Relief for foreign tax is a tax relief granted to avoid double taxation when a person or company pays tax abroad. This relief is generally granted under the credit method or the exemption method.
Frequently Asked Questions About relief for foreign tax
What does relief for foreign tax mean?
Relief for foreign tax means that Denmark fully or partly reduces the Danish tax on a given income by the tax that has been paid to another country on the same income.
The scheme is intended to ensure that the same income is not taxed twice when both Denmark and the foreign country have the right to tax. Relief can be granted either under national law (section 33 and section 33 A of the Danish Tax Assessment Act) or under a double taxation treaty (DTT).
Who can obtain relief for foreign tax?
Relief can be obtained by both individuals and companies when foreign tax has been paid on income that is at the same time fully taxable in Denmark.
How does the credit method work?
The credit method in section 33 of the Danish Tax Assessment Act works as a mechanism that grants a reduction in the Danish tax when a taxpayer has also paid tax abroad on the same income.
Denmark still taxes the income, but grants a reduction corresponding to the foreign tax, never exceeding the Danish tax on the relevant income.
What is the exemption method with progression?
The exemption method with progression means that foreign income is exempt from Danish tax, but that the income is still included when determining the Danish tax rate.
The scheme follows from section 33 A of the Danish Tax Assessment Act and from many double taxation treaties, where Denmark has reserved the right to apply progression.
The consequence is that the foreign income is not taxed in Denmark, but it affects progression so that the Danish income is taxed at a higher rate.
What is meant by documentation for foreign tax?
Documentation for foreign tax is about proving to the Danish Tax Agency that final and actual tax has in fact been paid abroad on the relevant income.
Only if this can be substantiated can relief be obtained under the Danish Tax Assessment Act or a double taxation treaty.
Typical documentation includes foreign tax assessments or information forms, payslips where tax has been withheld, or official statements from the foreign tax authorities.
What role do double taxation treaties play?
Double taxation treaties (DTTs) determine how the right to tax is allocated between Denmark and the other country, and which relief method Denmark must apply.
The rules in a DTT take precedence over the national rules in the Danish Tax Assessment Act if the DTT grants the taxing right to the country of residence. If the source country has the right to tax the income, there is freedom of choice between the DTT and national law.
How do you apply for relief for foreign tax?
Application for relief takes place as part of the ordinary tax return process, but the requirements for procedure and documentation depend on whether you are an individual or a company.
For individuals, this is done via the annual tax assessment in TastSelv, where the foreign income is reported in the relevant boxes together with information about the foreign tax. The amounts must be entered correctly and converted into Danish kroner using the Danish Tax Agency’s official exchange rates.
For companies, this is done via the corporate tax return, where foreign income and paid tax are included in the calculation. The foreign tax must be final and actually paid.
What are the limitations of the credit method?
Under the credit method, the reduction can never exceed the part of the Danish tax that relates to the foreign income.
Excess foreign tax can neither be carried forward to later income years nor refunded, and the part that exceeds the Danish tax is therefore lost.
When can the exemption method be more advantageous?
The exemption method can in some cases provide a greater advantage, as Denmark completely exempts the income from tax.
Whether this is more favourable depends on the specific income, the foreign tax and the applicable double taxation treaty.
Disclaimer
As the above is for guidance purposes only, we accept no liability for decisions that may be made based on the above without prior individual advice. We accept no liability for errors and omissions.