25% Tax Scheme. Taxation of the Salaries of Researchers and Key Employees recruited abroad
- Denmark
- 05/08/2007
In 1992, a special taxation scheme was introduced for researchers and key employees who are recruited abroad and who are employed by a Danish company or research institution. The rules are set out in Section 48 E of the Danish Withholding Tax Act (Kildeskatteloven).
The purpose of the scheme is to enable Danish trade and industry and Danish research institutions to attract and retain professional foreign researchers from abroad with a view to strengthening Denmark’s competitiveness internationally.
The scheme implies that highly paid employees and researchers recruited abroad may, subject to a number of conditions, choose - for a period of not more than 36 months - to be taxed at the rate of 25% of their remuneration with no allowances - instead of paying normal income tax.
Since the introduction of the scheme in 1992, it has been changed several times. The most recent changes were introduced by Act no. 468 of 9 June 2004 and are applicable for persons liable to taxation who, after 1 July 2004, choose to be taxed according to Section 48E of the Act on Taxation at the Source. The changes include a specification of the conditions in relation to stay and employment abroad prior to an employment and a limitation of the access to carry forward a deficit.
Conditions to be fulfilled by the employee
Previous tax liability in Denmark
The employee must not have been fully liable to taxation in Denmark or subject to limited tax liability on earned income or commercial income within the past three years prior to his or her employment.
If the employee has not been fully liable to taxation in Denmark or subject to limited tax liability on earned income or commercial income for a period of five years prior to his or her first employment under the 25% scheme, there is no requirement that full tax liability should cease after 48 months. The employee will thus be able to stay in Denmark on normal tax conditions without being subject to supplementary tax liability in respect of the 36-month period in which tax was paid at a rate of 25%.
The employee must not have had employment that was subject to limited tax liability during a trial period before entering into a contract of employment subject to 25% taxation.
Any stay prior to the commencement of employment must have been for a period of less than six months. During this period, the employee must not have received earned income or income as a self-employed person in Denmark. This is due to the fact that the condition that the employee must not have been liable to taxation in Denmark within the past at least three years prior to his or her employment would not then be fulfilled.
Residence abroad prior to employment
It is a condition for 25% taxation that the employee has not been posted, prior to his or her employment, to duties abroad by the research institution or the enterprise (or enterprise affiliated therewith) where he or she is to be employed. Nor may the employee have been sent out, prior to his or her employment, as a PhD student with his or her salary being paid from Danish public funds.
This condition is relevant in a situation in which a Danish company or research institution posts an employee abroad for a number of years after which time the employee is employed in the company or research institution or in an affiliated company in Denmark, possibly with a view to that person being posted abroad at a later stage.
It is also a condition for 25% taxation that the employee has not been employed in a foreign affiliated enterprise within a period of 3 years after tax liability to Denmark has ceased. In this way it is ensured that the employee is in fact recruited abroad. The provision is therefore unimportant to persons who were not liable to taxation in Denmark prior to the employment in a foreign subsidiary and who are then employed in the Danish parent company.
According to current practice, the conditions about not being posted or employed in an affiliated enterprise are considered fulfilled if within the latest 5 years prior to the employment with 25% taxation, there has not been an employment relationship between the employer and the relevant research institution, enterprise or enterprise affiliated therewith.
Co-owner of the employer’s enterprise
The employee must not have been directly or indirectly involved - within the most recent five years prior to his or her employment - in the management of, control over, or had a capital interest in the enterprise where he or she is being employed.
The decisive question is whether the person is or has been a co-owner in accordance with the criteria set out below.
If the employer’s enterprise is a company, etc., it means that the employee must not:
- own or have owned 25% or more of the share capital; or
- own or have owned more than 50% of the voting rights.
When calculating these figures, shares owned by the employee’s closest family are included. However, shares belonging to a former spouse of that group of persons - and shares which a present spouse of that group of persons has sold prior to the contraction of marriage - are not included.
Also included are shares belonging to companies, etc., over which the employee’s close family has had a controlling influence.
If the employer’s enterprise is personally owned, this means that the employee must not:
- own or have owned 25% or more of the equity capital; or
- enjoy or have enjoyed decisive influence in the enterprise.
The same criteria as for shareholders are applied here.
On the other hand, these conditions regarding co-ownership also imply that, for example, a manager or director who is not or has not been a co-owner of the employing firm may use the scheme.
The condition that the employee must not have been directly or indirectly involved in the management of, control over or had a capital interest in the enterprise in which he or she is being employed not only applies retroactively, but also applies during the period in which he or she is employed under the special tax scheme.
Full tax liability
As a general rule, the employee must be fully liable to taxation in Denmark from the start of his or her term of employment, and the 25% tax scheme must be used from this date. For exceptions to this rule, see the section on Subsequent choice of 25% taxation.
Full tax liability may start in connection with the employee taking up residence - or it may begin if his or her stay in Denmark is for at least six months (in accordance with the special rule of abode in the Danish Withholding Tax Act). This means that the employee must start his or her employment as a natural extension of the acquisition of residence in Denmark. This condition is fulfilled if the employment starts after the brief period which is generally necessary for moving house and arranging one’s home.
The requirement that the employee must become fully tax liable to Denmark in connection with the start of his or her employment does not apply to persons who are to be engaged in research and development tasks in Denmark. Such persons may also use the scheme while being subject to limited tax liability. It is a condition for this that the employee’s qualifications as a researcher have been approved by a public research institution or a research council - or that a research council certifies that the person in question is to carry out research and development work in this country.
Nationality and citizenship are irrelevant to the application of the scheme.
Conditions to be fulfilled by the employer
The employer must belong to one of the following groups:
- Persons or estates of deceased persons that are subject to full tax liability.
- Persons or estates of deceased persons that carry on business or participate in activities with permanent domicile in Denmark.
- Companies with full tax liability.
- Foreign companies that carry on business or participate in activities with permanent domicile in Denmark.
- Institutions - such as governmental and municipal institutions.
- Foundations, associations, etc.
In those situations referred to under items 2. and 4. above it is a condition for the use of the scheme that the employee is attached to the permanent domicile, and that - from an operational point of view - his or her salary constitutes expenditure for the permanent domicile.
Partnership
The employer may also be a partnership. But, if so, it is a condition that all the participants in the partnership belong to one of the above-mentioned groups (1. to 6.) in relation to the work which is to be carried out.
The employer must collect tax
The employer - or the employer’s agent - must collect the tax. Read more in the section Statement and payment of 25% tax deducted from income at source, AM contributions and SP contributions.
If the employer fails to meet the conditions throughout the period
If at any time during the contract of employment the employer does not meet the relevant requirements, the 25% taxation will lapse as from such time. The action which the employee must take is the same as stated in the section concerning the termination of employment.
The employee may continue to use the 25% scheme if, within a period of one month, he or she enters into a new contract of employment which meets the conditions.
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Source: SKAT
