It is well known that Denmark is - and for decades has been - a top contender for the world-record as the country taxing individuals the most.
Naturally, this entails a certain reluctance for foreigners and Danish citizens living abroad to become residents in Denmark for tax purposes. However, this may be an issue for non-residents acquiring a home in Denmark without taken up residency here at the same time.
Unfortunately, the rules determining when individuals become resident in Denmark for tax purposes under these circumstances seem complicated for many and the issue has in recent years let to several high-profile cases involving professional athletes, musicians, fashion models and even the husband of the Danish Prime Minister.
The question of tax residency often arises when a home in Denmark is acquired by an individual who remains – perhaps for the time being – residing abroad. In such cases, tax residency can be triggered unintentionally depending on the amount of time spent in Denmark and the kind of activities engaged in while staying in Denmark.
Generally, owning a home in Denmark severely limits work-related activities that can be performed in Denmark without triggering tax residency. However, holidays can be spent more extensively in Denmark without inducing tax residency.
A recent ruling by the National Tax Board shows an aspect of this adding to the complexity of the rules. In the ruling, it was determined that work performed in Denmark in the capacity as member of the board of directors of a Danish company - approx. 7 to 10 meetings a year - would not trigger tax residency in Denmark even though the individual owned a holiday home in Denmark. The holiday home was not used in relation to the meetings in Denmark.
The ruling may not be particularly surprising due to the fact that a distinction is generally made between holiday homes and all-year homes when determining tax residency. Having acquired an all-year home in Denmark, work-related activities performed in Denmark – regardless of whether the home is used while performing these activities - may quite easily induce tax residency. Conversely, if the home in Denmark is a holiday home, work-related activities may be performed in Denmark to a larger extent without triggering tax residency when the holiday home is not used in connection with work-related activities.
Despite not being particularly surprising, the case serves to demonstrate the complexity of the rules regarding tax residency. Foreigners and Danish citizens living abroad should be aware of these rules when acquiring a home in Denmark. It is advisable to seek professional advice in order to avoid unpleasant surprises. Naturally, BDO will be pleased to assist you.
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.