Running payroll in Denmark

Danish payroll is known for its complexity. Foreign companies hiring in Denmark might therefore find it challenging to process local payroll. One of the reasons for this is the multitude of taxation rules companies need to consider when calculating employee pay. In addition to state and municipal taxes on employment income, there also is a general contribution to the labor market as well as an optional church tax which has to be calculated. 

Special attention needs to be paid to the tax deductions available for employees as they do not apply to all of the above mentioned tax levies. Yet another characteristic of the Danish payroll system is that it is very digital compared to other countries. Before they can start their payroll processes, employers need toregister for a number of online services.

It is not necessary to establish a local legal entity in order to hire employees and process payroll in Denmark, as foreign companies can handle all payroll-related employer obligations without permanent establishment in Denmark. However, there are several registration processes both resident and non-resident employers have to complete before they can start processing payroll. 

The first step is to obtain a commercial registration number (known as CVR number) from the Danish Business Authority (DBA) which identifies the business and needs to be indicated in any exchange with the local authorities. Once they have a CVR number, companies have to register as an employer for income tax. This is done via a dedicated online portal (only available in Danish). The local tax authority is the Danish Customs and Tax Administration (SKAT). The only social security body employers need to register with is the ATP (Arbejdsmarkedets Tillægspension), which is the mandatory pension fund under which every employee in Denmark is covered. 

Further requirements related to payroll include setting up an industrial insurance scheme (mandatory) and getting a NemID which is a special online signature/ identification certificate needed to access official online portals related to tax reporting and more. The NemID is also needed to access the digital mailbox (e-Boks) - which is mandatory for communicating with the authorities - and for the tax filing e-service.  

Although not legally required, setting up a local bank account is recommended to facilitate payments to the authorities - especially since a local bank account is a requirement for the Nets direct debit service which is used by many Danish employers. Regardless of whether they intend to use a local or a foreign account for payroll-related payments, employers have to register one of their bank accounts as their official Nem Konto. This means that this is the account which will be used for any tax and social security payments. 

The Danish tax system comprises no less than four different tax levies on employment income which are state tax, municipal tax, labor market tax and church tax - the latter is optional. Social security contributions levied on employees and employers are low. 

Tax considerations

Income tax in Denmark is levied on two different levels. In addition to state income tax, working individuals also pay municipal income tax which represents the bigger share of taxes paid by the employee. Municipal taxes are set by each county and vary between 22.8% and 26.3% (rates for 2022).  

The government has introduced several changes to the tax system which entered into force in January 2022 and also affect state income tax. The lower state tax rate is now set at 12.10% (was 12.09% in 2021). The higher tax rate of 15% has remained unchanged while the income threshold to which the top rate applies has risen to DKK 552,500 (after deduction of the labor market contribution). 

Furthermore, all employees have to make an 8% labor market contribution (also known as AM-tax) which is paid along with the other payroll-related taxes. Additional church tax is levied on individuals belonging to a religious institution at rates ranging from 0.4% to 1.3%. When added to the mandatory state and municipal income tax, the total tax burden on employees can amount to over 50%. Employers can retrieve the necessary tax information for each employee from their individual tax card. 

There is a personal allowance of DKK 46,600 (reduced from DKK 46,700 in 2022) as well as an employment allowance of 10.65% of the employee’s salary (up to a maximum of DKK 41,600) which can be deducted from the employee’s taxable income. Other tax allowances and deductions include reductions for single parents, certain employment expenses as well as pension contributions. 

Resident taxpayers pay income tax on their worldwide income while non-residents are only taxed on the part of their income earned in Denmark. Tax residency is determined according to several factors:

• Permanent residence in Denmark

• More than 6 consecutive months spent in Denmark

• Longer stay for other reasons than holidaying  

There is a special tax regime for highly qualified expatriates coming to work in Denmark. For qualifying individuals, income tax is levied at a 32.84% flat rate.

Tax withholding and reporting 

Employers in Denmark have three main obligations with regard to withholding tax from employee salaries, which are deducting income tax at source, reporting the withheld amounts to the authorities and finally paying the outstanding amounts. 

Income tax deducted at source from employment income is called A-tax in Denmark and must be paid to the authorities by the 10th of the following month - this applies to small and medium-sized businesses - or by the end of the same month for large businesses. Monthly tax reports must be filed using the SKAT e-filing system on the same day. An overview of when the payments and tax declarations are due can be found on the SKAT’s website. 

There is no obligation for employers to file an annual A-tax withholding declaration. Employees, on the other hand, must file an individual tax return by 1 May of the following year - extended deadline until 1 July. The tax year is the calendar year.

Social security contributions

Social security contributions in Denmark are quite low compared to other European countries. This is because the majority of the Danish social security system is funded via regular tax revenue. Also, contributions are not calculated as a percentage of the employee’s salary or wages but consist of fixed amounts which must be paid by both employee and employer once every quarter. For this purpose, the social security authority will send out invoices to registered employers via the e-Boks system which then have to be paid separately. 

The employee share amounts to DKK 1,135.80 per year and covers contributions to the mandatory ATP pension fund. The social security share for employers includes contributions to:

• ATP pension fund 

• Maternity leave fund

• Scheme for financing state pension costs

• Vocational training fund

• Fund for work-related diseases

Further payments go towards the compulsory occupational accidents insurance at different rates - depending on the sector and the employee’s position. As contribution levels to the different funds vary, the total employer share is best estimated to be between DKK 10,000 and DKK 12,000 per year - but may go up to DKK 15,000.

Employees in Denmark are entitled to various benefits. These include:

• Annual leave and public holidays: 5 weeks which are remunerated with a 12.5% holiday allowance, plus 11 public holidays

• Maternity leave: 18 weeks paid at 50% of normal wages

• Paternity leave: 2 weeks

• Parental leave: 32 weeks, can be extended by 8 or 14 weeks

• Sick leave: determined by CBA or individual employment agreement; otherwise at least 30 days of fully paid sick leave; thereafter, employees receive sickness benefits for up to 22 weeks

For more information on employee benefits and other employment requirements in Denmark (including severance pay and termination procedures), check out our Global Hiring Guide.

Danish labor law does not determine a national minimum wage. Instead, minimum pay is set for each sector by collective bargaining agreements. There also is no general regulation for overtime pay which should therefore be determined in the employee’s individual employment contract - unless it is already regulated by a CBA. It is common to either offer additional pay or compensatory leave. Paying employees a 13th month salary is not mandatory. 

Although there is no statutory regulation on the payroll frequency, most employers choose to run their payroll once a month. Payments to employees must be made in the local currency which is the Danish Krone (DKK). It is illegal to pay salaries to Danish employees to foreign bank accounts. After each payroll run, employees have to be provided with a payslip which should detail: 

• Pay period covered, working hours and pay date

• Gross and net salary

• Deducted A-tax and labor market contributions 

• Total pension contributions

• Withholding rates and other relevant information from the employee’s tax card 

• Holiday pay as well as any other employee benefits

• Employee details (name, address, civil registration/CPR number)

• Employer details (name, address, CVR number)  

Both paper and digital payslips are legally accepted, the latter being the far more common option. The central online platform through which digital payslips can be distributed among employees is the E-boks system. Employers must keep payroll records for at least 5 years.