An assignment abroad, from a tax perspective, means working temporarily in another country while maintaining one’s base and residence in the home country. Perhaps the family remains at home, or one may sublet or lease their residence while being abroad for a year.
If one earns income abroad while still maintaining their residence in Denmark, they are required to pay taxes in Denmark on this income. However, they can typically deduct the tax paid in the foreign country on this income. For example, if one earns 500,000 DKK in the United Kingdom, where income tax at a rate of 33% is withheld, they only pay tax in Denmark on the difference up to the Danish tax rate. This is referred to as relief under the credit method, meaning that the tax paid in the foreign country is subtracted from the Danish tax on the respective income.
If you are engaged in paid employment for an employer based abroad and are stationed in another country for more than 6 months, you may, in many cases, fall under the rules of Ligningslovens § 33A (Section 33A of the Danish Tax Act). There are several requirements regarding the employer’s stationing abroad. Additionally, you must be abroad for at least 6 months, and during any 6-month period, you must not spend more than 42 days in Denmark, including travel days. For example, if you land in Denmark at 23:59 on May 5th, you are considered to have been in Denmark for one day on May 5th.
If you are subject to the rules of § 33A, you can benefit from tax relief under the so-called exemption method. Under the exemption method, the income you earn abroad is included in your Danish global income. However, you are not required to pay the portion of tax that corresponds to the foreign income to Denmark. This means hat you do not pay tax to Denmark of the pay roll income abroad.
For example, if in the year 20xx, you have a posting period of 9 months in Germany and work in Denmark for the last 3 months, you need to calculate the German income’s share of the tax in Denmark and subtract it. If you earn, for example, 1,000,000 DKK in Germany during the posting and 200,000 DKK in Denmark, your global income is 1,200,000 DKK. Assuming a tax rate of 50%, the tax would be 600,000 DKK. Under the exemption relief, you are exempt from paying tax in Denmark on the 1,000,000 DKK earned during the posting in Germany. In this case, the tax relief would be 50% of 1,000,000 DKK, which is 500,000 DKK. However, the income in Germany still counts towards your income progression in Denmark for purposes such as determining the top tax rate. In this case, you are not taxed as if you only earned 200,000 DKK. Instead, you are taxed as an individual earning 1,200,000 DKK at the full top tax rate, but you only pay proportional tax to Denmark on the income earned here.
It is not always straightforward to determine whether you fall under the rules of § 33A or not. Often, individuals choose to seek a binding response from tax authorities to clarify whether they should or should not pay tax to Denmark on a specific income.
Using Section 33A can often lead to the situation where you do not pay any tax to Denmark og pay rolle income abroad, and neither do you suffer exit taxation of you assets, since you stay under the Danish tax regime. However, in some situations it may be more profitable to leave Danish tax liability in case of larger capital gains while working abroad.
Feel free to contact us if you require assistance in resolving tax-related questions regarding secondment or alternative options.