Denmark and the Faroe Islands - taxation on pension payments

19 December 2014

Denmark and the Faroe Islands have agreed on amendments to the protocol to the Nordic double tax treaty concerning new tax rules on pension payments.

On 23 October 2014, Denmark and the Faroe Islands agreed on amendments to the protocol to the double tax treaty between the Nordic countries. The amendments affect taxation on most pension payments (except i.e. social pensions) from pension schemes established in one part of the kingdom to individuals residing in the other part of the kingdom.

According to the agreement, pension payments can be taxed in the part of the kingdom where the pension scheme is established if contributions to the pension scheme have been exempt from taxation in this part of the kingdom. The part of the kingdom where the individual resides can also tax the pension payments. However, in that case, the tax must be reduced with an amount corresponding to the tax paid in the part of the kingdom where the pension scheme is established (maximised to the tax on the pension payments in the part of the kingdom where the individual resides).

According to the current protocol, pension payments can only be taxed in the part of the kingdom where the individual resides.

If contributions to the pension scheme have been taxed at the time of contribution in the part of the kingdom where the pension scheme is established, pension payments are exempt from taxation in that part of the kingdom. Such pension payments will also be exempt from taxation in the part of the kingdom where the individual resides. However, the pension payments may influence taxation on other income in this part of the kingdom.

The amendments have been agreed upon due to the fact that the Faroe Islands have changed the local rules concerning how pension scheme contributions and pension payments are taxed. According to these new rules, contributions are taxed and pension payments are tax free. Without the amendments to the protocol, this would lead to tax exemption in both Denmark and the Faroe Islands when payments from Danish pension schemes where contributions have been tax exempt are paid to individuals resident on the Faroe Islands.

The amendments are expected to take effect on 1 January 2015.

The above article is taken from tax:watch, our electronic English newsletter on Danish Tax and VAT matters. tax:watch is issued on the last Friday of each month and is free of charge.