United States-Denmark Income Tax Treaty

The United States and Denmark have established a tax treaty to promote economic collaboration, prevent double taxation, and facilitate cross-border trade and investment. This treaty plays a crucial role in fostering stronger business relations by eliminating tax obstacles that hinder international expansion. For businesses and individuals operating in both countries, understanding the treaty’s provisions is essential for tax efficiency and compliance. At H&CO, we are committed to helping global entrepreneurs and multinational corporations navigate these complexities with tailored solutions.

Index
Key Provisions | Taxation of Income | International Tax Compliance | Tax Forms | Business Income Tax | U.S. Expat Income Tax | 10 Tax Strategies | FAQs 

Key Takeaways

• The U.S.-Denmark Tax Treaty offers several key benefits, including the prevention of double taxation by allowing for tax credits, exemptions, and reduced withholding rates on various types of income such as wages, pensions, dividends, and royalties.

• It establishes clear taxation rules for different income types and provides "tie-breaker" rules to resolve residency conflicts, ensuring individuals are not taxed as residents of both countries.

• The treaty also supports fair transfer pricing practices by adhering to the arm's length principle, preventing tax avoidance.

Overview of the Treaty

The treaty defines taxable income for individuals and businesses operating in both countries, including wages, capital gains, and other types of income, while also detailing available deductions. It encourages foreign direct investment by reducing withholding tax rates and defines the tax obligations for both businesses and individuals. The treaty also aims to prevent tax evasion and promote transparency between the two nations. Aligning tax regulations creates a stable environment for companies and investors, supporting H&CO’s mission of empowering global success.

Economic Relationship Between the U.S. and Denmark

Denmark and the United States maintain a strong trade and investment relationship, driven by shared interests in innovation, technology, and sustainable energy. The United States is one of Denmark’s top trading partners, with major industries such as pharmaceuticals, renewable energy, and financial services benefiting from cross-border cooperation. The treaty enhances this relationship by reducing tax barriers, encouraging investment, and supporting businesses expanding into new markets.

Key Provisions of the U.S.-Denmark Tax Treaty

Elimination of Double Taxation

The treaty provides mechanisms such as tax credits and exemptions to ensure that income is not taxed in both countries.

Dividends (0%, 5%, 15%)

A 5 percent withholding tax applies if the beneficial owner is a company that directly owns at least 10 percent of the voting stock of the dividend-paying company. A 15 percent withholding tax applies to all other cases where the beneficial owner is an individual or entity that does not meet the 10 percent ownership threshold. A 0 percent withholding tax may apply to certain pension funds that meet the treaty’s specific requirements.

Interest (0%)

Under the U.S.-Denmark Tax Treaty, the withholding tax rate on interest payments is generally 0 percent, meaning interest income paid between residents of the two countries is exempt from withholding tax.

Royalty (0%)

The rate on royalty payments is reduced to 0 percent under the U.S.-Denmark Tax Treaty.

Permanent Establishment Rules

The treaty defines when a company has a taxable presence in the other country, clarifying tax obligations for businesses. A Permanent Establishment (PE) is generally defined as a fixed place of business through which a company conducts operations, such as a branch, office, factory, or workshop.

Mutual Agreement Procedures

The Mutual Agreement Procedure (MAP) under the U.S.-Denmark Tax Treaty allows taxpayers to resolve tax disputes, such as double taxation or residency conflicts, through negotiations between the tax authorities of both countries.

Tax Tips: If a taxpayer believes they have been unfairly taxed under the treaty, they can request assistance from the competent authorities in the U.S. or Denmark.

Exchange of Information

The treaty enables tax authorities in both countries to share relevant tax-related data to prevent tax evasion and ensure compliance with tax laws.

Taxation of Income Under the Treaty

The treaty outlines specific tax treatment for various income types:

Capital gains are generally taxable only in the country of residence unless tied to real estate or a permanent establishment.

Employment and Business Income: Employment income is generally taxed in the country where the work is performed. However, an exception applies if the individual is present in the other country for 183 days or less in 12 months, their salary is paid by an employer who is not a resident of the host country, and the income is not borne by a permanent establishment in that country.

Social Security: Social security benefits are generally taxed only in the country from which they originate. This means that U.S. Social Security payments received by a resident of Denmark are taxed only by the United States, and Danish social security benefits received by a U.S. resident are taxed only by Denmark.

Tax Tips To prove exemption from social security taxes in the host country, U.S. workers in Denmark should request a Certificate of Coverage from the Social Security Administration (SSA), while Danish workers in the U.S. should obtain one from Danish authorities.

Pension Income: Taxation is typically based on the recipient’s country of residence rather than the source of the pension.

Foreign Income Taxes: U.S. corporations may face double taxation due to foreign income taxes paid in other countries, but foreign tax credits can mitigate this issue, ensuring appropriate tax relief.

Tax Tips: Income tax rates in Denmark, including the marginal tax rate and personal allowance, contribute to a significant overall tax burden when additional municipal taxes are considered.

International Tax Compliance Requirements

Adhering to both U.S. and Danish tax regulations is essential for businesses and individuals engaged in cross-border activities. Non-compliance with reporting obligations can result in substantial penalties and financial difficulties. The U.S.-Denmark Income Tax Treaty provides well-defined guidelines to facilitate compliance, especially concerning income generated through PEs in foreign jurisdictions.

Understanding one's tax status and staying compliant with local regulations is crucial, particularly for those living and working in Denmark. Individuals must pay taxes on their global income and meet various tax obligations, including property taxes based on value and specific rates for expats.

Proper compliance and reporting are essential to benefit from the U.S.-Denmark Treaty. Key considerations to ensure compliance include:

• Proper Documentation: Accurate documentation is essential to substantiate claims for reduced withholding tax rates or tax exemptions. This may include tax residency certificates, financial statements, and comprehensive income records.

• Accurately Report Foreign Income: Individuals and businesses must report their foreign income to avoid penalties or double taxation. Failing to do so could result in audits and legal consequences.

• Meet Deadlines: Complying with deadlines outlined in the U.S.-Denmark Tax Treaty is essential to avoid penalties and maintain seamless compliance. Submitting required documents, such as tax residency certificates and other forms, on time helps prevent complications such as delays in tax credits, exemptions, or withholding tax reductions.

International Tax Forms – U.S.-Denmark Tax Treaty

Under the U.S.-Denmark Income Tax Treaty, several international tax forms may be required to ensure proper reporting and compliance with tax regulations in both countries. These forms help individuals and businesses claim treaty benefits, prevent double taxation, and meet their tax obligations efficiently. Some key forms include:

• Form W-8BEN: Used by non-U.S. individuals to claim a reduced withholding tax rate or exemption under the treaty.

• Form W-8BEN-E: Used by foreign entities to certify their foreign status and claim treaty benefits.

• Form 8833: Treaty-Based Return Position Disclosure, required if a taxpayer is claiming a tax benefit under the treaty that differs from standard U.S. tax laws.

• Form 1040: U.S. individual income tax return, which may require additional reporting for foreign income and tax credits.

• Form 1116: Foreign Tax Credit, used to claim a credit for income taxes paid to Denmark to avoid double taxation.

• Form 5471: Information return for U.S. persons with certain ownership in foreign corporations, ensuring compliance with U.S. tax laws.

• Form 8865: Required for U.S. persons with interests in foreign partnerships, ensuring proper reporting of foreign business activities.

• Form 8938: Statement of Specified Foreign Financial Assets, required for individuals with significant foreign assets, including those in Denmark.

• FBAR (FinCEN Form 114): Required for U.S. persons with foreign bank accounts exceeding $10,000 at any time during the tax year.

Individual Income Tax Compliance and Tax Preparation

Ensuring compliance with individual income tax laws under the U.S.-Denmark Tax Treaty is essential for avoiding penalties and optimizing tax benefits. U.S. individuals earning income in Denmark must accurately report their worldwide income, claim applicable deductions, and utilize foreign tax credits to prevent double taxation. Proper tax preparation, including timely filing of required forms such as Form 1040 and Form 1116, helps individuals maximize treaty benefits while meeting their obligations under both U.S. and Danish tax laws.

Business Income Tax Compliance and Tax Preparation

Businesses operating between the U.S. and Denmark must comply with the provisions of the U.S.-Denmark Tax Treaty to avoid double taxation and ensure proper tax treatment. Key considerations include determining whether a PE exists, adhering to transfer pricing rules, and utilizing reduced withholding tax rates on cross-border transactions. Proper tax planning and compliance with reporting requirements help businesses optimize tax efficiency, mitigate risks, and take full advantage of treaty benefits.

U.S. Expat Income Tax Compliance and Planning

U.S. citizens and residents living in Denmark must comply with both U.S. and Danish tax laws, reporting their worldwide income while leveraging the U.S.-Denmark Tax Treaty to avoid double taxation. Expats may benefit from provisions such as the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC) to minimize their tax liabilities. Proper tax planning, timely filing of required forms, and understanding treaty provisions are essential to ensuring compliance and optimizing tax benefits.

Tax Tips: U.S. expats must comply with reporting requirements for foreign bank accounts and assets, such as FBAR (Foreign Bank Account Report) and Form 8938 (Statement of Specified Foreign Financial Assets).

Residency Determination

Under the U.S.-Denmark tax treaty, residency determination plays a crucial role in determining which country has the right to tax an individual. Generally, a person is considered a resident of the country where they have a permanent home or where their personal and economic ties are stronger. If residency is unclear, the treaty provides "tie-breaker" rules to resolve conflicts. These rules consider factors such as the individual's center of vital interests, habitual abode, and nationality. The country where the person is deemed a resident will generally have primary taxing rights on income.

Tie-breaker Rules

The tie-breaker rules in the treaty help determine residency when an individual could be considered a resident of both countries. These rules are used to avoid double taxation and clarify which country has the primary right to tax the individual. The rules are applied in the following order:

1. Permanent Home: The first criterion is that the individual has a permanent home available to them. If they have a permanent home in only one of the countries, they will be considered a resident of that country.

2. Center of Vital Interests: If the individual has a permanent home in both countries, the next test looks at where their personal and economic relations are closer. This is typically assessed based on family, social, and business ties.

3. Habitual Abode: If the individual’s center of vital interests is inconclusive, the next step is to determine where the person has their habitual abode, meaning where they spend more time.

4. Nationality: If the individual still cannot be determined as a resident, nationality is considered. The person will be deemed a resident of the country of which they are a national.

5. Mutual Agreement Procedure: If all else fails, the tax authorities of both countries may engage in a mutual agreement procedure to resolve the issue.

These rules are designed to prevent double taxation by ensuring an individual is not treated as a resident of both countries simultaneously.

Other Relevant Tax Treaty Information

Exchange of Information

Exchange of information involves the sharing of tax-related data between countries to fight tax evasion and promote adherence to tax laws. Through international agreements like the U.S.-Denmark Tax Treaty, tax authorities can exchange details to verify the income, assets, and tax filings of individuals and businesses operating in both countries. This level of transparency helps prevent tax avoidance and ensures taxpayers meet their obligations.

Global Expansion Considerations

The treaty offers relief from being taxed twice on income, such as through the foreign tax credit or exclusions like the Foreign Earned Income Exclusion. It’s important to understand the residency rules and how income, dividends, royalties, and capital gains are taxed in both countries. Additionally, businesses should be mindful of Denmark's local tax laws, including VAT and payroll taxes, to ensure full compliance and smooth operations in the Danish market.

Streamlined Procedures

Streamlined procedures aim to simplify and speed up tax compliance, especially for businesses and individuals involved in cross-border activities. These procedures reduce administrative burdens by offering clear guidelines for reporting, documentation, and claiming tax benefits under international tax treaties, such as the U.S.-Denmark Tax Treaty. By adhering to these streamlined processes, taxpayers can ensure timely and accurate filings, minimize the risk of errors, and avoid potential penalties.

Transfer Pricing

The treaty provides guidelines to ensure that these transactions are priced fairly and reflect market conditions, helping to prevent tax avoidance through the manipulation of prices. Both the U.S. and Denmark adhere to the arm's length principle, meaning that transactions should be priced as if they were conducted between unrelated parties. Businesses operating in both jurisdictions should ensure their transfer pricing practices comply with local regulations to avoid penalties and double taxation.

10 Tax Strategies for Maximizing Treaty Benefits – United States and Denmark

1. Utilize Tax Credits: Claim foreign tax credits to offset taxes paid in Denmark.

2. Structure Investments Efficiently: Use tax treaty provisions to optimize investment income taxation.

3. Leverage Reduced Withholding Taxes: Ensure proper documentation to benefit from lower withholding rates.

4. Plan for Permanent Establishment Rules: Structure business activities to avoid unintended tax liabilities.

5. Optimize Employee Assignments: Use treaty provisions for short-term work arrangements.

6. Maximize Retirement Benefits: Understand cross-border pension taxation to avoid double taxation.

7. Ensure Proper Treaty Elections: File necessary forms to claim treaty benefits.

8. Stay Compliant with Reporting: Maintain thorough documentation to avoid penalties.

9. Consider Holding Companies: Utilize treaty-friendly jurisdictions for tax-efficient structuring.

10. Consult Tax Professionals: Work with experts like H&CO to tailor strategies for your specific needs.

Conclusion

The U.S.-Denmark Income Tax Treaty is a valuable tool for businesses and individuals engaged in cross-border activities. By leveraging its benefits, taxpayers can optimize their tax position and ensure compliance. Navigating international tax laws requires expertise, and H&CO is here to help. Contact our team of international tax professionals to ensure you make the most of the treaty’s advantages.

How Can We Help You?

At H&CO, our dedicated team of CPAs and international tax advisors understands the complexities of cross-border taxation. We specialize in helping businesses and individuals navigate U.S. and international tax laws, ensuring compliance and efficiency. With over 30 years of experience, our bilingual professionals provide expert tax planning, preparation, and advisory services. Whether you are a multinational corporation, a small business owner, or an individual with international investments, we offer tailored solutions to minimize tax liabilities and maximize treaty benefits. To learn more about our accounting firm services, take a look at our individual tax services, business tax services, international tax services, expatriate tax services, SAP Business One, entity management, human capital, and audit and assurance services.  

Frequently Asked Questions (FAQ)

Does Denmark have a tax treaty with the USA?

Yes, Denmark has a tax treaty with the United States, designed to avoid double taxation and prevent tax evasion. The treaty provides clear guidelines on how income, such as wages, dividends, and interest, is taxed between the two countries. It also outlines provisions for tax credits, exemptions, and residency rules, helping individuals and businesses minimize their tax liabilities while ensuring compliance with both U.S. and Danish tax laws. The agreement aims to create a more predictable and efficient tax environment for cross-border activities between the two countries.

Who benefits from the U.S.-Denmark tax treaty?

The treaty benefits individuals and businesses engaged in cross-border activities between the two countries. U.S. expatriates living in Denmark and Danish residents with ties to the U.S. can take advantage of provisions that help avoid double taxation and reduce tax liabilities. This includes tax credits, exemptions, and deductions for income such as wages, dividends, and pensions. Businesses with operations in both countries can also benefit from reduced withholding taxes and more favorable transfer pricing rules. Overall, the treaty helps both individuals and companies optimize their tax situation while ensuring compliance with both U.S. and Danish tax laws.

How do I claim treaty benefits on my U.S. tax return?

To claim treaty benefits on your U.S. tax return, you must file Form 8833 (Treaty-Based Return Position Disclosure), which outlines the specific treaty provisions you're claiming. Additionally, you will need to report income and deductions based on the treaty benefits in the appropriate sections of Form 1040 (U.S. Individual Income Tax Return). For example, if you're claiming an exemption or reduced rate on income, you would include that information on the relevant income forms (e.g., Schedule B for interest or Schedule D for dividends). It’s important to maintain proper documentation supporting your claims to ensure compliance and avoid penalties.

Are pensions taxed under the treaty?

Under the U.S.-Denmark tax treaty, pensions are typically taxed in the country of residence of the recipient. For U.S. expatriates living in Denmark, this means that their Danish pension income may be subject to taxation in Denmark, not the U.S. However, certain U.S. pensions may still be taxed by the U.S., depending on the specific type of pension and treaty provisions. To avoid double taxation, the treaty may allow individuals to claim a foreign tax credit or an exemption, depending on the circumstances. It's important to review the specific provisions of the treaty and consult with a tax professional to determine how pension income is treated in both countries.

How can we assist with tax treaty planning?

We can help individuals and businesses navigate the complexities of treaty benefits, such as claiming tax credits, exemptions, or reduced withholding taxes. We also assist with transfer pricing strategies, residency determinations, and understanding the tax implications of cross-border transactions.