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Taxation of researchers

Taxation rules relating to the employment of foreign researchers at Aarhus University

The Danish Parliament has adopted an amendment to the researcher taxation scheme with effect from the 2011 income tax year.

General rules with effect from the 2011 income tax year

The general rule is that a foreign employee must pay tax in Denmark on the salary earned in Denmark in connection with work performed in Denmark as an employee of Aarhus University.
There may be exceptions to this rule if, for example, the provisions in a double taxation agreement prevent Denmark from taxing the salary.

Full or partial tax liability to Denmark must exist for a researcher to be covered by the researcher taxation scheme.

Full tax liability to Denmark takes effect upon the purchase of a residence in Denmark or a stay in Denmark of a minimum of six consecutive months. (Full tax liability will then apply from the first day of the stay).
A one-month stay prior to employment is permitted.

The tax liability must commence on the first day of employment.

The main conditions for the right to apply the special researcher taxation rules are as follows:

  • A researcher must not have been fully or partially liable for tax on salary and other income to Denmark during the ten years prior to the employment. This does not apply, however, if the employee was taxed during his/her previous employment in accordance with the researcher taxation rule, and the tax liability ceased upon termination of the previous employment.
  • Visiting lecturers and similar employees who have had limited liability to pay tax to Denmark on the guest lecturer salary for one or more periods of a maximum total duration of twelve months during the last ten years can use the special researcher taxation scheme during subsequent employment.
  • Visiting lecturers and similar employees who have had full tax liability to Denmark as a result of a stay in Denmark of more than six months’ duration during the last ten years, and whose employment at a Danish university is entirely financed by foreign funds, do not have to meet the requirement of not having had full tax liability in Denmark within the last ten years. The period with full tax liability must not have exceeded twelve months altogether.
  • The tax liability to Denmark must commence on the first day of employment. (A one-month stay prior to employment is permitted).
  • The researcher must be employed in accordance with the job structure for academic staff at Danish Universities in a position at a minimum level of assistant professor at the time of employment.

To have his/her qualifications as a researcher approved, as set out in the Executive Order on the Approval of Researchers (in Danish), a person must be able to document qualifications corresponding to the level required for employment as an assistant professor or higher, or as a researcher/project researcher or higher. The approval as a researcher pursuant to the rules on researcher taxation requires academic qualifications at PhD level or similar, cf. the circular on the position structure of academic staff at universities. In terms of the Executive Order, research and development work means activities as defined by the OECD, cf. the above link to the Executive Order (available in Danish only).

Taxation level

The researcher taxation rule means that the salary for the 2011 income tax year is subject to a gross tax rate of 26% for up to 60 months instead of the normal income tax rate. In turn, the staff member cannot deduct any expenses in connection with the salary and is not entitled to the standard personal allowance in the calculation of the tax owed. The gross tax amounts to approximately 32% (60 months) including contributions to Danish social security (labour market contributions).

Upon termination of the researcher taxation period, the employee becomes subject to taxation in accordance with standard rules.

Transitional rules

The 24-month extension (36 months extended to 60 months) of the period during which the researcher taxation scheme can be used does not apply to researchers who, by the end of 2013, have paid 25% tax (originally 30%) for 36 months.

Researchers who have chosen taxation at the rate of 25% or 33% with effect from the 2010 income tax year will be subject to 26% tax during the remainder of a total period of up to 60 months (60 months less any period[s] that had already been taxed in accordance with the researcher taxation scheme as of 31 December 2010).

Researchers who are covered by the researcher taxation scheme with a taxation rate of 25% at the turn of the year 2010/2011 have until 31 December 2011 to choose whether to continue paying 25% tax for periods not exceeding a total of 36 months. The choice is binding and applies until the period of 36 months from the first day of application of the special taxation scheme expires or until tax liability ceases, whichever is the earlier, but not beyond the end of 2013. The researcher must notify SKAT (the Danish Tax and Customs Administration) of the choice of the 25% tax rate by completing and submitting form no. 01.012 1 (Danish form or English form). In the event the researcher later re-enters the scheme, the tax rate will be 26% for the remainder of the period.

A researcher who has chosen the 25% tax rate in accordance with the transitional rules cannot during later employment in the same income tax year choose taxation at 26%. This rule implies that a researcher employed at the university who has chosen to continue with 25% taxation and who terminates his/her employment in 2012, for example, will not be eligible for the researcher taxation scheme if re-employed in 2012. The researcher will then be excluded from the researcher taxation scheme for the next ten years.

It is the view of the university that a researcher should carefully consider the merits of continuing with 25% taxation.

For further information about taxation in accordance with the researcher scheme, see SKAT’s guidelines.

Assistance by auditors

For an individual assessment of whether the employee meets the taxation requirements for using the special researcher taxation scheme and any corresponding advantages, Aarhus University has entered into an agreement with the PricewaterhouseCoopers firm of auditors about assistance in connection with the tax issues associated with potential employment. The firm of auditors can only be contacted following approval by the immediate superior. The local department pays for the assistance of the firm of auditors in accordance with the agreement entered into between the university and the firm of auditors.

Contact information for the firm of auditors:

  • Assistant Manager Jane Rahn Stampe
  • Director Jonna Skovdal
  • E-mail autax@pwc.dk

Further information:

Taxation pitfalls in connection with the option for taxation pursuant to Section 48 E-F of the Danish Withholding Tax Act

(The following list of pitfalls is not exhaustive)

The right to be covered by the researcher taxation scheme is lost if Denmark does not have the right to impose tax.

The employee loses the right to be covered by the researcher taxation scheme if the employee carries out work abroad and the right to impose tax passes to another country. As an example, the employee will no longer be covered by the scheme if abroad for an extended period of time, in general more than 183 days within a 12-month period, as set out in most double taxation agreements.

It is a condition for use of the researcher taxation agreement that the employee’s qualifications are at least equivalent to the level of assistant professor, and that the employee is engaged in research and development work.

It is a condition for use of the researcher taxation agreement that the tax liability to Denmark begins on the first day of employment. If, for instance, an Indian researcher is employed at the university with effect from 1 October 2010, but during the first two months of the employment carries out work for the university in India and only takes up residence in Denmark on 1 December 2010, the researcher does not qualify under the researcher taxation scheme. The tax liability to Denmark only commences on 1 December 2010 when the researcher takes up residence in Denmark and not on 1 October 2010 when employment commences (during the first two months of employment, the researcher is liable for tax to India).

The conditions for using the researcher taxation scheme must be met during the entire period. Once the conditions are no longer met, the researcher taxation scheme can no longer be used.

Foreign PhD students visiting Aarhus University (not employed at the university) and financed entirely with foreign funds cannot use the researcher taxation scheme in connection with subsequent employment as a researcher if they have taken up residence in Denmark during their stay or have spent more than six months in Denmark.

An accompanying spouse, who is employed as a researcher after having taken up residence in Denmark cannot use the researcher taxation scheme if the employment commences more than one month after the person took up residence in Denmark.

Periods with maternity or parental leave are included in the 60 months during which the researcher is taxed in accordance with Section 48 E-F, as the individual remains employed at the university during the period of leave. Salary paid during maternity leave is taxed according to Section 48 E-F, whereas daily benefits are taxed as normal income.

If a researcher is not employed at Aarhus University during the period of leave, the period of researcher taxation ends when the individual leaves his/her employment. If the researcher has income during the maternity leave period, for example from the municipality, the researcher is liable for normal income tax on the amount. The researcher can therefore only rejoin the researcher taxation scheme after ten years, provided he/she has not had any normal taxable income during the ten years.

If the researcher has previously used/been granted tax exemption, the researcher taxation scheme cannot subsequently be applied.

According to standard practice, it is permitted that a researcher takes up residence in Denmark for up to one month before employment begins.

Interruptions in employment periods

If the researcher terminates employment under the special researcher taxation scheme, the researcher can continue under the scheme in a new position, provided the researcher starts working in the new position no later than one month after termination of his/her previous employment. All other conditions for use of the scheme must be met, but the researcher does not have to take up residence elsewhere during the interim period.

A researcher at Aarhus University who is covered by the researcher taxation scheme, but does not work at Aarhus University for a period of several months, does not qualify for the scheme in connection with subsequent employment if the researcher remained resident in Denmark during the period when he/she was not employed at Aarhus University. By remaining resident, the researcher remains liable for tax to Denmark. If the researcher had given up residence in Denmark upon termination of his/her first employment, the Danish tax liability would have ceased, and the researcher would have been able to use the researcher taxation scheme during subsequent employment (provided all other conditions were met). It is therefore important that the researcher submits a request for deregistration to the National Register of Persons upon termination of employment.

If a foreign researcher enters into an agreement with Aarhus University for several employment periods over a number of years, the researcher has to apply for taxation under the researcher taxation scheme for each individual employment period.

It remains unclear at present as to whether foreign researchers who receive a fee for their participation in assessment committees (academic staff advertisements and PhD dissertations) are subject to the rule applying to visiting lecturers and similar staff, or whether they have to apply for tax exemption.
However, the payment of a fee for participation in an assessment committee does not prevent the researcher in question from being covered by the researcher taxation scheme in connection with later employment.

Alternatives to the researcher taxation scheme

Certain foreign researchers qualify for tax exemption in accordance with double taxation agreements double taxation agreements which can be a better option than the researcher taxation scheme.

A researcher who has been granted tax exemption does not pay labour market contributions, but still has to pay contributions to the Labour Market Supplementary Pension Scheme (ATP).

In some cases, taxation in accordance with the standard rules with the option of deducting expenses and the right to the standard personal allowance may be a valid alternative.

Application procedure

An application for researcher taxation should be submitted to Aarhus University’s Payroll Office, preferably by e-mail.

Applications for tax exemption are handled locally by each individual main academic area or by the individual department.

New employment

To ensure quick processing, applications for researcher taxation should be submitted via HR to the Payroll Office as soon as possible accompanied by a copy of the letter of employment (initially, the date of birth is sufficient).

The Payroll Office submits the application and attachments to SKAT, which commences processing on the basis of the documents submitted. Information about the complete civil registration number must subsequently be submitted to SKAT, whereupon SKAT can finalise the matter and forward the decision.

Even if SKAT has not yet finished processing the application, the Payroll Office automatically makes an on account payment of salary less 26% tax (and less labour market contributions). If the researcher is not covered by the researcher taxation scheme according to SKAT’s decision, the Payroll Office will deduct any additional tax owed from future salary payments.

Extensions for employees currently covered by researcher taxation

In connection with extensions, an application for researcher taxation accompanied by a letter of employment must likewise be submitted to the Payroll Office, which submits it to SKAT.

The Payroll Office will deduct tax as usual without waiting for SKAT’s decision/approval.

SKAT’s processing time is currently just over one month.

Tax implications in connection with the employment of Danish researchers at foreign universities

An employee’s tax situation during a stay abroad depends on the destination and on whether the employee continues to have a residence at his/her disposal in Denmark, used by family members, for instance.

If the employee continues to be registered in Denmark during the period abroad, he/she remains fully liable for tax to Denmark and continues to be a Danish resident for tax purposes. Consequently, Denmark can continue to tax the employee’s global income and therefore also income earned from work abroad.

Whether the employee will also be liable for tax abroad depends on the country’s internal rules and any double taxation agreement that may have been entered into between Denmark and the country in question. In the event of double taxation, Denmark grants a reduction in the Danish tax payable.

If the employee moves to another country and gives up his/her residence in Denmark, the employee ceases to be fully taxable in Denmark. Accordingly, the employee will only have limited tax liability to Denmark if he/she has a certain amount of income from sources in Denmark.

Upon termination of full tax liability to Denmark, tax may be payable on securities, etc. in connection with the change of residence.

Aarhus University has entered into an agreement with the PricewaterhouseCoopers firm of auditors about tax advice in connection with potential employment abroad. Employees can therefore obtain an individual assessment of the tax rules that apply during the period abroad, including any tax payable in connection with the change of residence and possibilities for optimising any pension schemes.

The firm of auditors can be contacted following approval by the immediate superior. The main academic area/department pays for the advice of the firm of auditors in accordance with the agreement entered into between the university and the firm of auditors.

 

In the event of any inconsistency between the Danish and English language versions of the document, the Danish version prevails.

 

 

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