What global companies need to know about payroll in Denmark

When it comes to European countries that punch above their weight in economic terms, Denmark is right at the top of the list. With a population of just under six million, it isn’t a huge player in numerical terms, but a GDP per capita of around $70,000 a year puts it in the world’s top ten.

The Danes tend to rank very highly when it comes to education and satisfaction with life. That makes for a motivated, quality workforce (90% of whom speak English), and a workforce that values work and rest in equal measure. But it has to be noted that, despite an attractive corporate tax rate of 22%, Denmark can be a very expensive and complicated place to do business if you aren’t careful, or go in unprepared.

This guide gives you all the key facts about business in Denmark, especially from payroll and employment perspectives.

Getting Started 

Starting a business in Denmark is relatively straightforward and speedy, and is now largely an online process, meaning much of the admin can be conducted remotely. However, 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 commencing trading, and will also need a work permit. The Business in Denmark website is your ideal starting point in the registration process.

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 40,000 Danish krone (DKK) (approximately £4600; $5800; €5300) and 500,000 DKK (approx. £58,000; $73,000; €67,000). For either of these companies, it is advisable to work with a lawyer in Denmark to draft and confirm the shareholders’ agreement, and your articles of association.

One important difference with the private limited company is that business owners may still be considered personally liable for any bank loan debts. This can be negotiated with lending banks on a case-by-case basis, and is an important area to watch out for when applying for loans and credit.

All businesses should register for a Central Business Registration Number (CVR). This can be done online for a fee of 670 DKK (approx. £80; $100; €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.

Employment Considerations

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. 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 37.5 hours, spread across Monday to Friday, and regularly working 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 a premium of between 50% and 100% on top of the normal rate; which levels apply, and at which times of the day or week, tend to be decided through collective bargaining. 

Probation periods are variable, depending on the employment agreement, and in some cases collective bargaining. Generally speaking, they run for a maximum of three months. For fixed-term contracts, there is a hard limit of 25% of the total length of the contract.

Compensation and Severance

There is no statutory national 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 545,000 DKK per year (approx. £63,000; $80,000; €73,000), although this varies substantially depending on industry.

Notice periods in Denmark are relatively long. They start at two weeks for employees serving their probation, and 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 all-encompassing legal requirements around severance pay, although these entitlements are often agreed through collective bargaining. However, there are certain severance entitlements for most long-serving employees, at one month’s pay for those with 12 years’ service, and three months’ pay for those with at least 17 years’ 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 12.1%, rising to 15% for total income exceeding 568,900 DKK per year (approx. £65,500; $83,000; €76,000). On top of this comes local labor market tax at 8%, a municipal tax of around 25% (although this is only applied to ‘taxable income’), and a church tax of around 0.9% for members of the Danish state church. 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 (all figures are per year):

• Social security: 2271 DKK employer; 1135.80 DKK employee
• Public social schemes: 5300 DKK employer
• Industrial injuries fund: 5000 DKK employer
• Maternity leave fund: 1350 DKK employer

This means the total that has to be paid out by employers each year is 11,921 DKK (approx. £1400; $1750; €1600) per employee.

Holidays and Leave Considerations

An 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.

Holiday pay works in two ways in Denmark. Either employees get their usual salary plus a 1% premium (common for white-collar workers), or are given a holiday allowance of the 25 days’ pay that is administered through FerieKonto (normal for blue-collar workers).

Denmark has ten 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.

Maternity leave entitlement is four weeks before the due date, ten weeks after the birth, and a further 14 weeks to be used any time before the child’s first birthday. Full-time employees can receive benefits up to a maximum of 4550 DKK a week (approx. £525; $665; €610) during these periods.

Further parental leave (which includes fathers) runs to two compulsory weeks immediately after the birth, and another 22 flexible weeks that can be used within the first year after the child’s birth. Of those 22 flexible weeks, 13 of them can be transferred to the mother and can even be used up until the child turns nine.

Sick pay is covered by the employer for the first 30 days, after which employers can claim any further sick pay back from local authorities. Maximum sickness benefit entitlement is 22 weeks over any nine-month period.

In Summary

Denmark is known around the world for its high quality of living, and the happiness of its residents – but that comes at a price. Wages and operational costs can be extremely high, and the rules around taxation in particular are very complex. If you can make sense of all your requirements, then Denmark is your gateway to huge opportunities throughout Scandinavia and Europe – and the support of a global payroll provider can make a real difference along the way.

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.