United States-Denmark Tax Treaty
US – Denmark Tax Treaty Quick Summary. The Kingdom of Denmark is a Nordic country located in Northern Europe. A Scandinavian country with an archipelago of 443 islands, Denmark consists of five main regions with its capital at Copenhagen.
Denmark is a constitutional monarchy with a parliamentary democracy. Denmark’s parliament is a unicameral body known as the Folketing, which is vested with legislative power.
Denmark has a civil law system that has been influenced by Germanic law and that is largely based upon customary law. Denmark’s constitution provides for independence of the judicial power from the government and Parliament.
In 2019, Denmark implemented the European Union (EU) Directive on Administrative Cooperation (DAC6), providing for disclosure requirements for certain cross-border transactions (though reporting was postponed until August of 2020).
In addition, Denmark has adopted a number of provision implementing the EU Anti-Tax Avoidance Directives (ATAD).
U.S.- Denmark Tax Treaty
Denmark is a member of the North Atlantic Treaty Organization (NATO), the Organisation for Economic Co-operation and Development (OECD), the European Union (EU), and the United Nations (UN).
- Convention Between the United States of America, and the Kingdom of Denmark for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, signed at Washington on May 6, 1948.
- Convention Between the Government of the United States of America and the Government of the Kingdom of Denmark for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed at Washington on August 19, 1999
- PROTOCOL AMENDING THE CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF THE KINGDOM OF DENMARK FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME
- Technical Explanation of the Protocol signed at Copenhagen on May 2, 2006
- Technical Explanation of the Convention and Protocol between the United States and Denmark signed at Washington on August 19, 1999
Currency. Danske Kroner (DKK)
Common Legal Entities. Public limited company, private limited company, partnership, sole proprietorship, and branch of a foreign company.
Tax Authorities. Danish Customs and Tax Administration (SKAT).
Tax Treaties. The Kingdom of Denmark is party to more than 80 tax treaties. It is a signatory to the OECD’s MLI.
Corporate Income Tax Rate. 22%.
Individual Tax Rate. 56.5%.
Corporate Capital Gains Tax Rate. 0% / 22%.
Individual Capital Gains Tax Rate. 27% / 42%.
Residence. An individual is resident if he/she has a permanent residence and a “qualifying” stay in Denmark or spends more than six months in Denmark.
Dividends. 0% / 27% (5% reclaimed) (resident company) / 27% (resident individual) / 0% / 15% / 27% (5% reclaimed) (nonresident company) / 15% / 27% (nonresident individual).
Interest. 0% (resident company or individual) / 0% / 22% (nonresident company or individual).
Royalties. 0% (resident company or individual) / 0% / 22% (nonresident company or individual).
Transfer Pricing. Follow arm’s tenth principles, generally following the OECD transfer pricing guidelines.
CFC Rules. CFC rules apply where (i) a Danish company controls, directly or indirectly, more than 50% of the voting power of another company (Danish or foreign), and (ii) more than 50% of the income, and more than 10% of the assets of the subsidiary are of a financial nature.
Hybrid Treatment. Follows the anti-hybrid mismatch provisions of the EU anti-tax avoidance directive.
Inheritance/Estate Tax. 0% (received from spouse) / 15% (received from immediate family) / 36.25 (received from other individuals)
OVERVIEW OF TAXATION IN DENMARK
Denmark imposes a tax at the national and local levels upon net income from employment, investment, and business activities. Income taxes are imposed on individuals at progressive rates and on companies, associations, and estates at a flat rate. In general, residents of Denmark are subject to taxation on all income, whether arising in Denmark or abroad. The definition of income within each enumerated category is, as in the United States, expansive and generally includes capital gains. The tax is computed on an annual basis, and the timing of income and deductions for companies is determined on an accrual basis.
Individuals resident in Denmark are taxed in Denmark on their worldwide income. The rate of income tax imposed upon an item of income depends upon its characterization as personal income, capital income, or share income.
Personal income includes wages, company profits, fringe benefits, and pension income. Capital income is defined as the net value of many items, including income from interest, capital gains on the disposal of shares, dividends not subject to share income taxation (including dividends from investment companies), and profits or losses from the rental of private property. The net sum of personal income and capital income forms taxable income. An individual is granted a fixed personal deduction. Employees earning a salary generally may deduct costs and expenditures incurred to produce income, such as travel costs to and from work and dues paid to trade unions. Other employee expenses are deductible to the extent they exceed certain thresholds. Municipal, local, and church taxes are extensive. There is an overall ceiling on tax.
“Share income,” including distributions from domestic and foreign companies (unless the company is an investment company), and gains and losses on the disposal of shares owned for more than three years, is not considered part of personal income. It is taxed separately.
Domestic Danish corporations are taxed on their worldwide income. No additional local taxes are imposed on corporate profits. Capital gains are generally aggregated with all other income for taxation at the corporate rate. Gains arising from the sale of shares by a corporation are exempt from tax provided that the date of sale was three or more years from the date of acquisition. Otherwise, such gains are taxable at ordinary corporate rates. Dividends received by a Danish corporation from a Danish or foreign corporation are generally taxable; however, for both domestic-source and foreign-source dividends, if the recipient corporation meets certain criteria, the dividends received are subject to special treatment. Legislation adds conditions that inbound dividends must satisfy to qualify for exemption from Danish corporate income tax—the payor corporation must be either (i) resident in the European Union, the European Economic Area, or a country with which Denmark has a tax treaty; (ii) controlled by the recipient company; or (iii) subject to Danish cross-border tax consolidation. Under both prior law and the legislation, if certain of these conditions are not met, complete tax exemption is unavailable, although the dividends might nevertheless be subject to Danish income tax at an effective rate that is less than the statutory Danish corporate income tax rate.
International Aspects of Taxation in Denmark
Individuals resident in Denmark generally are taxed on their worldwide income. Residence is broadly interpreted for this purpose. Individuals who acquire residences in Denmark and actually take up residence in Denmark, as well as individuals who are present in the country for a period of more than six months, are generally considered Danish residents for tax purposes. Residents of Denmark who are employed abroad for a period of at least six months generally are exempt from Danish taxation of their wages and salaries for personal work performed during the stay abroad. However, if the provisions of a tax treaty grant Denmark the right to tax this income, the income will be taxed at one-half the normal rate.
Denmark provides a special elective tax regime for certain foreign expatriates who become residents of Denmark in connection with being employed by Danish-resident employers.
Nonresidents are subject to tax on specific items of Danish-source income, including income derived from remuneration in Denmark by a resident employer, income from a permanent establishment or a professional service supplied in Denmark, and income and capital gains derived from real property located in Denmark. Dividends derived from Danish-registered companies are subject to a withholding tax.
Companies resident in Denmark generally are taxed on their worldwide income. However, there is an exception in the case of income derived from a permanent establishment abroad, which is generally exempt from tax. Foreign corporations (those without a registered place of business in Denmark and not effectively managed in Denmark) are subject to tax only on Danish-source income. This includes income derived from a permanent establishment in Denmark, income derived from the lease or sale of real property in Denmark, and interest payments and dividends received from Danish registered companies. However, dividends distributed by a Danish company to a nonresident company are generally exempt from Danish withholding tax, provided that (i) the recipient foreign company owns a requested amount of the Danish company for a continuous period of at least one year, and (ii) the dividends are declared within that holding period.
A Danish resident company may be subject to corporate income tax on the income of its CFCs. Under CFC legislation, the CFC regime includes all financial subsidiaries in all jurisdictions, including Denmark. For the CFC regime to apply to a subsidiary, the Danish parent company must hold more than 50 percent of the votes in the subsidiary; more than 50 percent of the subsidiary’s income must be CFC income, which includes interest income, taxable dividends, and capital gains; and more than 10 percent of the subsidiary’s total assets must be financial assets.
Inheritance, gift, and wealth taxes
Assets inherited from a closely related decedent exceeding a threshold are subject to a 15-percent inheritance tax. Beneficiaries that are not closely related, as defined by Danish law, are subject to an additional tax at a rate of 25 percent (making the total effective tax rate 36.25 percent). A gift tax of 15 percent is levied on gifts to descendents, stepchildren, sons and daughters-in-law, the spouse of a deceased child or stepchild, and parents. A rate of 36.25 percent applies to gifts to stepparents and grandparents. A gift to a spouse or registered partner is not subject to tax. All other gifts are subject to ordinary income tax. Denmark does not levy a wealth tax.
Social security contributions are levied on gross income. No contributions are levied on employers. The amount contributed is deductible for income tax purposes.
Denmark imposes a value-added tax (“VAT”) at all stages of production and distribution of goods and services. Certain goods and services are exempt from the VAT altogether. A national real property tax is imposed on homeowners.
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