Entering the Danish Expat Scheme is now easier

22. januar 2019

The Danish Expat Scheme offers a low 32.84% tax rate on employment income, as opposed to the normal rate of up to 55%. The scheme can be used for up to 7 years. Certain conditions must be met in order to qualify. We refer to our guide for a short introduction.

Danish employment contract

In a previous Deloitte Update, we described how the previous formalistic requirements towards the required Danish employment contract in principle would be removed from the law. 

By removing, the condition of having a formally qualified Danish employment contract at the exact date of entering a Danish tax liability more predictability and transparency should be available in terms of the obtaining approval for using the Expat Scheme.

In the previous update, we outlined that – despite the good intention – our expectation was that also going forward it would still be necessary for practical purposes to establish a qualified contractual relation between the foreign employee and the Danish employer.

The commentaries and specific questions answered by the Ministry of Taxation confirms this. Also going forward the practical reality will be that there should be a qualified contractual relation between the foreign employee and the Danish entity (the Danish employer). The contract will also serve the purpose of e.g. documenting that the minimum salary requirement is observed. 

However, the new rules are more lenient on this topic and the Ministry of Taxation makes it clear that not only a pure local Danish employment contract can qualify: 

• An international assignment contract as the basis for cross border assignments within a group is explicitly mentioned as being sufficient for qualifying for the Expat Scheme. The Danish (receiving) entity should as the main rule be a part of the contract.
• As we anticipated the Ministry of Taxation has confirmed that it is possible to be covered by social security in e.g. another EU country (Regulation 883/2004 etc.) and at the same time qualify for the Danish Expat Scheme. 
• In situations with international assignment contract and remaining on home country social security, it is possible to have the salary paid out from the home country. In these situations, the rules would require a recharge of salary costs to the Danish entity. In addition, the Danish entity must – despite the payout being made abroad – withhold and report Danish taxes.

Other versions of a contract can also be suitable as basis for qualifying for the Expat Scheme.

As mentioned in the update, the type of employer-employee relation that qualifies must have sufficient substance and not all relations will qualify. This means that going forward - and if we try to foresee the challenges with the new rules - we expect that the distinction between, on one hand employer-employee relations with enough substance vs. on the other hand the non-qualifying hiring-out-of-labor situations, will create confusion.

As also mentioned in the update, the overall conclusion on the new rules still is that we advise to have an employment contract between the Danish company and the employee in place and at the beginning of the employment. An international assignment with the Danish company being one of the parties to the contract can also meet the requirement.

Bonus earned during period when covered by the Expat Scheme, but paid out afterwards 

A bonus based on performance within an employment covered by the Expat Scheme, but which is paid out after the end of a period with expat taxation, will as from 1 January 2019 no longer eliminate the possibility of reentering the Expat Scheme and use any remaining period. 

As expected, the Ministry of Taxation has clarified that also equity income is covered by this if related to the Danish employment and with performance relating to the period with the Expat Scheme. 

Important to note is that only bonus etc., earned during an expat tax period after 1 January 2019, can be taken into account under this new rule.

Subsidiary vs. branch (as the Danish employer)

There were no adjustments on this topic and now it is possible for an employee of a foreign company to take up employment with the Danish branch of the foreign company and use the Expat Scheme (irrespective of the foreign company and the Danish branch being the same legal entity).

Period of maternity leave and less salary 

There were no adjustments on this topic and as from 1 January 2019, periods with lower salary due to maternity and paternity leave will be disregarded when measuring if the minimum salary requirement is fulfilled.

Entering into force

Amendments have effect as from 1 January 2019.