With a population of only 5.8 million, Denmark might be one of the smaller countries in the European Union, but it has built a strong reputation as one of the most progressive countries around. This applies both to business, where corporate tax rates have been consistently cut in recent years to the current level of 22%, and to people, where Danes regularly rank among the happiest in any country in the world.
These are just two of the reasons that Denmark is an excellent place for foreign businesses to set up, alongside its long-standing EU membership, relative economic stability, and the fact that around 90% of the population speak English. Energy, tourism, agriculture and construction are key industries in the country, but there are many others where success can be found, too. This guide covers the basics in understanding how to stay compliant in Denmark from a payroll perspective:
Starting a business in Denmark is relatively straightforward and speedy, although all companies from outside the EU, Scandinavia or EEA (European Economic Area) need to register online with the Danish Commerce and Companies Agency (DCCA) at least eight days before opening your business.
The most popular choices for new businesses are private (ApS) and public (A/S) limited companies. Minimum share capital for the two types respectively are 80,000 Danish krone (approximately £9500; $12,500; €10,500) and 500,000 DKK (approx. £60,000; $79,000; €67,000).
All businesses should register for a Central Business Registration Number (CVR). This can be done online for a fee of 670 DKK (approx. £80; $105; €90), although it does require a NemID digital signature account with the Danish government. Completing this process automatically registers a business with the relevant tax authorities, and also gives the business access to a digital mailbox, to which official public notices and messages are sent.
A bank account in Denmark is not required to start a business but it is highly recommended. Corporate bank accounts are fairly fast and easy to open, and can be done at any major Danish bank. You will need a recommendation or reference from a major bank in your home country, the articles of association of the company, and a list of authorized people to conduct official business. Owners and partners who own more than 25% of the company will need to provide full identification information (e.g., passports.)
You will need to abide by Danish laws which prohibit discrimination for gender, age, sexual orientation and race. Denmark also has a strong focus on health and safety: its rules are closely aligned to those of other EU countries, but the Working Environment Authority (WEA) makes regular unannounced inspections to ensure compliance, with strict penalties for transgressors.
Written contracts are mandatory in Denmark, and while there is no legal requirement around length of probationary periods, three months is customary. Labor organizations are fairly active in Denmark, and so many employee salaries will be determined by collective bargaining.
The official working week in Denmark is 37 hours, spread across Monday to Friday, and regular working of late hours is uncommon as Danes generally value family time and work-life balance. There is no specific legislation regarding overtime or overtime pay in Denmark, aside from the 48-hour-per-week limit set out in the EU Working Time Directive. Most employers who offer overtime generally pay at 150% of rate for the first three extra hours in a weekday, and at 200% for any further hours and for any hours worked at weekends or public holidays: these rates may vary according to collective agreements.
Compensation and Severance
There is no minimum wage in Denmark, but collective bargaining sets requirements for different types of workers based on both skill and experience. Wage growth is normally determined by employee and employer negotiation, or potentially through collective bargaining. Typically, there is little friction in this area as employers are expected to increase salaries every year, commensurate with the employee's experience.
It should, however, be noted that average wages in Denmark are among the highest in the world at around 500,000 DKK per year (approx. £60,000; $79,000; €67,000), although this varies substantially depending on industry.
Notice periods in Denmark are relatively long. They start at one month for those with less than six months of service, rising to three months thereafter. Progressively longer periods then kick in: four months after three years, five months after six years and six months after nine years. There are no legal requirements around severance pay, although these entitlements are often agreed through collective bargaining, and there are certain severance entitlements for employees dismissed after at least 12 years of service.
Tax and Social Security
All employees who work in Denmark must have a tax card, and general taxes are automatically withheld from employees. However, Danish tax rules are complex and can be difficult for incoming businesses to get to grips with.
Income tax is on a progressive scale and rates are high: national income tax starts at 12.14%, rising to 15% for total income exceeding 531,000 DKK per year (approx. £64,000; $84,000; €71,000). On top of this comes local labor market tax at 8%, and a municipal tax of around 25%, although the latter rate is only applied to ‘taxable income’. Corporate tax runs at 22% and VAT at 25%.
Social security contributions are relatively low as much of the scheme is funded by other tax intake. Employees contribute 1135.80 DKK per year (approx. £135; $180; €150). Employers put in 3421.60 DKK per year (approx. £410; $540; €460) to cover social security and maternity fund payments, but may also have to contribute further for industrial injuries insurance and other schemes, dependent on lines of business.
Holidays and Leave
A new entitlement for 25 days’ paid leave per year came into force in Denmark on September 1 2020. Some employees receive five extra days depending on their contract, which can be taken as leave, transferred to the following year, or paid at the usual daily rate in lieu. Denmark has 12 days of national holidays each year which employees are entitled to take off if they fall on a weekday. Days in lieu are not given on occasions when they fall on Saturdays or Sundays.
Paid parental leave entitlement is a total of 52 weeks between both parents. The use of 20 of these weeks is fixed:
- Four weeks for the mother prior to birth
- 14 weeks for the mother after birth
- Two weeks for the father within the first 14 weeks after birth
The remaining 32 weeks can be shared out between the two parents as they choose, and they are allowed to spend ‘double’ to both take time off concurrently if they so wish.
Sick pay is covered by the employer for the first 30 days and then can be partially covered by the local municipality thereafter.
Denmark is a high-wage, high-tax environment (corporate tax excepted), but these costs to doing business are worth it because of the high level of the employees and quality of life there. However, as this guide demonstrates, Denmark does have its complexities, especially around income tax, and as a country, it takes a very dim view of companies who are not fully compliant. A global payroll partner can help avoid these potentially sticky situations with solutions and expertise to help you get started on the front foot.
This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.