Denmark is one of the wealthiest countries in the world, with an emerging and growing tech sector. As an EU member state, doing business in Denmark can be a smooth transition for your business. However, hiring an employee and learning how to do payroll in Denmark can create some challenges, as the country requires monthly tax reporting for all employees. While you do have to register your business to do payroll in Denmark, you don’t have to set up a local bank account.
A note about currency: Denmark’s currency is the Danish Krone (kr). For comparison purposes, we’ll note the equivalent US Dollar figure, where applicable, using the conversion amount relevant at the time of writing this article. The conversion rate used is 1 Danish Krone = 0.14 USD. Make sure you check current conversion rates to ensure accurate calculations.
Step 1: Set Up Your Business as an Employer
To do payroll in Denmark, the first thing you need to do is register your business with the Danish Business Authority (Erhvervsstyrelsen). Denmark allows for permanent and non-permanent establishment of a business—and that’s an important consideration because it will determine your tax liability, value added tax (VAT), and more.
Once you’ve determined your business type, you’ll need to complete the appropriate registration. Upon approval, you’ll receive a Danish certificate with your Danish CVR number. The CVR number is like a US employer identification number (EIN). Start this process as soon as you know you will hire employees in Denmark because it can take several months to receive approval once you’ve submitted your paperwork.
You must register as a Foreign Service Provider (RUT) to provide services legally in Denmark. You’ll also need to register for your VAT. Do this online by registering as a non-Danish company.
A permanent establishment applies when your employees buy, sell, or conduct business from a physical workplace location. This includes many workplaces:
- A physical office or branch office of your US business
- A physical office of an authorized agent of your US business
A non-permanent establishment exists if your US business operates in Denmark through a broker or other independent worker. This sounds straightforward, but let’s look at a couple of examples to illustrate.
- You own a US-based cleaning business and have hired an employee to clean offices in Copenhagen. You secure contracts with four buildings and provide cleaning services once per week. Because these services are provided at the same location and with regularity, your Denmark operations will be considered a permanent establishment.
- You own a US-based technology company and hire a Danish employee to provide customer support to clients in nearby time zones. Assuming the employee works from the same location, even if it’s their home, you’ll probably be a permanent establishment because the work happens from the same location.
- You open a postal address in Denmark and register your business—but you don’t conduct any business from this address. You’ll probably be a non-permanent establishment.
While this seems simple, it’s a fairly complex process, and it’s recommended that you speak with an international business attorney familiar with this Danish requirement.
Step 2: Establish Your Payroll Process & Policies
You’ll want to create a structured process so you don’t miss any vital payroll steps. Consider the following:
- Pay schedule: How frequently will you pay employees? Monthly is most common in Denmark, but you can also pay weekly, every two weeks, or twice monthly.
- Type of employees: Full- vs part-time?
- Tracking time: How will you track employee hours, and how will it be reported to you?
- Taxes: How often will you need to pay taxes? What tax rates will you pay? How often do you need to remit taxes and to what agencies?
- Payroll processing and calculations: Will you calculate payroll by hand, Excel, or use a payroll service or software?
- Paychecks: Will you write manual checks, use pay cards, pay via direct deposit, or pay in cash?
The typical Danish workweek is 8 a.m. to 5 p.m., Monday through Friday, with a one-hour lunch break. The majority of workers in Denmark work about 37 hours per week, but this can be adjusted through collective bargaining agreements or employment contracts. Working hours, under the EU Working Time Directive cannot exceed 48 hours per week, averaged over four months. Overtime is paid at 1.5 or two times the employee’s regular hourly rate and is paid for all hours worked over 37 in a single workweek. Employees who work on a public holiday must be paid twice their regular hourly rate.
To ensure your company processes payroll in Denmark effectively, you should also have policies on:
- Benefits: What benefits are required, and how do you remit payments?
- Leaves: What leaves are required to be paid vs unpaid, and at what rates?
- Overtime: At what rate do you need to pay employees’ overtime, and for how many hours?
- Absences: How do you track absences and know whether they’re paid or unpaid, excused or unexcused?
- Holidays: What holidays are paid and at what rate?
Step 3: Determine Salaries & Ensure Compliance
The cost of living in Denmark is similar to the US, currently nearly 20% less expensive. The average annual salary in Denmark is about 545,000kr ($78,500). When determining what you’re going to pay your Danish workers, consider their experience and skills, in addition to the cost of living. However, while you may be able to save money by having Danish workers, you’ll still need to pay competitive rates to ensure you attract and retain the best talent.
Payroll & Employment Law Compliance
Denmark has similar employment and payroll compliance laws to the US and follows many of the employment laws set forth by the EU. It’s vital that you understand the differences and nuances of Danish employment law so that you remain compliant. Written contracts are not required though companies frequently use them.
Employee classification is extremely important in Denmark. Danish regulators regularly review employee classification and may disagree with your assessment of a worker being an independent contractor. Because the majority of Danish worker benefits apply only to employees, many companies may try to classify employees as independent contractors to avoid this additional overhead. However, this increases your risk of putting your business in danger, running afoul of Danish employment laws resulting in costly fines and penalties.
To be clear, you can partner with a Danish independent contractor; just make sure they’re actually a contractor and not an employee.
Here’s where Denmark diverts from other EU countries. There is no minimum wage in Denmark. In fact, none of the Nordic countries have a stated minimum wage. Instead, Denmark allows companies and unions to determine a minimum wage through collective bargaining agreements.
Denmark bases the workweek on about 37 hours over five days. As mentioned above, the maximum hours allowed for an employee is 48, averaged over four months.
It’s also important to note that employees in Denmark are entitled to rest periods between working shifts. You must provide your workers with at least 11 hours of uninterrupted rest in every 24-hour block and at least one day of rest per week.
In Denmark, the standard time off provided is 25 days per year, accrued at a rate of 2.08 days per month worked. The Danish Holiday Act (Ferieloven) provides these minimum requirements, but employers may always provide more time off.
Federally regulated employees are entitled to 10 paid general holidays off each year. If a general holiday falls on a non-working day, employees are entitled to a holiday with pay on the working day immediately before or after the holiday.
- New Year’s Day
- Maundy Thursday
- Good Friday
- Easter Sunday
- Whit Monday
- Great Day of Prayer (Friday before the fourth Saturday after Easter)
- Ascension Day (40th day after Easter)
- Pentecost
- Whit Sunday (7th Sunday after Easter)
- Christmas Day (Dec. 25)
- Boxing Day (Dec. 26)
Danish law provides parents with up to 52 weeks of paid parental leave. Maternity leave is provided four weeks before the expected birth date and 14 weeks after birth. Paternity leave is provided for two weeks during the first 14 weeks after the birth of a child.
Parents may share the remaining time between them. The 32 weeks can be shared, taken by only one parent, or the parents can take the time together.
Denmark requires employers to pay employees who are out sick for up to 30 days. Employees receive full pay during these first 30 days out of work.
If an employee is out sick longer than 30 days, sick leave is provided by the government. Sick pay provided by the government is a maximum of 4550kr ($428.61) per week. Note that this amount increases annually. Employees can receive this benefit for up to 22 weeks within a nine-month period. To qualify for the government-paid sick leave, an employee must have been employed for at least 240 hours in the last six months.
Most companies in Denmark use employment agreements or hire workers who are subject to collective bargaining agreements. These contracts will determine under what conditions an employee can be terminated and how much severance pay is required.
Employers may terminate an employee, with or without a contract, for business, personal, or misconduct reasons. Employers must give the employee written notice and an explanation for the termination. Like in the US, if you’re terminating an employee for misconduct, it’s good practice to provide them a written warning in advance of any termination.
If you’re terminating an employee in Denmark, there are times when you’ll need to provide notice and severance. Often specified in the employment contract, most notice periods fall between one and six months. If an employee has worked for your company for at least 12 years and up to 17 years, you must provide them with at least one month of severance pay. For employees who have worked for your company for 17 years or more, you’ll need to provide at least three months of severance pay.
Step 4: Collect Employee Data & Forms
As with US-based employees, you’ll need to collect certain data from your Danish employees. This often includes:
- Employee’s full name
- Employee’s permanent address in Denmark
- Identification proving the employee’s identity
- Employee’s civil registration number (CPR) like a US social security number
- Copy of the employee contract or collective bargaining agreement
- Bank account information
- Pension details
Step 5: Collect Time Sheets & Calculate Payroll
When a business first launches, they often use paper time sheets. The best and most effective way to keep track of employee hours is to use time tracking software. Your employees clock in and out electronically, and your managers can review and approve time sheets before they get to your payroll team for processing.
Once payroll gets the time sheets, they should still review them for accuracy. A second set of eyes to spot any glaring errors is crucial to ensuring your company runs payroll correctly each time. It’s easier to fix these errors before running payroll, and it creates a smoother process for everyone involved.
When calculating your Danish payroll, you’ll need to account for tax and payroll deductions. Missing these will leave you out of compliance and could cause costly fines and penalties from Danish government agencies.
Type of Payroll Deduction | Employer Share | Employee Share |
|---|---|---|
Mandatory Social Security | 2271.60kr annually | 1135.80kr annually |
Public Social Security | 5300kr annually | 0 |
Industrial Injuries | 5000kr annually | 0 |
Maternity Leave Fund | 1350kr annually | 0 |
Besides these payroll withholdings, you’ll also need to withhold appropriate income tax from your employee’s paychecks. Taxes in Denmark are complex and extensive.
Type of Tax* | Withholding Percentage |
|---|---|
Commune | 25% |
Church | 0.92% |
Bottom Tax | 12.09% |
Top Tax | 15% |
Labor Market Contribution | 8% |
Employment Deduction | 10.65% |
Additional Employment Allowance for Single Parents | 6.25% |
Deduction | 4.5% |
Extra Pension Deduction up to 15 Years Before Public Pension Age | 12% |
Extra Pension Deduction from 15 Years Before Public Pension Age | 32% |
Income Tax | 27%–42% |
*Figures were taken from the PwC website and Øresunddirekts.
Every month, you’ll need to report all these details to Denmark Tax. Unlike in the US, where businesses often pay the government just once per quarter, Danish employers must report and make payments every month. You must report and pay what’s due within just a few days after the start of a new month, so it’s crucial that you have your books in order.
The VAT in Denmark is fairly high at 25%—this applies to all goods and services. As a company, you’d charge a purchaser the VAT, which you then pay to the government.
Step 6: Pay Employees
Now that you’ve reached the point of calculating your payroll, it’s time to pay your employees. Make sure you’re following the pay schedule you’ve previously outlined.
If you have just a single or handful of employees in Denmark, you may want to outsource your payroll to a local provider. They will be licensed and familiar with Danish payroll laws and processes. While you’ll pay them a fee, it’ll likely be worth your time for just a few workers.
However, if you have more employees or plan on dramatically expanding your Danish workforce, you may want to do payroll in-house. Make sure you or your payroll team are familiar with Danish payroll laws and deductions to ensure you’re making the right deductions from an employee’s paycheck and sending tax payments to the right Danish government authorities.
Step 7: Document & Store Your Payroll Records
Payroll records in Denmark must be kept for at least five years. Your payroll records should include, at a minimum:
- The dates of employment and rate of pay
- The frequency of pay
- Deductions
- Total regular and overtime pay
- Net employee pay
Bottom Line
Doing payroll in Denmark for the first time is complex. However, with similar processes to the US, you’ll find it won’t take long to get the hang of it. Just make sure you take your time and set everything up correctly from the start.
