The Danish Expat Tax Regime

The Danish Expat tax regime covers among others highly paid employees and scientists, who have not been taxable in Denmark for a period of ten years. The maximum duration of the regime has been extended from a total of 60 months (5 years) to a total of 84 months (7 years) and the base tax rate has been increased from 26% to 27%.

The Danish parliament has passed a bill that changes two provisions in the Danish Expat Tax Regime (also referred to as the 48E regime or ‘forskerordningen’).

1. As of 1 January 2018, the base rate is increased to 27%, which means that the effective tax will be 32.84% after deducting the gross tax (AM) of 8%. Previously, the base rate was 26% and the effective tax rate 31.92%. From the January 2018 payroll, the employer needs to withhold the 27% for all employees covered by the regime.
2. The regime now applies for up to 84 in months total, compared to previously 60 months. Employees who have been covered by the regime for less than 60 months as per 1 January 2018 and employees employed after 1 January 2018, may benefit from the extended period.

This implies that, an employee who has been comprised by the regime since 2014 will be able to benefit from the extended period of coverage. An employee who has already exhausted the 60 months prior to 1 January 2018 will not be able to continue the coverage and benefit from the extended period.

Besides understanding the technical implications of the changes of the regime, employers might consider these questions;

Is the employer obligated to inform the employee of the changes? From a legislative point of view, there is no obligations for the employer to communicate the changes to the employee. However, if the tax rate is stated in the employment contract, the employer might consider informing the employee about the changes to avoid any misunderstandings and in order to comply with the Danish Act on Employment Certificates. Otherwise, the employer merely needs to withhold the taxes with the rate of 27%. Employers should consider giving the employee proper information of the changed withholding of 27% in January even if no change in the contact is needed, since this may otherwise cause employee dissatisfaction and a lot of questions coming to payroll/HR with regard to the increased withholding.

Who is responsible for paying the additional tax? Unless stipulated differently in the employment contract or in a company policy, the employee bears the costs of the taxes, and thus the employee will be responsible for paying the extra one percent. Please note that there could be special cases, where interpretations of unclear wording in the contract or other agreement discussions between the parties could lead to a different result.

What if it has already been agreed to bridge impact of going from the regime to ordinary taxes after the 60 months’ period with an additional payment from employer? It would depend on the agreement and other circumstances whether the compensation could be annulled in lieu of the new rules.