Government will impose tax on salary income of posted employees

The Government will abolish the special favourable tax rule in section 33 a of the Tax Assessment Act. In the future, companies posting employees should therefore be aware of the tax implications and review their posting policies and contracts.

Section 33 a of the Tax Assessment Act

On 14 August, the Government introduced a bill abolishing the favourable tax rule in section 33 a. According to this rule, the employee may avoid or reduce by 50 % the Danish tax on salary earned during posting when satisfying detailed requirements concerning the duration of the posting, etc. This applies even though the posted employee is fully taxable in Denmark.

According to the tax rule, there is full relief in respect of the Danish tax if the requirements are satisfied and the assignment country holds the right to tax the salary. As most countries have lower tax rates than Denmark, this means large tax savings. In some cases, the salary is not even subject to tax.

If Denmark holds the right of taxation, there is 50 % relief in respect of the Danish tax. In this situation, the posted employee will also obtain large savings.

The new rules

If the bill is adopted, general Danish tax is to be calculated based on the salary of the person fully taxable in Denmark, irrespective of the country in which the salary is earned. If the assignment countries also tax the salary, a reduction of the Danish tax will be granted in the future in relation to the tax which has in fact been paid in the assignment country.

In practice, the abolishment of the special rules means that you will always have to pay an amount equivalent to general Danish tax on the salary.

It should be noted, however, that special tax rules still apply to persons working in the border regions of Germany, Sweden and Norway.

Comments from an employment law perspective

The purpose of the bill is to increase the tax payment of those posted employees who today enjoy the advantage of section 33 a. Whether the employer or the employee should bear the risk (and the burden of payment) of this extra payment very much depends on the agreement in the posting contract, which may e.g. state "net salary", or that the "tax implications are of no concern to the company".

The purpose of the bill is to increase the tax payment of those posted employees who today enjoy the advantage of section 33 a. Whether the employer or the employee should bear the risk (and the burden of payment) of this extra payment very much depends on the agreement in the posting contract, which may e.g. state "net salary", or that the "tax implications are of no concern to the company".

We therefore recommend that the posting contracts are reviewed to obtain an overview of the risk and to consider whether the existing posting contracts are to be changed respecting the general notices of employment law and whether future contracts are to be changed according to the new rules.

Coming into force

According to the bill, the special rule will be abolished by the end of 2012.

However, the bill suggests a transitional rule according to which employees posted at the time of the adoption of the bill may apply the previous rules in section 33 a until the end of 2013, unless the stay abroad is discontinued.

The bill is expected to be adopted on 13 September 2012.

Comments

If you consider posting one or more of your employees in the near future, you may want to speed up the process so that the posting may commence before the bill is adopted. As things are now, the posted employee will be taxed according to the more favourable rule until the end of 2013.

Finally, we recommend that all postings etc. where the employees have been taxed according to the special rule so far are reviewed in the light of the new tax implications.

The content of this Newsletter is not, and should not replace, legal advice.

contact

Marianne Lage

Partner