Foreigners' Tax Scheme in Denmark
In 1992, a special taxation scheme was introduced in Denmark for high income foreigner who take up residence in Denmark for a limited period of time, this tax scheme also known as the preferential tax regime or special tax scheme in Denmark. It applicable to all foreigner who sign their contracts for work in Denmark after 1st of June 1991. When this scheme is first introduce, there is a special tax rate on labor earnings of 30% for a maximum period of up to 3 years (36 months). This Foreigners' Tax Scheme is almost twice lower than the regular tax rate where workers with earnings above the scheme threshold would need to paid average income tax rates of around 55% with the absent of the special tax scheme.
The scheme rate was dropped to 25% in 1995, however, a payroll tax of 8% was gradually phased in between year 1994 to 1997. The payroll tax is deductible in the regular income tax, the ...view middle of the document...
Research shows that eligible workers that choose second option (33% for 60 months) is low. When the maximum 3 years period of special tax scheme ended, the taxpayer will be taxed on the ordinary tax schedule for subsequent earnings.
There are some requirements needed to be fulfilled to be eligible for this special tax scheme. The first requirement is for local people in Denmark. Danish citizens who have been living and paying taxes abroad, which were not resident in Denmark for tax purpose for at least 3 years can also apply for the scheme. The second requirement is applicants for the special tax scheme must have earnings above an eligible threshold. The threshold vary year by year, it increase roughly at the rate of average earnings. In year 2009, the threshold is equal to 765,600 Danish kroner.
The scheme treatment has to be requested by the employer, hence, it is the employer responsibilities to prove to the tax authorities that the level of earning of the employee is above the eligibility threshold, and make sure that employer met all other requirements for the special tax scheme. The threshold for eligibility applies only to earnings with the specific employer requesting the scheme. In addition, employees was not allow to add other sources of income /earnings to make them qualify for the special tax scheme. The threshold of eligibility must also be met on an annualized basis. Incentives such as house allowance and free cars are included in earning eligible for the special tax scheme and taxed at the flat rate. Other income that does not included in earning eligible will be taxed at the regular tax schedule.
As a conclusion, the special tax scheme creates some tax variations. The scheme introduced a lower tax rates within a given periods (36 months) for high income foreigners and Danish citizen that do not paid tax in Denmark for 3 years and above. This variation provides an ideal setting for a difference-in-differences analysis of migration effect (discuss in 4.0). Furthermore, the scheme have a 3 years duration kink among those who migrate to Denmark, it provide a sharp quasi-experimental variation where can be used to study the effect of how taxation affect the duration of stay.