Key takeaway
A DIS employer that compensates an employee for income tax imposed by the employee’s country of residence does not breach the net pay condition in Seafarers’ Tax Act § 5(4). The compensation is treated as part of the net pay structure and is itself covered by the DIS tax exemption.
BACKGROUND
The DIS regime allows employers registered in the Danish International Ship Register to pay seafarers a net wage that is exempt from Danish income tax. The tax saving passes through to the employer as state-approved aid under the EU maritime state aid guidelines. The condition, set out in Seafarers’ Tax Act § 5(4), is that the pay must be fixed with the tax exemption taken into account.
That condition has worked straightforwardly for employees whose country of residence uses the exemption method to relieve double taxation: Denmark exempts the income, the employee’s home country follows suit, and the seafarer retains the full net pay.
The position is different where the home country applies the credit method. Under a credit agreement (double taxation agreement, or DTA), the residence state taxes the income but gives credit for tax paid in Denmark. Because the DIS income is exempt in Denmark, meaning no Danish tax is paid, there is nothing to credit against. The result is that the seafarer pays full home-country income tax on the DIS wage. The net pay the employer intended to deliver is reduced.
THE CREDIT METHOD PROBLEM: A CONCRETE EXAMPLE
Under the Denmark-Latvia DTA, Denmark retains the right to tax the income but exempts it under the DIS rules. Latvia is required to give credit for Danish tax. Because Danish tax is zero, no credit is granted.
The Latvian seafarer therefore pays Latvian income tax at 25.5% on income up to EUR 105,300, or 33% on the remainder. An otherwise identical seafarer from a country using the exemption method pays nothing in either jurisdiction.
THE QUESTIONS PUT TO THE DANISH TAX ASSESSMENT COUNCIL
A Danish consortium operating DIS-registered vessels, employing seafarers from Latvia and potentially other credit-method countries, asked The Danish Tax Assessment Council three questions.
| Question | Answer |
| Can a country-specific pay supplement be negotiated by collective agreement to cover the employee's foreign tax? | Dismissed. Outside The Danish Tax Assessment Council's competence; a matter for the labour market parties. |
| Can the employer pay compensation for the employee's foreign income tax without breaching the net pay condition in § 5(4)? | Yes, confirmed, subject to the conditions in the ruling. |
| If both above are refused, does § 9 apply (30% flat tax)? | Falls away. Question 2 was confirmed. |
WHAT THE DANISH TAX ASSESSMENT COUNCIL CONFIRMED
On Question 2, The Danish Tax Assessment Council, adopting Skattestyrelsen’s reasoning, confirmed that an employer can pay compensation equal to the employee’s Latvian income tax on DIS wages without causing the arrangement to fall outside the DIS exemption.
The reasoning rests on a clear principle: the compensation does not give the employee a higher net income than was agreed. It neutralises a tax burden that, had a credit been available, would not have arisen. The net pay position the parties negotiated is preserved, not exceeded.
The compensation does not constitute a general pay supplement or standardised allowance for personal tax circumstances. It is specifically grounded in the individual employee’s foreign tax liability and calculated solely on the basis of the DIS wage.
The Danish Tax Assessment Council also confirmed that the compensation is itself covered by the DIS exemption under § 5(4). It is treated as an integrated component of the net pay structure, not as a separate taxable payment alongside it.
THE STATE AID DIMENSION
DIS is an EU-approved state aid scheme. Any extension of its scope, in particular any measure that increases the intensity of the support above the approved ceiling, requires fresh notification to the European Commission.
The Danish Tax Assessment Council found no such extension here. The compensation does not increase the Danish tax loss: Denmark exempts the DIS income regardless of whether the employee receives the compensation. The state aid intensity, measured as the tax foregone, is unchanged. The Commission’s 2002 approval and subsequent confirmations of the DIS scheme remain the operative framework.
This distinguishes the present case from SKM2020.75.SR, where The Danish Tax Assessment Council refused to extend the DIS exemption to employer contributions to a § 53A pension scheme. In that case, both contributions and future payouts would have been tax-free, creating a double exemption that increased the support beyond what had been approved.
WHAT THIS MEANS IN PRACTICE
For employers operating DIS vessels with crew from credit-method countries, the ruling provides a workable path. The compensation arrangement must satisfy four conditions.
The compensation is limited to the tax on DIS income.
It covers only the foreign tax attributable to wages from work on board. Tax on other income, including capital gains, property, and other employment, is outside scope.
The compensation does not increase net income beyond what was agreed.
Its purpose is to restore the intended net pay, not to add to it.
The basis is the individual employee’s actual tax liability.
It is not a flat allowance or a standardised supplement calculated without reference to what the employee actually owes.
The compensation itself is covered by the DIS exemption.
It does not create a taxable income event in Denmark alongside the tax-free DIS wage.
The ruling addresses Latvia specifically, but the reasoning applies equally to other countries that apply the credit method under their DTA with Denmark and where the DIS exemption leaves no Danish tax to credit against. Employers with crew from those countries face the same structural problem, and the same solution should be available.
WHAT THE RULING DOES NOT RESOLVE
Question 1, whether a country-specific pay supplement can be agreed by collective bargaining, was dismissed on procedural grounds. The Danish Tax Assessment Council has no competence over the terms of labour agreements. Whether such a supplement is permissible under the relevant collective agreement remains a matter between the employer, the shipowners’ association, and the seafarers’ union. The ruling on Question 2 provides an alternative route that sidesteps this question in many practical situations.
RELEVANCE FOR SHIPPING AND OFFSHORE OPERATORS
The issue is not confined to one employer or one flag. Any DIS-registered operator employing crew from EU or third countries where the DTA with Denmark uses the credit method faces the same exposure. The effect is competitive: seafarers from credit-method countries take home less than colleagues from exemption-method countries on identical pay terms, creating a recruitment disadvantage for those nationalities.
The ruling gives operators a documented, Danish Tax Assessment Council-confirmed basis for addressing that imbalance through direct compensation, without restructuring pay, renegotiating collective agreements (overenskomster), or accepting that certain nationalities are simply harder to recruit and retain.
REFERENCE
SKM2026.161.SR — The Danish Tax Assessment Council (Skatterådet), 26th of March 2026 (published 8th of April 2026)
Subject: Compensation for DIS employees’ foreign income tax
Legal basis: Seafarers’ Tax Act § 5(2) and § 5(4); TFEU Articles 107 and 108
View full ruling on info.skat.dk
DOES THIS APPLY TO YOUR CREW?
If you operate DIS vessels and employ seafarers from countries where the DTA with Denmark uses the credit method, we assess your crew composition and build the compensation structure.
