Amended rules relating to the method for calculating Danish tax relief for foreign income will be retroactive to the 2010 tax year. The change will allow Danish tax residents to claim a full personal allowance in cases where they have foreign source income not subject to tax in Denmark.
Denmark has announced it will amend its rules relating to the method for calculating tax relief for foreign income in light of a European Commission reasoned opinion. The change will allow Danish tax residents to claim a full personal allowance (rather than a proportionate allowance) in cases where the individuals have foreign source income not subject to tax in Denmark based on domestic law or by application of an income tax treaty. The change will be retroactive to the 2010 tax year.
The retrospective nature of the change means there may be refund opportunities forindividuals who ”overpaid” their Danish tax liabilities under the terms of the old rules.
According to Danish regulations (the “old” rules), only a proportion of the personalallowance is allowed to Danish taxpayers when calculating their income tax if they alsohave income from other countries which is exempt from Danish taxation, either due to theapplication of an income tax treaty or domestic law.
In the spring of 2013, the European Commission issued Denmark with a reasoned opinion1 because the Commission did not consider the Danish regulations on tax relief for foreign income to be in accordance with European Union (EU) law.
In response, the Danish government informed the European Commission that it would amend its rules to comply with EU law. In January 2014, the Danish tax authorities issued a notification2 stating that the application of the Danish regulations on tax relief for foreign income will be amended and will have retroactive effect to 2010.
The Danish tax authorities (“SKAT”) have announced they will contact all affectedindividuals before the end of 2014, although there remains a lack of detail concerning theform and timing of such contact. Such individuals may be entitled to tax refunds ofapproximately DKK 7,000 to 15,000 per year depending on the facts and circumstancesin each specific case.
Individuals who believe that the amendment is relevant for them should contact theirlocal tax advisers if they are not contacted by the Danish tax authorities within the nextcouple of months, since the period for claiming excess paid taxes for the income year2010 is expected to expire on 1 May 2014.
Further, companies that had employees abroad on a net contract3 in the relevant income years, and where the salaries have been exempt from Danish taxation should contact their local tax advisers to evaluate the amendment vis-a-vis the implications for tax equalization policies and hypo-tax and reconciliation calculations.
1 Reasoned Opinion no. 2012/4169 of 26 April 2013.
2 SKM2013.920.SKAT. The amendment will affect situations where Denmark exempts foreign income from Danish taxation either according to domestic regulations (the Danish Tax Assessment Act Section 33A) or according to a double taxation treaty.
3 A net contract is a contract where the employees is guaranteed a net salary instead of a gross salary, i.e., the employer pays all taxes, this included extra taxes which are levied and the employer is entitled to receive all excess paid taxes (tax equalization policies/hypo-tax policies).
The information contained in this newsletter was submitted by the KPMG International member firm in Denmark.
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