The Danish Expat Scheme
Welcome amendments to the Danish Expat Scheme
A new draft bill has been introduced and the intention is to make life easier for companies and employees making use of the favorable Danish expat tax scheme. The draft bill deals with several topics, which all aim to make the scheme less administrative burdensome, transparent and more flexible.
6 September 2018
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 applied 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
A fundamental condition for entering the existing version of the Danish Expat Scheme is that the employee enters into an “employment relation” with a Danish employer.
Based on present wording, the Danish tax agency (Skattestyrelsen) has – in our opinion against the intentions of the scheme - managed to interpret and impose burdensome formal requirements in terms of character and content of the Danish employment contract that must be entered between the Danish employer and the employee recruited from abroad.
This has caused significant challenges for companies and employees using the Expat Scheme.
The character of the previous challenges have been multiple. However, especially international assignment contracts in all shapes have caused problems, as such contracts normally involve a foreign company assigning the employee to work for a Danish subsidiary. Consequently, Skattestyrelsen has raised the question; which entity (the foreign or the Danish?) is in reality the employer?
In an attempt to solve this problem, the existing formalistic and burdensome requirements towards the employment contract will in principle be removed from the law.
By removing the condition of having an approved Danish employment contract at the exact date of entering a Danish tax liability, more predictability and transparency should be obtainable.
Going forward, it will still be a requirement to have a Danish employer in order to apply the Expat Scheme. However, the evaluation as to whether there is a “Danish employer” will change and the intention with the draft bill is that entering the Expat Scheme shall no longer be conditioned on – at the exact time of entering Danish tax liability – the existence of a formal employment contract that fulfils the not very transparent conditions set up by the tax authorities.
So far so good.
In the new proposed version of the Expat Scheme, the employer-condition will be fulfilled if:
- the foreign employee and the Danish company/branch enters into the type of employer-employee relation that is used to determine if Danish limited tax liability is triggered in cases where foreign employees are working physically in Denmark for a Danish company/branch.
An important point is that this version of an employer-employee relation does not necessarily require a contract.
So, what is the content of this new employer-employee criterion, and how do Danish companies document this employer-employee relation?
Among others, the following requirements will be involved when determining if this employer-employee relation is fulfilled:
- The “employer” has the right and competence to instruct and control the individual and the work performed,
- The individual only (or mainly) works for one “employer”,
- An (employment) agreement has been entered regarding the individual’s – on an on-going basis – work for the “employer”,
- Working hours are determined by the “employer”,
- The individual has a right to a notice period,
- The salary is calculated in a manner, which is normal for employees; hourly, weekly, monthly, provision etc.,
- Salary is paid out periodically (e.g. each month),
- Cost of salary is borne by the employer,
- The individual does not have his/her own business costs associated with the work performed for the “employer” (as opposed to a self-employed),
- In terms of related legislation, the individual is regarded as an employee (e.g. the Danish salaried employees act, law on work injury insurance, law on holiday pay, the Danish working environment act).
It is important to note that the required Danish employer-employee relation must (still) have significant substance and the Danish company and the employee must be able to show that they have established a normal employer-employee relation.
This means, for example, that the related tax-concept called “Hiring-out-of-Labor” (arbejdsudleje) – which is also categorized as an employer-employee relation – will not meet the requirements for entering the Expat Scheme (not enough substance). The distinction between these two concepts of employer-employee relations will be very important.
However, the distinction between a “normal” employer-employee relation (fine for the Expat Scheme) and the type of employer-employee relation found within the Hiring-out-of-labor rules (not enough for the Expat Scheme) is narrow. The fact is that the difference between the two concepts can be documented best by means of an employment contract. This also means that there is a potential that after this change, focus will be on the existence of an employment contract.
In the hands of the Danish tax agency, it is not possible to know how this new and (intended) user-friendly version of the Danish Expat Scheme will be interpreted. The risk is that Skattestyrelsen – as the new employer-concept remains subjective – will continue to have a formal focus and require a certain version of an employment contract in order separate from the Hiring-out-of-labor concept. And the risk is that also the timing of the contracts will continue to be crucial. On the other hand, the intention of this new bill is very fine.
So, at this stage, the conclusion remains that we advise creating an employment contract between the Danish company and employee and have this in place at the beginning of the employment. E.g. an international assignment contract, where the Danish company is a party, will also meet the requirement.
Covered by social security in another country?
It is expected that the new bill will clarify that it is possible to be covered by social security in e.g. another EU-country (Regulation 883/2004) and at the same time qualify for the Danish Expat Scheme. For some reason, Skattestyrelsen has questioned this.
Bonus earned during period where covered by the Expat Scheme, but paid out afterwards
Status with the existing rule is that e.g. a bonus* vested and paid out after the end of a period of for example 2 years with Expat Taxation, will eliminate the possibility of reentering the Expat Scheme – and use the remaining 5 years (unless the employee stays out of Denmark for at least 10 years, cf. the basic condition of having no normal types of Danish tax liability for at least 10 years prior to entering the Expat Scheme).
Clearly, this is contra-productive in terms of the intention of the Expat Scheme (attracting talent from abroad).
Going forward, a bonus that is based on performance within an employment covered by the Expat Scheme, but which at the same time is paid out after the end of a period with Expat Taxation, will not eliminate the possibility of reentering the Expat Scheme and use any remaining period.
While this amendment is positive, the Ministry of Taxation did not have the appetite to make the further and logic step and accept that such bonuses – paid after termination of the period with the Expat Taxation – could also be taxed with the low Expat Tax rate.
*We expect that also equity income related to the Danish employment (e.g. restricted shares, share options) and with performance located during the period with the Expat Scheme will be covered. However, this is not 100% clear from the draft bill.
Subsidiary vs. branch (as the Danish employer)
As mentioned above, as a basic condition, the Expat Scheme requires a Danish employer. In principle, the Danish employer can be both a Danish subsidiary of a foreign company or a Danish branch of a foreign company.
With the existing rule, it is a requirement that the Danish employment commences at the same time as entering Danish tax liability. In short, a “new” Danish employment must commence.
At some point in the not very far past, the Danish tax agency decided to interpret this in a way so that an employee of a foreign company taking up employment with the Danish branch of the foreign company, cannot use the Expat Scheme, as the foreign company and the Danish branch are the same legal entity (a branch/Permanent Establishment is not a separate legal entity). In principle, no “new” employment is commenced.
It was never the intention to distinguish between the two methods of establishing in Denmark (subsidiary vs. branch) and now the Ministry of Taxation will adjust the rule so that the Expat Scheme can be used also in the situation where an employee of a foreign company is transferred to work – as an employee - for the Danish branch.
A useful clarification.
Period of maternity leave and less salary
With the existing rule, the requirement of a having a minimum guaranteed salary (monthly DKK 65,195 measured as an average during the calendar year) resulted in situations where an individual going on e.g. maternity leave would be kicked out of the Expat Scheme, as the salary often decreases for a period of time, thereby resulting in a salary that did not meet the minimum requirement.
With this draft bill, periods with lower salary as a result of maternity leave and paternity leave can be disregarded when measuring whether the minimum salary requirement has been fulfilled.
Entering into force
Amendments will have effect from 1 January 2019.