I am American and have been living in Denmark for over a year and a half. During that time I have been thinking a lot about taxes. I am not an accountant or a tax expert, but here is everything I wish I had known before I moved.
Danish Income Tax
In Denmark income can be taxed at a maximum of 52%, but the tax rate is progressive so you will likely pay closer to 40%.
There is a special expatriate tax scheme that is a bit tricky to qualify for (you must be highly paid or qualified as a researcher), but that entitles you to a 33% tax on wage income (but has no beneficial impact on the asset tax rates discussed later).
Danish Asset Tax
Gains on financial assets are taxed at 42%. There are two tax bases, “realized gains” and “unrealized gains”.
Realized gains
This is the tax basis that Americans should already be familiar with. When you sell a financial asset you need to pay taxes on the increase in value from the time you bought it to the time you sold it. In Denmark, these gains are taxed at 42%.
The realized gains basis is applied to individual stocks, non-Roth 401ks, and a selected list of ETFs (the positive list).
Unrealized gains
This tax basis is not going to be familiar to Americans. Unrealized gains are evaluated each year on assets that have not been sold. If an asset gains value, you pay taxes on those gains. If an asset loses value, you can deduct those losses from your taxes (although be aware that the special expatriate tax scheme mentioned above disqualifies you from all deductions including this one).
The unrealized gains basis is applied to ETFs, mutual funds, and Roth 401ks.
An asset can only be taxed on one basis. If you have an ETF share that is taxed on an unrealized basis, you will not be taxed on a realized basis when you sell it.
A special note on Roth 401ks
The Danish tax authorities tell me that they have not actually concluded on if Roth 401ks are taxable or not. But they have concluded that Roth IRAs are taxable. So my expectation is that they will conclude Roth 401ks are taxable. If I were not to pay, and they conclude 5 years later that I should have paid, they will charge 5.5% interest for every year I failed to pay.
A special note on exchange rates
Similarly to the US, the Danish government charges taxes on foreign assets based on the value increase in the currency in which the tax is paid. In the US this, is a huge tax arbitrage opportunity because you can wait to sell your assets until the exchange rate is favorable. However, in Denmark, you get taxed at the end of each year even if you don’t sell (per the unrealized basis). This may seem like a minor issue, but because the exchange rate applies to your entire asset value it makes a big difference. There was one year that it doubled my taxes and the exchange rate is not easy to predict (more cash flow issues).
Filing Danish Taxes
Danish income is automatically reported to the tax authorities which is refreshing compared to the US.
The unrealized gains taxes are quite difficult to calculate especially for mutual funds with automatic reinvesting of dividends. My fiance wrote a cool Python script to calculate unrealized gains for mutual funds with automatic reinvesting, comment on this post if you are interested in learning more!
I received quotes from a number of Danish accountants to calculate these gains for me. The cheapest tax filing offered was $2,000 and one group quoted me $5,800. And that is just for one year!
To add insult to injury, the tax authorities charge interest every day (at a yearly rate of 1.7%) on outstanding balances starting on the first of the year. But the web application to file taxes doesn’t open until March! If you file your taxes April 1, you will pay an additional 0.57% on your asset taxes in interest. In theory, you can avoid paying any interest by calculating your total tax bill on January 1 and sending that money directly to the tax authorities. But the calculations are a bit tricky so it is a significant benefit to file using the web application.
When I have discussed these issues with Danish residents they sometimes question why I reported my international assets at all. Some tell me that they have friends who don’t report their international assets to the tax authorities. I even know someone who didn’t accept a company stock grant because he was concerned about the tax implications. The Danes are a bit soft because they typically can file taxes by clicking a single button each year. But this at least gives you an idea of the perceived difficulty of the asset tax calculations.
Filing American Taxes
The US is one of the few countries that taxes all citizens regardless of residency! You have two options when filing US taxes on Danish income. You can either deduct up to $120,000 of your income or you can take a foreign tax credit. The decision to do one or the other is a bit tricky and a lot has been written on it so I won’t explain further here. But be aware that you can only take the foreign tax credit on income taxes, not on asset taxes.
My advice
If you have a lot of ETFs, mutual funds, or a Roth-401k in the US, Denmark may not be the right place for you to establish residency. The unrealized tax basis applied to these assets is very unpleasant because you do not know how much tax you will pay until the end of the year. It can be quite difficult to make sure you have enough cash available to pay those taxes. If you sell assets to pay those taxes, you will be taxed by the US on the realized gains. And if you are being taxed on a Roth-401K, you can’t sell those assets without huge penalties so you need to come up with that money elsewhere.
But if you do not have significant assets in those classes, then don’t be scared of the income taxes – they are worth it!
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