Simple Tax Guide for Americans in Denmark
At TFX we have been preparing taxes for Americans in Denmark since 1998.
When someone thinks of Denmark, several things come to mind - happy people, mild temperatures, and...high taxes. Before heading for Denmark, make sure to understand what effect living there will have on your US taxes as an expat.
Expat Taxes - Denmark
US citizens, as well as permanent residents, are required to file expatriate tax returns with the federal government every year regardless of where they reside. Along with the typical tax return for income, many people are also required to submit a return disclosing assets which are held in bank accounts in foreign countries by using FinCEN Form 114 (FBAR).
The United States is among only a few governments who tax international income earned by their citizens, as well as permanent residents, residing overseas. There are, however, some provisions that help protect from possible double taxation. These include:
- The Foreign Earned Income Exclusion. This exclusion allows one to exclude USD $104,100 (this amount is for 2018 taxes) in earned income from foreign sources.
- A tax credit allowing a tax on remaining income to be reduced based on the taxes paid to foreign governments.
- An exclusion on foreign housing that allows additional exclusions from their income for some amounts paid to cover household expenses due to living abroad.
Preparing a quality tax return following proper tax planning should allow one to use these, as well as other strategies, in minimizing or possibly eliminating tax liability. Note that in most cases the filing of a tax return is required, even if taxes are not owed.
Who Qualifies as a Danish Resident?
There are two tests for determining residency in Denmark. When a person meets either one of them, they are considered a resident.
The first test is how long a person has been in Denmark. If a person stays there for over 6 months, they are a resident.
The other test is simply making Denmark your permanent home.
Does Denmark Tax Foreign Income?
Danish residents get taxed on income worldwide. Nonresidents get taxed only on income from sources in Denmark.
The Danish Tax Rates
Initially, the income tax rates may seem fairly low, but if all of the various taxes on income in Denmark are taken into account, taxes are quite high.
|Tax Rate||Tax Base|
|8%||On||0 - DKK 46,200|
|41%||DKK 46,200 – 558,043|
|56%||Over DKK 558,043|
The tax rate varies due to different municipality tax rates. The rate shown applies to Copenhagen. Marginal tax rate exclusive of church tax is limited at 55.89% (all municipalities). Please note that the personal allowance of DKK 46,200 only applies once.
There is a special structure for taxes on expats in Denmark who are either researchers or are considered “highly paid”. These people can elect to pay taxes at a rate of 26% of salary if certain qualifications are met. Along with this tax, the 8% tax for health care continues to be payable.
The United States and Denmark have had a tax treaty for many years, but they did update their agreement in 2001. This current treaty sets maximum rates for taxes provides for the countries to exchange information between each other, and protects the citizens of both countries from dual taxation.
When Are Danish Taxes Due?
In most cases, the deadline for filing your tax return in Denmark is the 1st of May in each year.
Danish Social Security
Almost all of the Danish social security system is funded with income taxes. All employees are required to contribute DKK 90 each month to the Supplementary Pension Scheme. Employers must contribute DKK 180 each month into the scheme.
The Dutch pension system is made up of three pillars.
- Pillar I: The state or AOW pension (basispensioen) is an insurance scheme which covers everyone who lives or works in the Netherlands, regardless of nationality. In addition to surviving partner pension and specific health costs, your Dutch social security contribution is considered as coverage for state pension.
- Pillar II: Collective pension funds are collective or private schemes connected to a specific industry or company. Employer contributions will not be included in current year taxable income. (Exempt by tax treaty.)
- Pillar III: Individual pension funds or supplements make up the third pillar. Pillar III is mostly used by self-employed individuals and employees in industries with no collective pension funds. Individual pension products may include life insurance, shares, or property.
There is a totalization agreement between Denmark and the United States. US expats who work in Denmark must consider this agreement and the rules it sets forth concerning which country’s system they will be taxed under. One of the factors is whether the taxpayer works for a Danish company or for a US company. The details of this agreement are available on the web site of the United States Social Security Administration. Of course, seeking professional tax advice is always a good idea.
In Denmark, there is a value-added tax of 25% on most services and goods. Denmark was one of the first countries to impose a value-added tax on unhealthy food, but they have since rescinded that tax after realizing that people simply bought their choice of food in other countries.
Remember FATCA and FBAR!
United States citizens must report certain account balances in foreign accounts, no matter where they live. The Foreign Bank Accounts Report (FBAR) regulations require US expats to file Form 114 when they have balances in their accounts totaling a minimum of USD 10,000 at any single point within the year. There are big penalties if you do not file by the deadline of June 30th, and there are not any extensions of time available.
The Foreign Account Tax Compliance Act (FATCA) is an attempt by the United States government to find tax evaders. These regulations require both banks and taxpayers to report any balances of at least USD 200,000 as of year-end, or USD 300,000 as of any point in the year. These thresholds are slightly higher for expats who are married. If you need to report, use Form 8938, and file it with US taxes (either on time or if an extension was requested).
Questions About Danish Taxes?
Contact us! We have an expert team to provide tax advice to expats and give you all the information you need to know to file your United States expatriate tax return while living outside the country.