Denmark operates a progressive tax system that funds extensive public services. Both employers and employees have distinct obligations regarding income tax, social security contributions, and other labor-related levies. Employers are responsible for withholding income tax (A-skat) and labor market contributions (AM-bidrag) from employee salaries and remitting these amounts to the Danish tax authorities (Skattestyrelsen). Additionally, employers must make various social security and labor market-related contributions based on their payroll.
Understanding these obligations is crucial for companies employing staff in Denmark, whether they are local entities or foreign businesses operating through an Employer of Record. Compliance ensures smooth operations and avoids potential penalties. The specific rates and thresholds for the 2025 tax year are typically finalized and announced late in the preceding year, but the fundamental structure and types of contributions remain consistent.
Employer Social Security and Payroll Tax Obligations
Employers in Denmark are required to pay several contributions related to their employees' employment. These are generally calculated based on gross salary or a fixed amount per employee. Unlike many countries, Denmark does not have a single, large social security contribution paid by the employer based on a percentage of salary (like employer-side social security or health insurance premiums). Instead, there are several distinct schemes.
Key employer contributions include:
- ATP (Arbejdsmarkedets Tillægspension) - Labour Market Supplementary Pension: A mandatory pension scheme. Contributions are fixed amounts, shared between the employer and employee, and depend on the employee's work hours (full-time, part-time, etc.). The employer pays the larger portion.
- AES (Arbejdsmarkedets Erhvervssikring) - Employees' Guarantee Fund: Covers compensation in case of work-related injuries or illnesses. The contribution is an annual amount per full-time employee, varying slightly each year.
- AUB (Arbejdsgivernes Uddannelsesbidrag) - Employers' Reimbursement Scheme: Contributes to vocational training programs. The contribution is an annual amount per full-time employee.
- Lønmodtagernes Feriemidler - Employees' Holiday Fund: Since the introduction of the new Holiday Act, employers must report and potentially pay holiday pay accruals to a central fund (FerieKonto) or manage it internally if certain conditions are met. This isn't a tax but a significant payroll obligation.
- FIP (Finansieringsbidrag til Barselsfonden) - Financing Contribution to the Maternity Fund: A contribution to the fund that provides maternity/paternity benefits. This is a small percentage of the total wage sum.
Specific rates for 2025 for ATP, AES, and AUB are typically announced late in 2024. The FIP rate is also subject to annual adjustment.
Income Tax Withholding Requirements
Employers are responsible for withholding income tax (A-skat) and the labor market contribution (AM-bidrag) from employee salaries before payment. This Pay As You Earn (PAYE) system is mandatory.
- Labor Market Contribution (AM-bidrag): This is a flat-rate contribution deducted from the gross salary before income tax is calculated. The rate is 8% of the gross salary. This is a fundamental part of the Danish tax system and applies to most types of income.
- Income Tax (A-skat): Calculated on the salary after the 8% AM-bidrag has been deducted. The amount of A-skat to withhold is determined by the employee's tax card (skattekort).
Employees receive a tax card from Skattestyrelsen, which contains information about their expected income, deductions, and allowances for the year. There are different types of tax cards (main card, secondary card, and frikort for low income). The employer must obtain the employee's tax card information electronically from Skattestyrelsen's system (Ersatningssystemet) to calculate the correct withholding amount. The tax card specifies:
- Main Card: Used by the primary employer. Includes personal allowances (fradrag) that reduce the taxable income before tax rates are applied.
- Secondary Card: Used by a secondary employer. Tax is withheld at a flat, higher rate (typically the top marginal rate) without considering personal allowances.
- Frikort (Exemption Card): For individuals with very low expected annual income (below a certain threshold). No tax is withheld up to this threshold.
The actual income tax rates applied to the employee's income are a combination of municipal tax, state tax (bottom and top tax), and potentially church tax (if the employee is a member of the Danish National Church). Municipal tax rates vary depending on the employee's municipality of residence, typically ranging from 23% to 28%. State tax rates are progressive. The total marginal tax rate can be high, but personal allowances significantly reduce the effective tax rate for most individuals.
Employee Tax Deductions and Allowances
Employees in Denmark can claim various deductions and allowances that reduce their taxable income, thereby lowering their A-skat withholding. These allowances are typically included in the employee's tax card calculation provided by Skattestyrelsen.
Common employee deductions include:
- Employment Allowance (Beskæftigelsesfradrag): A percentage of salary (after AM-bidrag) is automatically granted as an allowance, up to a maximum amount. This is designed to reduce the tax burden on earned income.
- Standard Allowance (Personfradrag): A basic personal allowance granted to all taxpayers, reducing taxable income.
- Transport Allowance (Kørselsfradrag): For commuting long distances between home and work. The allowance is calculated based on the distance and number of working days, with different rates for different distance brackets.
- Trade Union and Unemployment Fund Fees: Contributions to recognized trade unions and unemployment insurance funds are deductible.
- Pension Contributions: Contributions to approved pension schemes are generally tax-deductible, either from the gross salary before tax (ratepension, livrente) or from the taxable income (aldersopsparing, within limits).
- Interest Expenses: Interest paid on loans can be deducted.
Employees are responsible for reporting changes in their income or deductions to Skattestyrelsen to ensure their tax card is accurate. An inaccurate tax card can lead to over- or under-withholding throughout the year, requiring adjustment when the final tax assessment is made.
Tax Compliance and Reporting Deadlines
Employers must comply with strict reporting and payment deadlines for withheld taxes and employer contributions. The primary system for reporting wage and employment information is the eIndkomst system.
- Monthly Reporting: Employers must report salary payments, withheld A-skat, and AM-bidrag for each employee to the eIndkomst system by the 10th of the month following the salary payment. For example, salaries paid in January must be reported by February 10th.
- Monthly Payment: The withheld A-skat and AM-bidrag, along with certain employer contributions (like FIP), must be paid to Skattestyrelsen by the last working day of the month following the salary payment. For example, taxes withheld from January salaries must be paid by the last working day of February.
- Other Contributions: Contributions like ATP, AES, and AUB have different payment frequencies (e.g., quarterly or annually) and deadlines, managed through separate systems or payment notices.
Failure to report or pay on time can result in penalties, interest charges, and potential audits. Accurate and timely reporting via eIndkomst is essential as this data is used by Skattestyrelsen to calculate employees' preliminary and final tax assessments.
Special Tax Considerations for Foreign Workers and Companies
Foreign workers and companies operating in Denmark face specific tax considerations:
- Tax Residency: An individual is generally considered tax resident in Denmark if they live there or stay for a continuous period of at least six months (including short stays abroad). Tax residents are taxed on their worldwide income. Non-residents are typically only taxed on income sourced in Denmark, such as salary for work performed in Denmark.
- Double Taxation Treaties: Denmark has double taxation treaties with many countries to prevent individuals and companies from being taxed twice on the same income. These treaties often determine which country has the primary right to tax employment income.
- Researcher Tax Scheme: Highly compensated researchers and key employees recruited from abroad can potentially benefit from a special flat-rate tax scheme (currently 27% plus 8% AM-bidrag, totaling 35%) for up to seven years. Strict conditions apply regarding salary level, previous residency, and the nature of the work.
- Foreign Companies: A foreign company employing staff in Denmark may trigger a permanent establishment (PE) for tax purposes, depending on the nature and duration of the activities. If a PE is created, the company becomes subject to Danish corporate tax on the profits attributable to the PE. Using an Employer of Record can help foreign companies employ staff legally in Denmark without necessarily creating a corporate PE, as the EOR acts as the legal employer.
Navigating these rules requires careful consideration of the specific circumstances of the foreign worker and the foreign company's presence and activities in Denmark.
