A Guide for Foreign Employees: Understanding Your First Tax Assessment in Denmark
As a foreign employee in Denmark, navigating the Danish tax system can be challenging, especially when receiving your first tax assessment. This guide provides a thorough introduction to what you need to be aware of, how to ensure your tax assessment is accurate, and how to avoid mistakes that could result in additional tax payments or missed deductions.
What is a Tax Assessment?
Your tax assessment is an overview from the Danish Tax Agency (Skattestyrelsen) of your income, taxes, deductions, and any outstanding tax payments or refunds for the previous year. In Denmark, the tax system is based on automatic reporting from employers, banks, and pension providers, but this does not mean your tax assessment is always 100% accurate. As a foreign employee, you must ensure that all relevant information is correctly registered.
The Tax Information Form: When and Why?
If you have foreign income or assets, or if your tax situation is not straightforward, you may need to complete a tax information form (previously called the foreign taxpayer declaration). This form is used to inform the Danish Tax Agency about financial aspects that are not automatically registered, such as foreign investments, real estate, or additional income.
Automated Reporting in Denmark
Denmark operates a reporting-based tax system, meaning that most information is automatically reported to the Danish Tax Agency by:
- Employers, who report your salary, pension, and any benefits
- Banks, which report interest income and account balances
- Pension providers, which record your contributions and payouts
- Housing associations, which report any mortgage interest expenses
This system simplifies tax administration but also means that, as a foreign employee, you must carefully review your tax information to ensure everything is correctly registered.
10 Important Aspects to Be Aware Of
Property Abroad
As an employee working in Denmark, owning real estate outside the country requires careful tax considerations. If you own property abroad, it must be included in your Danish tax assessment. Your foreign property may be subject to taxation both in Denmark and in the country where it is located. If you rent out the property, the rental income must be declared in Denmark and could also be taxed abroad, depending on existing double taxation agreements. The value of your foreign property can also influence your overall tax obligations in Denmark. In some cases, wealth taxation may apply, and failing to report your property correctly could result in penalties or unexpected tax liabilities. If you decide to sell your property, you may be liable for capital gains tax in Denmark. The tax is calculated based on the original purchase price, improvements made, and the final selling price. Ensuring that you keep accurate records of all costs related to the property—such as purchase price, maintenance, and renovations—can help optimise your tax situation. Managing foreign property taxation requires awareness of both Danish and foreign tax regulations. If you are unsure how your property impacts your tax assessment, seeking professional advice is highly recommended.
Foreign Assets
As an employee with foreign financial assets, it is your responsibility to ensure that these are correctly reported to the Danish tax authorities. Denmark participates in international financial information exchanges, meaning foreign bank accounts, investment portfolios, and other financial holdings must be declared. Failure to disclose these assets could result in penalties. Additionally, fluctuations in exchange rates may impact the valuation of your foreign assets, which can have tax implications.
Cross-Border Worker Rules
If you live in a neighbouring country but work in Denmark, you may be subject to specific cross-border worker taxation rules. These rules define which country has the primary right to tax your income and whether you qualify for special tax deductions. The amount of time you spend in Denmark versus your home country can significantly impact your tax situation. Proper documentation of workdays is often required to avoid miscalculations in your tax obligations. Understanding these rules is essential to ensuring compliance and optimising your tax position.
Annualised Income Calculation
If you have only been working in Denmark for part of the tax year, your income may be annualised, meaning it is adjusted as if you had worked in Denmark for the full year. This calculation can impact your taxable income and potentially increase your tax liability. If you believe that your tax assessment does not accurately reflect your actual income, you may need to request a correction from the Danish tax authorities. Reviewing your tax assessment carefully ensures that you are not overpaying due to incorrect income projections.
Entry Values for Shares and Securities
When becoming a tax resident in Denmark, you must register the market value of any shares or securities you own. This value, known as the entry value, will be used to calculate taxable gains or losses when you eventually sell these assets. If this value is not registered correctly, you may end up paying higher taxes than necessary. Proper documentation of the acquisition price and market value at the time of your relocation is crucial for accurate tax reporting.
Foreign Interest Income
Interest earned from foreign bank accounts or investments must be declared as part of your Danish tax assessment. Depending on tax treaties between Denmark and the country where the interest was earned, you may be subject to taxation in both countries. It is essential to correctly report this income to avoid penalties and ensure compliance with international tax laws. Exchange rate fluctuations can also impact the taxable value of your foreign interest income.
Sale of Investments After Moving to Denmark
If you sell stocks, cryptocurrencies, or other investments after becoming a Danish tax resident, any gains may be taxable in Denmark. The taxable gain is determined based on the entry value assigned when you became a resident. In some cases, foreign tax authorities may also claim tax on these gains, making it important to understand and apply double taxation relief rules.
Foreign Income and Pensions
If you receive salary payments, bonuses, stock options, or pension distributions from previous employment outside Denmark, these are often taxable in Denmark. While tax treaties may prevent double taxation, the specific rules vary depending on the country of origin. Foreign pension schemes may be subject to Danish taxation even if they have already been taxed abroad. Failure to properly report foreign pensions can result in tax liabilities and penalties.
Travel and Tax Liability in Other Countries
Frequent work-related travel can create tax obligations in multiple countries. Many nations tax individuals based on the number of days they spend working within their jurisdiction. If you travel extensively for work, it is important to maintain records of your travel days and income allocation. Double taxation agreements help determine which country has the primary right to tax your income, but understanding these agreements is crucial to avoiding unnecessary taxation.
Deductions Are Not Automatic
Unlike in some countries, tax deductions in Denmark are not automatically applied. Employees must actively claim deductions for expenses such as commuting costs, union fees, and home office expenses. Failing to report eligible deductions can result in a higher tax bill than necessary. Keeping detailed documentation of deductible expenses and reviewing your tax assessment regularly can help ensure you take full advantage of available tax benefits.
Concluding Insights on Navigating the Danish Tax System for Foreign Employees
Navigating the Danish tax system as a foreign employee can be complex, but understanding your tax assessment and obligations is crucial for ensuring compliance and avoiding unnecessary tax liabilities. By carefully reviewing your income, assets, and deductions, you can optimise your tax situation and prevent errors that could lead to additional costs.
Employers who hire foreign employees also play a significant role in ensuring that their staff receive the correct tax guidance. Misinformation or misunderstandings can lead to compliance risks and unexpected tax burdens. Therefore, companies should consider professional tax advisory services to assist their employees in navigating the Danish tax system effectively.
For tailored assistance with tax compliance, foreign income reporting, and deductions, explore our specialised services at Crossbord Foreign Employee Solution. Ensuring accurate reporting and compliance will not only benefit employees but also create a smoother administrative process for businesses handling international talent.
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