When will a stay in Denmark result in full tax liability?
Full tax liability entails that all your earned income is subject to taxation in Denmark. For example, staying in Denmark for six months consecutively will result in full tax liability to the country. Due to the outbreak of COVID-19 several people have involuntarily been forced to stay in Denmark for periods of time which exceed the tax liability limit of six months. However, will a stay in Denmark exceeding six months entail full tax liability to Denmark, even if the stay is necessitated by COVID-19 restrictions? This column zooms in on the assessment of the six months period and examines whether the special measures enacted by the Danish Parliament due to COVID-19 have affected the six-month assessment.
Full tax liability to Denmark
The rules concerning tax liability to Denmark appears in the Danish Withholding of Tax Act (Kildeskatteloven). The Act states that a person can become subject to full tax liability to Denmark if residence in the country is established (rule of residence) and/or if a person stays in Denmark for six months consecutively (rule of stay). Persons without residence in Denmark who stay permanently on board of Danish vessels are also subject to full tax liability. Lastly, people who are expatriated by the Danish state, a region or municipality to work abroad remain fully tax liable to Denmark.
This column will centre on the subjection of full tax liability due to a stay in Denmark which exceeds six months (rule of stay). According to this rule an uninterrupted stay in Denmark exceeding six months will entail full tax liability, cf. the Withholding of Tax Act section 1, subsection 1, no. 2. It is not necessary that a residence in Danmark is established. It is solely the duration of the stay which determines whether a person is fully liable to pay taxes in Denmark according to the rule of stay.
The consequence of full tax liability is, as a general rule, that all your earned income (salary and income from capital – including earnings from outside Denmark) is subject to taxation in Denmark.
If the duration of a stay in Denmark exceeds six months, full tax liability will apply from the beginning of the six-month stay. One would be required to pay taxes of all income earned during the whole stay in Denmark.
Full tax liability to Denmark will continue until the stay in Danmark is terminated.
Assessment of the six-month period
The duration of the stay in Denmark must be consecutive. However, tax liability will apply even if, within six-month period, a person has interrupted the stay in Denmark for a stay abroad for the purpose of going on holiday etc. Employment abroad will under all circumstances interrupt the duration of a stay in Denmark. Frequent stays abroad, which are not associated with employment, may interrupt the duration of a stay in Denmark.
The cause of a stay in Denmark is insignificant to the subjection of full tax liability to Denmark due to a stay which exceeds six months. Even an involuntary stay exceeding six months may result in subjection to full tax liability. Even confiscation of a person’s passport does not exempt from full tax liability if, as a consequence, the duration af a stay in Denmark exceeds six months.
Exceptions to the six-month rule - students and tourists
In some cases, a stay in Denmark which exceeds six months will not result in full tax liability to Denmark. Tourists and students will not become full tax liable unless they partake in self-employed economic activities. To avoid tax liability to Denmark, tourists and students must also remain liable to pay taxes to their home country. A stay exceeding 365 days over a span of two years will, however, always result in full tax liability to Denmark.
Stays exceeding six months in consequence of COVID-19
The Danish Parliament has in connection with COVID-19 implemented the Act on Provisional Deferral of Declaration and Payment Deadlines. The Act allows for persons residing in Denmark to choose not to become full tax liable under the rule of residence if the stay in Denmark takes place in the period of 9th of March to 30th of June 2020.
The Tax Assessment Council has by binding ruling of the 23rd of June 2020, published as SKM2020.267.SR, established whether the tax relief rules of the Act also allows for persons, subject to tax liability under the rule of stay, to choose not to become liable to pay taxes to Denmark. The Tax Assessment Council dismissed that a person staying in Denmark for more than six months because of COVID-19, can be exempt from full tax liability.
This means that a person staying in Denmark for more than six months will always become full tax liable, regardless that the stay is involuntary. Inability to leave the country due to COVID-19 restrictions will not impact whether a person, who has had to stay in Denmark for more than six months, is liable to pay taxes to Denmark under the rule of stay.
Therefore, it is important to be aware that a stay in Denmark exceeding six months will entail full tax liability to Denmark, even if the stay is necessitated by COVID-19 restrictions.
Contact DAHL Law Firm
If you have questions concerning full tax liability to Denmark, you are always welcome to contact one of our experts in international tax law. We can help you with an assessment of whether you meet the conditions for full tax liability as well as provide general advice on tax liability to Denmark.