Australian Expats in Denmark Beware
If you are thinking of joining the growing number of Australian expats in Denmark for a secondment or in pursuit of career interests, there are some key tax issues to be aware of. It all centres around making sure you have your finances structured correctly before heading over there.
If you’re not sure of what to do it might be worth booking in to have a pre-departure review. It all centres around you making sure your financial ducks are lined up.
Things to investigate before heading overseas are:
- Tax Status: Are you going to become a non-resident or remain a resident. If becoming a non-resident how will it impact current investments held here in Australia? Do I need to declare anything or looking into deemed disposal?
- Private Health Insurance: Will you be covered overseas, or do you need to look at suspending this for the period abroad?
- Banking: what sort of bank account can Australian expats in Denmark open? Do you need to notify the banks here?
- Taxation: Do you have any tax structures set up such as Companies, Family trusts, SMSF’s or a partnership? What is the impact of you becoming a non-resident on these types of things? Are you taxed more or not at all?
All of the above and more need to be taken into account when you are making the big move overseas. Denmark has some unusual tax treatments of certain types of structures and investments. At present, if you hold exchange-traded funds, listed investment companies and managed funds in an investment portfolio then you are meant to make a mark-to-market election each financial year.
A mark-to-market election means that each financial year you must declare both the realised and unrealised capital gains of these types of investments. Unrealised gains mean you have not sold the investment, but it has increased in value. You are then required to pay tax on these gains even if you have not sold the investment. This may seem like a ridiculous tax rule, but it is not uncommon. We note that the US IRS has a similar treatment when holding PFIC’s. This tax rule applies to Non-Danish managed funds, listed investment companies and exchange-traded funds.
Recently, the Danish government has announced that it wishes to make it more attractive for residents to invest in non-resident mutual funds (managed funds, ETF, etc) without there being an extensive tax burden by doing so. They aim to achieve this by reducing the capital tax rate to the same as the share income rate. They are also in discussions to remove the mark-to-market rule and to stick by a traditional realisation rule. The realisation rule is what Australia currently follows whereby you only pay tax on capital gains that are realised, which is also what a large percentage of countries abide by.
The overall impact of this push by the Danish government is that foreign equity investments are taxed in the same way as Danish equity-based investment funds. This will therefore increase the competitiveness of foreign investment funds on the Danish retail market and in turn make Australian ETF’s more appealing to Australians expats in Denmark.