Ultimate Expat Tax Guide for Americans Living in Denmark

By Expat News

There is a saying that moving to Denmark is the best idea if the Viking spirit runs through your veins. American expats living in Denmark always praise a mild climate and friendly people in this country. However, the biggest concern of most expats is a high rate of taxes in Denmark. We get a lot of questions from the clients starting with the overview of Danish tax system, social security benefits, ways to minimize US expat taxes and ending with whether we prepare US expatriate tax returns and whether we provide US expat tax services to American expats living in Denmark. The below expat tax tips from our experts will cover a wide range of questions.

Expat Tax Returns and Tips for Americans living in Denmark

Does your firm provide US expat tax services to Americans living in Denmark?

Yes, we provide a full range of expat tax services to American expats living in Denmark.

Are American expats living in Denmark required to file US expatriate tax returns?

Even when living abroad in Denmark, a US expat is still obligated to file taxes with the Internal Revenue Service (IRS) each year. This will include all of their earned income including that from foreign employment, even if that was taxed by the government of Denmark. There is a possibility that US expat taxes can be reduced by tax credits and deductions from the money that was earned in Denmark.

How can Americans working in Denmark can minimize US expat taxes and avoid double taxation?

There are some methods that could help in avoiding being double taxed on the income earned in a foreign country. They are as follows :
• Foreign Earned Income Exclusion (FEIE) : Foreign income exclusion allows an expat in Denmark to decrease the taxable income earned in Denmark by the first $101,300 (2016 tax year) and $100,800 (2015 tax year).
• Foreign Tax Credit: This credit may be applicable towards income that is subject to being taxed in the US and in Denmark.
• Foreign Housing Exclusion or Deduction: If housing expenses in Denmark meet a certain threshold for the US expat, this allowance could be added to the FEIE.

For the Purpose of Taxation, who is considered a resident of Denmark?

Any individual with an owner occupied home in Denmark is considered a resident for tax purposes. Any individual who has been in Denmark for six consecutive months or more is also considered to be a resident of Denmark for tax purposes. This six month period is not interrupted by the US expat taking short trips out of Denmark. For establishing taxes, the period of residence begins from the date of the expats first arrival.

The obligation to pay taxes in Denmark will not be lifted until the expat leaves the country permanently. This means they must not have any type of housing available to them inside of the country. They will have to either sell or rent an owned property and if rented, the lease must be for a period of no less than three years. Notice must be given to the landlord for a rented residence.

Is Foreign Income Subject to Taxation in Denmark?

A resident of Denmark is obligated to pay tax on income earned worldwide. Non-residents are taxed on the income they earn from a Denmark based employee.

Is Salary Earned From Working Abroad Taxed in Denmark? If so, How?

There are certain circumstances where a resident of Denmark who earns an income overseas for more than six months can be exempt fro Danish tax. This exemption could be applied to the Danish tax on the remuneration attributable to the work abroad. There are the tax treaties that grant exemption from Danish tax. This is often utilized by using credits.

An employee may also be eligible to receive a tax free allowance for business trips along with a reimbursement of the documented expenses. The tax –free allowance for a business trip will equal 25 percent of the applicable fixed meal allowance for travel. The reimbursement may be exchanged for 100 percent of the fixed tax-free travel allowance of DKK650 per day, this is the combined total of DKK 455 for meals and DKK195 for accommodations. Under these circumstances, the employee will be required to pay the actual expenses. An employee should also note that the tax-free travel allowance for meals is only applicable for trips lasting more than 24 hours and only for a period of 12 months in one location. The allowance for accommodations is allowed so long as the business trip is temporary.

What are Personal Income Tax Rates for Expats Living in Denmark?

The national income rate for Denmark residents is based on a progressive scale and it can be as high as 59%.
The income up to 41,000 DKK is not taxable. The income from 41,001 to 279,800 is subject to 37.48%; 279,801 to 335,800 43.48% and 335,801 and over 59%.

As per a tax treaty between the US and Denmark, Denmark will allow a special tax bracket for US expats who are specialized researchers or highly paid. An expat can choose to pay a tax rate on their income of 26% for the first five years if they meet those requirements. They will still be subjected to an 8% tax as a health contribution.

The original tax treaty between Denmark and the US was replaced with a new one on the 1st of January, 2001. This new treaty has set a maximum tax rate in certain circumstances, enforces the exchange of information between the nations and protects expats from both sides to be protected from double taxation.

When are Tax Returns Due for Expats living in Denmark?

Under normal circumstances, a tax return in Denmark must be filed by the first day of July immediately following the tax year. Those individuals who receive pre-printed tax forms from the taxation office must return them by the 1st day of May if they have made any changes to the documents. Denmark taxation authorities will send these pre-printed forms if they feel that the income statement is very straight forward. The May 1st deadline can only be extended to July 1st by written request to the taxation office.

What is the Tax Year-End for Taxpayers living in Denmark?

Like in the United States, the Danish tax year ends on the 31st of December.

What Income is Considered Taxable Income in Denmark?

Any type of payment made in-cash or in-kind for a service performed by an employee constitutes taxable income. A typical US expat will have one or more of the following taxable items in their compensation package:

  • The reimbursement of Danish and/or US country taxes
  • The reimbursement of costs related to education
  • Allowances for the difference in the cost of living
  • Allowances for housing expenses

Are Investment Income and Capital Gains Taxed in Denmark? If so, How?

Any investment income, regardless of its source, will be taxed by the Denmark tax authorities when the recipient is a resident. Taxable investment and capital includes the following:

  • Interest earned on investments and savings
  • Capital gains from bonds or other financial instruments
  • Capital gains earned on assets and liabilities in a foreign currency

What is Social Security System in Denmark?

Payments are made by employees into their social security through the Denmark income tax system. Monthly payments of DKK 90 are made by employees, while employers pay DKK 180 a month into the Danish Supplementary Pension Scheme.

Is there the Social Security Agreement between the USA and Denmark?

A US expat who is working and living in Denmark needs to consider the totalization agreement between the United States and Denmark. It will determine into which country’s social security system US expats will be required to pay into. One determining factor is whether the US expat is working for a US based company in Denmark or for a Danish company. To learn more about the Social Security agreement between the USA and Denmark, please visit the SSA website.

Are there Other Taxes for expats living in Denmark?

Denmark has added a 25% value added tax (VAT) on almost all goods and services sold in the country. It was also one of the first nations to levy VAT on foods that are known to contribute to obesity. After realizing that many residents were crossing the border to avoid paying the tax, Danish officials decided to repeal the “fat tax” on the 8th of December in 2012.

Is There Any Relief for Foreign Taxes in Denmark? For Example, A Foreign Tax Credit (FTC) System, Double Taxation Treaties and So On?

Legislation in Denmark allows for a credit relief if income earned overseas is subject to tax in the originating country and in Denmark. The relief comes in the form of a tax credit, by computing the Danish withholding percentage and the final tax calculation. An employer is not permitted to apply an FTC to an employees income outside of the tax card system.
The tax authority in Denmark is enabled to issue a certificate of non-withholding on income that is not subject to taxation. In doing so, the employer is then allowed to pay out without withholding any income for the purpose of paying taxes.

Denmark has enacted tax treaties with a number of nations to avoid double taxation of their foreign residents and citizens working and living abroad. The majority of these treaties work using the credit method, but there are a few where the exemption principle is applied. This means that in those cases, foreign income will not be taxed in Denmark. The same internal rules apply when granting that relief.

What are the FBAR and FATCA Requirements for Americans Living in Denmark?

A US citizen is required by law to report their balances held in foreign financial accounts. This is regardless of the nation they reside in. Under the rules of FBAR (Foreign Bank Accounts Report) a US expat has no choice but to file FinCEN form 114 if their foreign bank account balances total $10,000 or more. Not filing this form before the June 30th deadline will result in large fines and no extensions will be offered.

The United States government has also enacted FATCA (Foreign Account Tax Compliance Act) in an attempt to uncover US expats who are evading taxes. Under the law, a US expat and banks around the world that they use must report any balance over $200,000 at the end of the year or $300,000 at any one point or more during the course of that year. Married expats will have higher thresholds. If an expat living in Denmark does qualify they will need to file a completed Form 8938 with along with their US tax return.

Do you have more questions about US Expat Taxes?
It is essential that Americans planning to reside or living in Denmark understand the key tax issues in the USA and Denmark. If you require additional help, expat tax experts at Artio Partners will be happy to provide assistance with various tax situations.