Expat Tax for Americans in Denmark – What You Need To Know

Expat Tax In Denmark – Expat Living In Denmark

Denmark, officially the Kingdom of Denmark, is the 10th most competitive economy in the world. The country is located in Northern Europe consists of the peninsula of Jutland and 443 named islands. Denmark includes two overseas territories; Greenland, the world’s largest island, and the Faroe Islands in the North Atlantic Ocean. Denmark citizens enjoy a high standard of living, and one prime characteristic of the Danish economy is extensive government welfare provisions. Read on to discover important tips on US Expat Tax In Denmark.

Denmark has recently transformed into a nation of net immigration. Most immigrants are from other European countries. Read on to discover essential tips on US Expat Tax In Denmark.

Below is our top 10 list of areas to live in Denmark for expats (in no particular order):

• Copenhagen
• Aarhus
• Vejle
• Aalborg
• Odense
• Esbjerg
• Randers
• Kolding
• Horsens
• Roskilde

About Denmark

Denmark’s island of Bornholm is located east of the rest of the country in the Baltic Sea. Its official languages are Danish, Faroese, Greenlandic, German, and the currency is the krone.

The population in Denmark is mostly of Danish descent (including Faroese and Greenlandic).

While the remaining are of foreign background with the following countries of origin: Turkey, Poland, Syria, Germany, Iraq, Romania, Lebanon, Pakistan, Bosnia and Hercegovina, and Somalia. Chefs and restaurants have introduced gourmet cooking, and cuisine has an enormous influence from France. Danish is more distantly related to the West Germanic language.

Denmark’s economy is one of the freest in the Index of Economic Freedom and the Economic Freedom of the World. It is the 10th most competitive economy in the world and 6th in Europe, according to World Economic Forum in their 2018 report.

Denmark has a temperate climate with an average temperature in January of 1.5 °C (34.7 °F), and an average temperature in August of 17.2 °C (63.0 °F). However, there are large seasonal variations in daylight due to its location in the northern hemisphere. When the weather cooperates, and viewing conditions are ideal, visitors and residents of the Faroe island archipelago can witness one of nature’s most remarkable phenomena. Viewing the northern lights, also known as aurora borealis, is between April and September on clear nights.

In addition to Denmark proper, there are two autonomous territories: Greenland and the Faroe Islands. These two have their home governments and parliaments. Faroe’s home government is an equal partner of the Danish national government, while the Greenlandic people are separate.

Guide To US Expat Tax In Denmark

The Tax Samaritan country guide to US ex-pat tax in Denmark provides a general review of Denmark’s tax environment and how that will impact your U.S. expatriate tax return as a U.S. Expat In Denmark.

As a U.S. taxpayer, all worldwide income is subject to taxation and reporting. For most expatriates, you have a requirement to file a U.S. tax return on an annual basis due on April 15 each year (June 15 if you are residing overseas on the April 15 deadline). The tax treatment for different classes of income can vary significantly from Denmark and the U.S.

For example, certain benefits are tax-free in Denmark. However, for U.S. tax purposes, these benefits likely are subject to inclusion as gross income. As such, there are several considerations related to US ex-pat tax in Belgium. This brief article will address a few of those considerations.

Denmark Expat Income Taxes

Who Is Liable For Income Taxes In Denmark

Residents in Denmark are subject to Danish tax on their worldwide income. Nonresidents are subject to taxation on Danish-source income. Individuals are generally residents if they permanently reside or are present in Denmark for more than six months. Income is divided into personal income and net capital income.

Accordingly, taxable income consists of personal income plus or less net capital income or loss and less allowable deductions. A special tax regime applies to expatriates employed by a Danish resident employer. Salary income is subject to taxation at a flat rate of 32.84%, including the 8% labor market tax, for one or more periods up to a total of 84 months. After 84 months, the expatriate is taxed according to ordinary income tax rules. Income other than salary earned during the special regime use is subject to tax at the normal progressive tax rates.

Tax Year In Denmark And Tax Filing And Payment Rules

The Danish tax year is the calendar year. Before each tax year, there is an advance income assessment filing for each taxpayer. There are advance tax payments through deductions (withholding) from employment income.

Suppose self-employment income or net capital income rises to a certain level.

In that case, advance tax is paid through prepayments claimed from the individual by the authorities in 10 installments over the tax year, based on the advance assessment.

After each tax year, taxpayers must file tax returns no later than July 1st of the following year. Any overpaid tax is refunded by the Denmark tax authorities when the final tax assessment notice is issued. Underpaid tax, including interest up to a certain threshold, is carried forward to the following year while the remainder is due in three installments in September, October and November. Married persons must file separate tax returns. In the tax calculations, taxpayers may transfer certain deductions between the spouses.

Taxpayers may make voluntary payments of tax during the fiscal year and until July 1st of the following fiscal year to save interest on underpaid tax.

Denmark Tax Relief

Various forms of “tax reliefs” such as a personal and spousal deduction are available only to “resident” taxpayers. This does not apply to individuals taxed under the special expatriate tax regime. The tax rates applicable to residents also generally apply to nonresidents. An 8% mandatory labor market tax is applicable for all salary income. Income taxes are calculated on the income after the labor market.

Expat Tax Withholding

Shareholders are generally subject to 27% statutory withholding on dividend income. Those eligible for a lower tax rate under a tax treaty or other law can file for a refund of statutory withholding from the Danish tax authorities.

The monthly contribution to the Danish Supplementary Pension Scheme (ATP) for 2019 is DKK284, of which the employee bears 1/3 through payroll withholding. The annual cost of insurance depends on the nature of the business and other factors. For a white-collar employee, this may be approximately DKK15,000 (2019). To provide relief from paying into two separate social security systems and assure benefit coverage, Denmark has entered into a totalization agreement with the United States.

Denmark has entered into tax treaties (commonly known as Avoidance of Double Taxation Agreements or DTAs) to protect those who qualify from taxation of the same income by both Denmark and the taxpayer’s country of residency or citizenship. Most ex-pat should have their U.S. and Denmark-source income carefully reviewed by an international tax specialist like Tax Samaritan to ensure the appropriate application of any treaty benefits.

What You Need To Know About US Income Taxes

When dealing with US expat tax in Denmark, several preferential expat tax treatments may benefit your U.S. expatriate tax return. In fact, for many U.S. ex-pats, the Foreign Earned Income Exclusion (IRS Form 2555) and other deductions will reduce your U.S. tax liability to zero.

Some of these preferential tax treatments or benefits for US expat tax in Denmark include:

• If you are a U.S. citizen or a resident alien of the United States and live in Denmark, your US ex-pat tax in Denmark is based on your worldwide income. As such, you must file a U.S. return for all the years that you are residing in Denmark. However, as a U.S. expat you may qualify to reduce your U.S. taxable income up to an amount of your foreign earnings that have an annual adjustment for inflation ($107,600 for 2020). Also, you can exclude or deduct certain foreign housing amounts. This is known as the Foreign Earned Income Exclusion and foreign housing exclusion.
• When it comes to your US expat tax in Denmark, most US expatriates worry about “double taxation”—paying taxes to two different countries – the U.S. and Denmark. A U.S. taxpayer working overseas in Denmark may reduce U.S. taxable income and “double taxation” by claiming the Foreign Tax Credit on Form 1116. Should any foreign income not be fully offset by the foreign earned income exclusion, housing exclusion, or housing deduction, the foreign tax credit paid or accrued may be used as a deduction or credit on the U.S. tax return. Taxpayers can elect to either deduct the taxes as an itemized deduction or claim as a credit. In most cases, it is to your advantage to take foreign income taxes paid as a credit.

Don’t Make This Mistake

A common but dangerous mistake is the assumption that if there are zero taxes when claiming these tax benefits, there is no US expat tax filing requirement.

That is not true.

If you are working overseas, it is likely that you meet the filing requirements to file a tax return and must do so. It is important to note that the preferential tax treatments, such as the foreign earned income exclusion and foreign tax credit, are not automatically granted until an accurate return is filed correctly.

When faced with US expat tax in Denmark there are many tax items to consider.

But the above are by far the most common preferential tax benefits.

With top-notch experience and knowledgeable ex-pat tax preparation from Tax Samaritan, you can be assured that you are paying the minimal amount of U.S. taxes that you are under obligation.

Denmark Foreign Bank Account Reporting – The FBAR (FinCen Form 114)

Another vital tax deadline that frequently applies to US expat tax in Denmark is the disclosure of foreign assets on the FBAR (Foreign Bank Account Report – Form 114).

The FBAR filing deadline is April 15th (or the preceding business day if April 15th falls on a weekend). Unfortunately, requesting an extension on your return does not extend the FBAR due date. There is no extension available for the FBAR deadline. Any report filing after this date is a delinquent FBAR. However, in recent years, an automatic extension till October 15th is applicable.

The FBAR must be filed with the Treasury Department (it is not filed with your federal income tax return) whenever you meet the FBAR filing requirements, which in a nutshell is whenever a U.S. person has a financial interest in, or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust or another type of foreign financial account (including an insurance policy with a cash value such as a whole life insurance policy) maintained with a financial institution, with an aggregate value of over $10,000 at any time during the calendar year based on the highest value of each foreign account during the tax year

Suppose you have bank accounts at Danske Bank, Jyske Bank, Nordea Bank Danmark, Nykredit, Sydbank, or at another bank in Denmark or any other foreign country. In that case, you may meet the filing requirement to disclose your foreign accounts on the FBAR.

Please don’t hesitate to contact Tax Samaritan to learn more about your filing requirements.

U.S. – Denmark Social Security Totalization Agreement

The United States has entered into agreements, called Totalization Agreements, with several nations to avoid double taxation of income concerning social security taxes.

These agreements must be taken into account when determining whether an alien is subject to the U.S. Social Security/Medicare tax or whether any U.S. citizen or resident alien is subject to a foreign country’s social security taxes.

As of this time, Denmark has entered into a Totalization Agreement with the United States. This agreement helps people who would otherwise have to pay Social Security taxes to both countries on the same earnings. The agreement covers Social Security taxes (including the U.S. Medicare portion) and Social Security retirement, disability, and survivors insurance benefits.

Under the agreement, if you work as an employee in the United States, you will usually have coverage by the United States. You and your employer will pay Social Security taxes only to the United States. If you work as an employee in Denmark, you usually will have coverage by Denmark, and you and your employer pay Social Security taxes only to Denmark.

Self-employed individuals living and working in Denmark have coverage by the Danish system and should obtain a certificate of coverage to claim the totalization agreement’s benefits. You must attach a photocopy of this certificate to your U.S. individual tax return to exempt yourself from U.S. self-employment tax properly. Tax Samaritan can help guide you through this process if unsure of how to proceed.

U.S.- Denmark Tax Treaty And Tax Relief For US Expat Tax In Denmark

The United States does currently have a separate tax treaty with Denmark. The US Internal Revenue Code offers tax credits against any Denmark income tax. Many of the articles apply to non-resident aliens for U.S. tax purposes. Still, they can also extend certain benefits to U.S. citizens, residents, and green card holders (limited by the ‘Savings Clause’), so it is vital to understand if you qualify for these benefits. We recommend discussing with a tax professional to determine if you are eligible for benefits in the treaty.

Tax Samaritan Takeaways For US Expats In Denmark

Please click on the following hyperlinks below for additional takeaways and resources for expats residing in Denmark:

Tax Samaritan Expat Tax Services

IRS Publication 54, Tax Guide for US Citizens and Resident Aliens Abroad

Danish Tax Agency (for tax schedules and other resources)

Major Banks in Denmark, (for important contact numbers)

US Embassy in Denmark

Ministry of Foreign Affairs Denmark (for important contact numbers)