If you have UK resident employees who are being posted to work in Denmark there are a number of important factors to consider in relation to their income tax and social security/National Insurance liabilities in both the UK and Denmark.
Firstly, as with most other European countries, if employees are working on the Continental Shelf in Denmark, they will be liable to pay Danish tax from the first day of work in Denmark. Normally, when working offshore, the tax payable is at a different rate from the Danish tax paid by Danish nationals. There are also a different set of simplified reporting arrangements in place to declare the income and tax attributable to each employee. The tax rate will normally be a flat rate of 35.6% and any employees included on this simplified submission should not be required to submit a Danish income tax return.
Double Tax Treaty
The double tax treaty that Denmark and the UK have agreed is different from most other treaties when employees are working offshore. The impact of this unusual tax treaty is that earnings paid for duties offshore in Denmark are not taxable in the UK, although they remain liable to UK National Insurance.
When a UK resident works overseas and incurs a liability to overseas tax the normal method to claim credit for the double taxation is to offset the overseas tax against the UK tax. Very broadly, the UK tax payable is reduced by the amount of the foreign tax.
However, this is not the case with Danish tax payable when the duties are offshore in Denmark. Credit is claimed by exempting the tranche of Danish offshore earnings from UK tax. This very subtle difference makes a huge practical difference which can cause a lot of confusion for payroll departments. Getting it wrong can lead to an HMRC enquiry as well as difficulty in correcting the position at a later date.
In addition, if the employees you are sending are going to be UK basic rate taxpayers (i.e. 20%), then consideration must also be given to whether their net pay is going to be impacted by the higher Danish offshore tax rate, or if the Company will ensure they are no worse off because of working in Denmark. To do this, gross up calculations are required at the UK tax year-end or at the point the employee leaves the Company to work out the differential and the additional payment due to bring them back to the same position had they only worked in the UK.
If the work is onshore in Denmark, there are many variables to consider before it can be established whether employees are taxable or not. Most of the considerations relate to the employer and not to the employee even though the answers determines the employee’s liability to income tax.
In many cases the employees may not be taxable, however, if they are found to be liable to Danish tax, the Danish income tax rates are some of the highest in the world and a net of tax credit in the UK payroll would not likely cover all Danish tax, and so the same net pay position as for working offshore would need to be agreed.
Additionally a Danish payroll would have to be operated, bringing about further costs.
Finally, consideration must be given to the social security position, and in most cases, we would recommend looking to keep employees within the UK National Insurance system rather than Danish social security.
If you are looking to send employees to Denmark, or are already in country and want to ensure you are being as compliant and efficient as possible, please contact Charlotte Stewart (firstname.lastname@example.org) or your usual AAB contact.