Denmark operates a progressive tax system encompassing various income types, including employment income. Both employers and employees have distinct obligations regarding contributions and reporting to the Danish tax authorities (Skattestyrelsen). Employers are responsible for withholding income tax and remitting certain social contributions on behalf of their employees, while employees are subject to income tax on their earnings, with possibilities for various deductions and allowances that impact their final tax liability. Understanding these requirements is crucial for compliant payroll management in Denmark.
The Danish tax year aligns with the calendar year, from January 1st to December 31st. Compliance involves accurate calculation, timely payment, and correct reporting of taxes and contributions through designated digital systems.
Employer Social Security and Payroll Tax Obligations
Employers in Denmark are responsible for contributing to several social security schemes on behalf of their employees. These contributions are generally fixed amounts or calculated based on specific criteria, rather than a percentage of salary like in many other countries. The primary contributions include:
- ATP (Arbejdsmarkedets Tillægspension): A mandatory supplementary pension scheme. Contributions are typically split between the employer and employee. For a full-time employee in 2025, the total monthly contribution is a fixed amount, with the employer paying a larger portion than the employee.
- AES (Arbejdsmarkedets Erhvervssikring): Contributions for industrial injury insurance. The cost varies depending on the industry and the risk associated with the work.
- Lønmodtagernes Garantifond (LG): A fund that guarantees employees' salaries in case of employer bankruptcy. Contributions are paid annually per full-time employee.
- Barselsfond (Maternity/Paternity Leave Fund): Employers contribute to funds that help cover costs during employee parental leave. There are different funds depending on the sector (e.g., Barsel.dk for the private sector). Contributions are typically quarterly and based on the total wage sum.
- FerieKonto/Feriepengeinfo: Employers must report holiday pay accrual and payments. While not a tax, it's a significant payroll obligation.
Unlike some countries, Denmark does not have a broad social security tax percentage levied on gross salary for general healthcare or unemployment benefits; these are primarily funded through income tax.
Income Tax Withholding Requirements
Employers are required to withhold A-skat (income tax) and AM-bidrag (labour market contribution) from employee salaries before payment. This Pay As You Earn (PAYE) system is based on the employee's tax card (skattekort), issued by Skattestyrelsen.
- AM-bidrag (Labour Market Contribution): A flat rate of 8% is deducted from the gross salary before other income tax calculations. This contribution is mandatory for most types of income.
- A-skat (Income Tax): Calculated on the remaining income after deducting AM-bidrag and any applicable allowances from the employee's tax card. The A-skat rate is progressive and depends on the employee's total expected income and deductions for the year, as reflected on their tax card.
There are three types of tax cards:
- Main tax card (Hovedkort): Used by the primary employer, applying the full personal allowance and other deductions.
- Secondary tax card (Bikort): Used by any secondary employers, applying only the tax rate without allowances.
- Tax card for recipients of public benefits (Frikort): For individuals with low expected income, indicating that no tax should be withheld up to a certain annual threshold.
Employers must obtain the correct tax card information digitally from Skattestyrelsen for each employee to ensure correct withholding.
Employee Tax Deductions and Allowances
Employees in Denmark can benefit from various deductions and allowances that reduce their taxable income, thereby lowering their A-skat liability. These are typically included in the employee's tax assessment and reflected on their tax card.
Common deductions and allowances include:
- Personal Allowance (Personfradrag): A basic annual allowance applied to the main tax card, below which no state or municipal income tax is paid. The amount is fixed annually.
- Employment Allowance (Beskæftigelsesfradrag): A percentage of earned income, up to a maximum annual limit. This is automatically calculated.
- Transport Deduction (Kørselsfradrag): For documented travel between home and work exceeding a certain distance, calculated per kilometer above a threshold.
- Trade Union and Unemployment Fund Contributions: Membership fees paid to recognized trade unions and unemployment insurance funds are deductible.
- Pension Contributions: Contributions to approved pension schemes are generally deductible, either from gross income before tax (for certain types) or within specific limits.
- Interest Expenses: Interest paid on loans can be deducted.
The specific amounts and rules for these deductions can change annually and are detailed by Skattestyrelsen.
Tax Compliance and Reporting Deadlines
Employers have significant reporting obligations in Denmark, primarily through the eIndkomst system. This is a central database where employers report salary payments, tax withholdings, and other relevant information for each employee.
Key obligations and deadlines include:
- Monthly Reporting: Salary information, including gross pay, AM-bidrag, A-skat withheld, and ATP contributions, must be reported to eIndkomst by the 10th of the month following the salary payment.
- Payment of Withheld Tax and Contributions: The withheld A-skat and AM-bidrag, along with employer ATP contributions, must be paid to Skattestyrelsen by the last working day of the month following the salary payment.
- Annual Reporting: While monthly reporting is key, the eIndkomst data forms the basis for employees' annual tax assessments. Employers must ensure the cumulative data reported throughout the year is accurate.
- Other Contributions: Payments for AES, LG, and Barselsfond have separate deadlines, typically quarterly or annually, depending on the specific fund.
Failure to report or pay on time can result in penalties and interest.
Special Tax Considerations for Foreign Workers and Companies
Denmark offers specific tax schemes and rules that apply to foreign workers and companies.
- Expatriate Tax Scheme: Highly paid foreign researchers and key employees can potentially opt for a special tax scheme for up to seven years. Under this scheme, a flat tax rate (including AM-bidrag) is applied to gross salary, without the possibility of standard deductions. Strict conditions apply regarding salary level, type of work, and previous tax residency in Denmark.
- Tax Residency: An individual's tax liability in Denmark depends on their tax residency status. Full tax liability generally applies if a person resides in Denmark or has their centre of vital interests there. Limited tax liability applies to non-residents earning certain types of income from Denmark, such as salary for work performed in Denmark.
- Foreign Companies: Foreign companies employing staff in Denmark may establish a permanent establishment (PE), triggering Danish corporate tax obligations. Even without a PE, they have employer obligations (PAYE, social contributions) for employees working in Denmark, unless these obligations are handled by a Danish entity or an Employer of Record.
- 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 can impact where income is taxed and how foreign tax credits are applied.
Navigating these special considerations often requires careful analysis of individual circumstances and applicable agreements.
