liability in Denmark within the last 3 years before taxation under the favourable 25% scheme. With the amendment, this requirement is relaxed for scientists who have been subject to limited tax liability on income earned from guest lecturing in Denmark in periods of up to a total of 12 months, as such income does not prevent eligibility under the 25% scheme if proper employment in Denmark is subsequently obtained.

  • Up until now, individuals who were subject to taxation in Denmark in the past must not have been seconded abroad by the organisation or an affiliate which is employing the individual to perform services or work in Denmark. With the amendment, the condition has been rephrased to the effect that the individual must not have been employed by the employing entity or an affiliate for a period of 3 years before and up to 1 year after the tax liability in Denmark ended, subject to certain modifications. 

The changes will come into force the day after the announcement in the Danish Law Gazette, which is expected to be soon. It should be noted that individuals who are currently taxed under the 25% scheme may opt to transfer to 5 years at 33% if they do so before the end of the original 3-year period. If they so opt, income will be taxed subsequently until the 33% mark is reached, with effect from the transfer to the scheme. As a result of this subsequent taxation and the interest that will accrue, it is important to consider carefully before transferring to the 33% scheme whether it will in fact be financially worthwhile to do so.

Karsten Holt

Torben Mølgaard Hededal

This information does not constitute legal advice and should not be relied upon as such

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