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Understanding the tax and social security system in Denmark

It is important to understand how the Danish tax and social security system works.

Understanding the tax system in Denmark.

Expats relocating to Denmark do not understand the tax system in Denmark.

It is very important to understand that the personal income taxes (PIT) are high in Denmark. The marginal tax rate is approx. 56 % and the effective PIT rate is approx 35%-48% .On the other hand the social contributions are rather small, the part paid by the employer will normally not exceed approx. 2 % and the part to be paid by the employee also approx. 2 % of the gross salary. This combination is different from most other countries in Western Europe, where PIT marginal rates are smaller (on average 40-45 %) and effective PIT approx. 25% - 30 %. The social contributions to be paid by the employer are higher approx. 20 % and for the employee approx. 10 %.

The social contribution rates are low based on two reasons. The high income taxes finance a large part of the State Budget including also a large part of the social welfare benefits. The other reason is that pension savings in Denmark to a large extent is a private matter as opposed to being a public matter. The pension savings is normally agreed as a part of the salary package. The public pensions are relative small and the private pensions are relative high. So in order to obtain a proper pension saving in Denmark private pensions must be made normally as a part of the salary package or privately without involvement of the employer. Very often 10-15 % of the salary is placed in private pension schemes in tax favoured defined contributions schemes. The contributions are normally split between employer and employee.

The result of this is that Denmark has an average salary level far higher than other countries.

The employer will look at his total cost to employ an individual, which will normally in principle be approx 102 % of the salary in Denmark and in other Western European Countries 120 % - 130 % of the salary.

The employee will look at his net income after PIT and social contributions, which will in principle be approx. 52-65 % of the salary.

So if the employer is prepared to offer a total cost for an average salaried employee in Denmark the calculation will in rough figures be:

Total cost                                                         1000

Social contributions paid by the employer   -20

Pension contribution paid by employer       -50

Salary                                                                930

Pension contribution paid by employee      -50

Social contributions paid by the employee -17

PIT                                                                   - 366

Net salary in hand                                          495

Net private pension saving                            59

Total value of salary package                      554

In an average other West European country:

Total cost                                                          1000

Social contributions paid by the employer  -200

Salary                                                                  800

Social contributions paid by the employee   -80

PIT                                                                      -198

Net salary in hand                                            522

Net public pension saving                               61

Total value of salary package                       583

This explains the high salary level in Denmark.

A consequence of the high salary level is that the cost of living expenses in Denmark is considered the highest in Western Europa. With an EU average index of 100 the index rate in Denmark is approx. 140. This off cause means that the purchasing power in Denmark is less the in the average EU country.

For individuals relocating to and being tax resident in Denmark a special 26 % flat rate tax system can under certain conditions be applied instead of the regular PIT system. The effective tax rate under the 26 % flat rate system is 31.66 % because a socalled labour market contribution which is tax deductible also has to be paid.

The regular PIT system consists of state taxes and local taxes. A part of the local taxes socalled church taxes of approx. 1% can be avoided by not being member of the Danish State Church. The remaining local taxes varies from approx 23-28 % depending on the municipality in which the individual live. The regular PIT rates are indicated above.

By Inwema October 2011. or

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