Taxation of foreign pension in Denmark

Overview

‍Taxation of foreign pension plans or life insurance policies in Denmark

Do you know how your foreign pension plans or life insurance policies are taxable in Denmark and how they must be reported?

The rules for the taxation of foreign pensions or life insurance can be complex, as they depend on both Danish tax regulations and any double taxation treaties between Denmark and the relevant country. Therefore, it is important to understand how these rules work in order to avoid double taxation or unexpected tax liabilities.

You should be aware of the following pitfalls:

Reporting to the Danish Tax Agency (SKAT)

Foreign pensions or life insurance policies must be reported to the Danish Tax Agency via Declaration L, after which the tax authorities will make a decision on the taxation. If information about a foreign pension is not reported to the Danish tax authorities, you may face a large back-tax bill of up to 10 years, with added interest and penalties.

Taxation of returns or payouts

The annual return is taxable unless it can be documented that there was a deduction or exemption right in the foreign country, at the time of payment.

Foreign pensions or life insurance are generally taxed in the year of the payout, as it is assumed that there was a deduction or exemption right in the foreign country at the time of contribution. Payouts can be tax-free if it can be documented, that there was no deduction or exemption right in the foreign country at the time of contribution to the pension plan. The annual return will still be taxable. There is also a risk that both the return and the payout may be taxed if you cannot document whether there was a deduction or exemption right in both the foreign country and in Denmark.

For this reason, it is essential for anyone with foreign pension plans or life insurance policies to clarify whether there was a deduction or exemption right at the time of contribution.

Double Taxation

Foreign pensions are generally taxable in Denmark. However, there may be situations where the same pension is taxed both in Denmark and in the country from which the pension is paid.

Denmark has entered into double taxation treaties with many countries to avoid double taxation of income. It is important to investigate, who has the right to tax and which relief options are available.

Currency Fluctuations

Foreign pensions are typically paid in another currency. Currency fluctuations can affect the taxable income when converted to Danish kroner.

Documentation Requirements

As a taxpayer, you must be able to document:

Your country of residence at the time the plan was established.
How you contributed to the pension plan, e.g. directly from your employer or through a private plan.
Whether you received a deduction for the contribution in the country you were taxable in at the time of contribution.
Additionally, you must be able to document that all contributions correspond to the amount for which you received a deduction or exemption in the foreign country.
Please note, the tax authorities are very strict regarding documentation requirements.

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Frequently Asked Questions (FAQ)

1. What is the requirement to report foreign pension schemes to the Danish Tax Authorities?

If you are fully tax liable to Denmark and own a foreign pension or life insurance scheme, you are required to submit Declaration L (Form 49.020) to the Danish Tax Authorities. This obligation applies regardless of whether the scheme has made any disbursements.

The declaration must include your name, CPR number, policy number, account value, and information on whether contributions were made with right to tax deduction or from taxed funds in the foreign country. The form must be submitted no later than July 1st of the year following the date you became taxable in Denmark.

Failure to meet this deadline may lead to unfavourable tax consequences and an increased likelihood of review by the Danish Tax Authorities.

SkatteInform can assist with assessing the tax implications of foreign pension arrangements and in preparing the required declaration.

2. Will distributions from my foreign pension be taxed in Denmark?

Yes. Unless otherwise exempted, distributions from foreign pension schemes are taxable in Denmark, even if foreign tax has already been paid, under Denmark’s worldwide income principle. Relief may, however, be available by offsetting foreign tax paid, either by Danish domestic rules or through an applicable double taxation agreement (DTA) with the relevant country.

SkatteInform can advise on the taxation of pension distributions and the available relief mechanisms.

3. Is the annual return from my foreign pension scheme taxed in Denmark?

That depends on the classification of your pension scheme:

§53A scheme: Annual returns are taxed each year in Denmark. Disbursements are typically tax-exempt, provided no foreign tax deduction was granted at the time of contribution. This is often referred to as the “garbage can rule.”

§53B scheme: Returns are not taxed annually; taxation occurs only upon disbursement, provided the scheme is formally approved as a §53B arrangement. Approval is subject to strict documentation requirements.

Incorrect classification can result in double taxation, both annual taxation and taxation at disbursement.

SkatteInform can advise on the correct classification of your pension scheme.

4. Can I claim deductions in Denmark for contributions made to a foreign pension scheme?

Generally, no. Contributions to foreign pension schemes are not deductible or exempt in Denmark unless the scheme has been formally approved by the Danish Tax Authorities.

Approval requires that the scheme meets the requirements under §1 of the Danish Pension Taxation Act and is the subject of a formal application. If approval is not obtained, contributions will be taxed as ordinary income in the year they are paid.

SkatteInform can assist with preparing an application for approval and determining whether a foreign scheme qualifies under Danish law.

5. How can I avoid double taxation of a foreign pension?

Denmark has double taxation agreements (DTAs) with many countries to prevent the same pension from being taxed in both the source country and in Denmark. The taxation rules depend on the type of pension:

Public pensions are generally only taxed in the source country.

Private pensions are often taxed in both the source country and the country of residence (Denmark), unless otherwise specified.

Typically, Denmark offers relief for foreign tax paid, either through a credit or exemption method, depending on the applicable DTA.

SkatteInform can analyse the relevant agreement and calculate the correct tax relief.

6. What documentation must I provide when moving to Denmark with a foreign pension plan?

When relocating to Denmark and becoming tax resident, you must file Declaration L, indicating whether the pension should be classified as a §53A or §53B arrangement. The Danish Tax Authorities will assess whether the scheme can be approved under §53B.

The documentation requirements are extensive, and failure to provide sufficient documentation generally results in automatic classification as a §53A scheme, meaning both annual taxation of returns and taxation at disbursement.

Typical documentation includes:

Statements from the foreign pension provider or an auditor describing the scheme’s structure and type

Evidence showing whether contributions were tax deductible or exempt in the foreign country

Contribution history and payroll records covering the entire savings period

In practice, gathering such documentation, particularly for older schemes, can be challenging. E.g. the Danish Tax Authorities often requires individuals who worked abroad between 1975 and 2000 to produce decades of pay slips, even if payroll systems from that period were not digitalised.

SkatteInform has extensive experience in advising on the taxation of foreign pension schemes and in preparing and organising the necessary documentation.

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Disclaimer

The above information is for guidance purposes only, and we accept no responsibility for decisions made based on this information without prior individual advice. We accept no responsibility for errors or omissions.

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