Taxation of Foreign Income

If you are fully tax liable in Denmark, the starting point is that Denmark taxes your worldwide income. Foreign income must therefore generally be reported in Denmark as well.

This may include salary from a foreign employer, income from property abroad, interest and dividends, investments, pensions or income from a business abroad.

The fact that income originates abroad does not in itself make it exempt from Danish tax.

What matters is, among other things, where you are tax resident, what type of income is involved, and whether Denmark has concluded a double taxation agreement with the country concerned.

The Danish Tax Agency now receives information about financial matters abroad through the international exchange of tax information. It may therefore obtain details of foreign bank accounts, interest, investments or other financial assets.

A case often begins with a request for information asking the taxpayer to explain specific amounts or foreign holdings.

It may be necessary to produce bank statements, foreign tax assessments, evidence of foreign tax paid, purchase agreements, lease agreements or other material.

Before replying, it is important to establish precisely what information the agency actually holds.

If you live in Denmark and work wholly or partly abroad, a question may arise as to which country has the right to tax the salary.

This depends on where the work is physically carried out, the length of the stay, who the employer is, and which double taxation agreement applies.

In some situations both Denmark and the country of employment may tax the income. That does not necessarily mean paying full tax twice, as relief may be available in Denmark for tax paid abroad.

Owning a home, holiday property or other real estate abroad may also have Danish tax consequences, for instance in relation to rental income, gains on sale and other income connected with the property.

The country where the property is situated will often also have taxing rights. Both Danish tax law and the relevant double taxation agreement therefore become important.

Documentation of the acquisition cost, expenses, rental income and foreign tax paid can be decisive if the Danish Tax Agency opens a case.

Foreign bank accounts and investments frequently give rise to questions from the Danish Tax Agency, whether the issue is interest on a foreign account, dividends from foreign companies, shares, investment funds or other securities.

In these cases it is essential to distinguish between the capital itself and the return or gain that the capital has generated.

A transfer from your own foreign account to your Danish account is not necessarily taxable income. The agency may nevertheless ask you to document where the funds originally came from, which often requires tracing the flow of funds several years back.

Foreign pension arrangements can be complex in tax terms, both as regards the treatment of contributions to the scheme and the taxation of later payments.

A pension may be treated in one way in the country where the scheme was established and quite differently under Danish rules.

The double taxation agreement between Denmark and the country concerned may also determine which country holds the taxing rights.

If you carry on business abroad while remaining tax liable in Denmark, questions may arise concerning both your personal taxation and the tax position of the business.

It may be necessary to assess where the business is genuinely managed from, whether a permanent establishment exists, and how the income should be allocated between Denmark and the other country.

The formal registration of the business is not always decisive. The actual circumstances may carry considerable weight.

Where the same income may be taxed both in Denmark and in another country, the rules on double taxation become relevant. Denmark has concluded double taxation agreements with a large number of countries.

These agreements allocate taxing rights between the countries and set out how double taxation is to be avoided. This can be done in different ways.

In some cases relief is granted in the Danish tax for tax already paid abroad. In others, the income must be treated under a different method.

It is therefore not enough simply to establish that tax has been paid abroad. The relief that can actually be claimed in Denmark must be examined.

If you wish to claim relief for foreign tax, the foreign taxation must normally be documented, for instance through foreign tax assessments, payment receipts or confirmation from the foreign tax authority.

The same applies to the documentation of the income itself. If the Danish Tax Agency does not consider the documentation sufficient, relief may be refused or reduced.

In larger cases the documentation can therefore be just as important as the legal analysis.

If the agency considers that foreign income has not been correctly reported, it may propose an increase of the taxable income.

In such cases it should be examined what each amount actually relates to. A credit on a foreign account is not necessarily income. It may be the taxpayer's own funds, a loan, a gift, the sale of an asset or a transfer between the taxpayer's own accounts.

The same applies to transfers from abroad to Denmark. Each transaction should therefore be reviewed individually and compared with the available documentation.

Where a decision has already been made, it may be appealed to the Danish Tax Appeals Agency or the Danish National Tax Tribunal, and a case may ultimately be brought before the courts.

If the case concerns older income years, a separate question may arise as to whether the conditions for reopening are met.

A case concerning foreign income may in certain circumstances be referred for criminal assessment, for instance where the agency considers that foreign income or foreign assets have been left undeclared intentionally or through gross negligence.

Both an ordinary tax case concerning the adjustment itself and a subsequent case concerning a fine, or in more serious matters imprisonment, may then arise.

It is therefore important to be aware of the potential criminal dimension already when replying to a request for information.

HAY LAW works with both tax cases and tax criminal cases and can handle the two aspects of the matter together.