Contractors who have won a contract in Denmark may find the most effective way to trade is under the Expat Tax Scheme (ETS), which is also known as Article 48E. This is a local payroll solution that enables contractors to retain around 60-70% of their fees after tax, and they can use this scheme for up to five years.
The ETS is an alternative to the Danish self-employment or limited company route, which involves Danish taxation requirements that reduce the take-home pay and is only likely to be worthwhile for those looking to use substantial business expenses to reduce their tax bill.
“Danish labour and tax legislation is strict, so contractors can find it easier to trade compliantly by working through the ETS,” explains CXC Global’s Danish expert Charles Daw. “This ensures they meet all necessary statutory criteria, and this scheme provides an easy and straightforward trading vehicle for any Danish assignment.”
Do contractors need visas to work in Denmark?
Under the European Union’s (EU) free movement of labour, UK citizens do not need a visa to live and work in Denmark. Contractors from the EU, therefore, have no special requirements to fulfil in order to obtain the EU work certificate as part of the ETS package.
Non-EU citizens, however, do require a work and residence permit before starting work in Denmark. For these contractors, there is a major advantage from using the ETS – as it is an employed solution, it is also open to contingent workers from outside of the EU.
Daw explains: “Well established UK service providers will have a local structure in place that is fast lane certified by the Danish immigration authorities, whereby they can pre-approve visa papers to allow non-EU contractors to start work within a few days. The self-employed route, on the other hand, is only open to those who are inside the EU.”
Non-EU citizens can start immediately if no general entry VISA is required.The work and residence permit can be pre-approved for an immediate start if the contractor is working via a local solution provider. S0, on arrival in Denmark, the contractor has to visit the immigration office to collect the required documents prior to working.
How does ETS work?
In order to qualify for the ETS package, a contractor must have an average monthly salary of a minimum of 61,500 Danish Kroner (DKK), which works out to be approximately €8,290 or €58 per hour based on full-time hours (exchange rates correct at the time of writing). The contractor must also not have paid Danish taxes in Denmark within the last 10 years.
“Under this scheme, a contractor will have an employment contract with a local service provider for the duration of their assignment,” says Daw. “For contractors who use a service provider that has an in-country partner, there is typically a start-up fee and on-going fee to apply for and make use of the ETS solution.
“ETS contractors will be covered under the service provider’s public liability insurance and professional indemnity insurance for claims made against the worker while working on site in Denmark,” adds Daw. “They should also be covered by employer’s liability for any occurrence.”
When a contract comes to its end, a simple letter to the tax authorities is necessary to de-register the contractor. Contractors using the ETS in Denmark are registered as what is known as a ‘local wage tax withholder’. Based on approved time sheets, the net amount earned is transferred to a Danish or a foreign bank account.
Statutory entitlement for paid holiday is on a monthly basis and the contractor receives their accrued holiday pay in the same month through the payroll process.
Can contractors trade in Denmark using their UK-based limited company?
Contractors can trade in Denmark through their UK limited company for contracts of a few weeks’ duration.They may need to register their company within the Danish system from day one of their contract. They may also need to engage the services of an accountant who is familiar with the Danish tax system to handle taxation matters.
This can include registration for work, filling out required forms and being aware of the dual taxation treaties. This tells a contractor how much tax and social security will be payable on a fee income generated while contracting in Denmark.
For the most part, Daw does not recommend this option for medium and long-term contracts in Denmark: “If you are going to contract in Denmark for any significant length of time, then you need to pay your tax and social security in Denmark and the ETS process is one of the most tax efficient ways of working.”
Can contractors set up a limited company in Denmark?
Contractors can set up a private limited company in Denmark, as there is not requirement to be a resident of Denmark to do so. If registering a limited liability company, there will be additional procedures.
All foreign businesses that provide goods or services must register with the Danish Commerce and Companies Agency. Contractors can either register online or call the Danish Commerce and Companies Agency for an application form.
What contractors should do when starting a Denmark-based contract
“Denmark has a national registration system for workers,” explains Daw. “All Danish citizens have what is known as a CPR number and contractors working in Denmark are required to gain residency by getting an address and thereafter a CPR number. Once that is acquired, the contractor can then apply for the ETS status from SKAT, the Danish tax office.
On obtaining the ETS status, contractors with an employment contract to work in Denmark can start immediately, as they will have a pre-approved work and residence permit. These contractors can arrive in Denmark, go straight to the relevant authorities and could technically begin working legally on the same day.They can complete the registration process during the first couple of weeks after they start their contract.
How contractors are taxed in Denmark
Non-ETS contractors are taxed through social security payments and income tax, which can result in a marginal rate as high as 55% for those working at the top end of the earnings scale.
For highly skilled contractors that qualify, ETS offers an alternative to the normal Danish progressive income tax. ETS contractors pay the flat rate of 31.92%. Under this structure, contractors take home around 65-70% after tax, which is based on the required contract rate for ETS eligibility and the period of time worked during the tax year, plus an allowance for dual housing (where applicable and for the first 12 months only).
In addition, ETS contractors also receive the Danish national health insurance card, which provides them with standard welfare rights in Denmark, including full medical healthcare. All taxes are deducted at source, with legal responsibility for correct deductions fully absorbed and indemnification provided by the local Danish service provider.
“Youneed to weigh up the pros and cons of both processes,” concludes Daw. “The ETS retention rate at over 65% is extremely high; even by offsetting business expenses, the self-employed alternative still demands social security and high-level tax of over 50%.
“The only possible benefit of being self-employed in Denmark is to use business expenses to reduce the tax bill.”