U.S.-Denmark Tax Treaty: Key Rules and Benefits Explained

The tax treaty between the U.S. and Denmark helps individuals and businesses avoid double taxation while promoting cross-border trade and investment. By setting clear rules on taxation, it provides certainty for taxpayers in both countries and includes provisions to prevent tax evasion and ensure fair treatment.

Understanding its key rules can help taxpayers benefit from reduced withholding rates, exemptions, and credits.

Determining Residency

Residency status determines taxation under the U.S.-Denmark tax treaty. The treaty follows domestic tax laws but provides guidance when a person or entity qualifies as a resident in both jurisdictions. Tie-breaker rules resolve cases of dual residency.

For individuals, residency depends on domicile, residence, or similar criteria. In the U.S., this includes citizens, green card holders, or those meeting the substantial presence test, which requires spending at least 183 days in the country over a three-year period using a weighted formula. Denmark considers individuals tax residents if they have a permanent home or stay in the country for more than 183 days in a 12-month period.

When dual residency occurs, the treaty applies tests to determine primary residency. The first factor is the location of a permanent home. If homes exist in both countries, the next consideration is where the individual has stronger personal and economic ties. If unclear, habitual abode—where they spend more time—is considered. If still unresolved, nationality is the deciding factor. If no resolution is reached, tax authorities must negotiate a mutual agreement.

For corporations, residency is based on incorporation or management. The U.S. determines corporate residency by incorporation, while Denmark applies a management and control test. If a company qualifies as a resident in both countries, the treaty assigns residency based on the place of effective management.

Permanent Establishment Criteria

A business is taxed in a country if it has a permanent establishment (PE) there. Under the treaty, a PE exists when a company has a fixed place of business in the other country through which it operates. This includes an office, branch, factory, workshop, or a construction site lasting more than 12 months. The PE allows the host country to tax the business’s profits attributable to that establishment.

A PE can also be created if a company has a dependent agent in the other country who habitually concludes contracts on its behalf. Independent agents, such as brokers or commission-based representatives acting in the ordinary course of their business, do not trigger a PE.

Certain activities do not create a PE, including using facilities solely for storage, display, or delivery of goods, as well as conducting preparatory or auxiliary activities like market research or advertising. These provisions ensure only substantive business operations are taxed.

Employment and Business Income

Taxation of employment and business income depends on where the income is earned and where the work is performed. Salaries, wages, and similar compensation are generally taxable in the country where the employee physically works. However, if a U.S. or Danish resident works in the other country for a short period—typically not exceeding 183 days in a 12-month period—and their salary is paid by an employer outside the host country, the income remains taxable only in the employee’s home country, provided the employer has no taxable presence in the host country.

Self-employed individuals are taxed differently. Income from independent personal services, such as consulting or freelancing, is taxable only in the country of residence unless the individual has a fixed base in the other country. If a fixed base exists, the host country can tax income attributable to that location. Similarly, business income earned by sole proprietors or partnerships is taxable in the country of residence unless the business has a taxable presence in the other country.

Taxpayers with cross-border employment or business activities must track days worked in each country and maintain documentation. Payroll reporting and withholding requirements vary, and noncompliance can result in penalties. For self-employed individuals, tracking deductible expenses related to foreign work can help reduce tax liabilities.

Dividend, Interest, and Royalty Treatment

The treaty reduces withholding taxes on investment income. Dividends paid by a company in one country to a shareholder in the other are subject to reduced withholding rates. The treaty caps withholding tax on dividends at 15% for most recipients, with a reduced 5% rate for companies holding at least 10% of the voting stock in the paying company. Certain pension funds and government entities may qualify for a complete exemption.

Interest income is generally exempt from withholding tax, meaning U.S. or Danish residents receiving interest from sources in the other country are typically taxed only in their country of residence. Exceptions exist for interest tied to hybrid instruments or transactions designed to avoid tax.

Royalties, covering payments for intellectual property such as patents, trademarks, and copyrights, are also exempt from withholding tax. This provision encourages cross-border licensing and technology transfers by ensuring that royalties are taxed only in the recipient’s country of residence.

Double Taxation Relief Methods

The treaty prevents double taxation through the foreign tax credit and exemption methods. The U.S. primarily uses the foreign tax credit system, allowing taxpayers to offset Danish taxes paid against their U.S. tax liability on the same income. This credit is limited to the amount of U.S. tax that would have been owed on the foreign income. To claim the credit, taxpayers must file IRS Form 1116 (for individuals) or Form 1118 (for corporations) and provide documentation of foreign taxes paid. In some cases, taxpayers may elect to deduct foreign taxes instead of claiming a credit, though this is often less beneficial.

Denmark applies both the foreign tax credit and exemption methods depending on the type of income. For Danish residents earning income from U.S. sources, a credit is typically granted for U.S. taxes paid, reducing Danish tax liability. In some cases, such as income from permanent establishments in the U.S., Denmark may exempt the income entirely from Danish taxation. Danish taxpayers must comply with local reporting requirements to claim these benefits.

Documentation and Reporting

Proper documentation is necessary to benefit from the treaty’s provisions. Both countries require specific forms and disclosures when claiming treaty benefits.

For U.S. tax residents receiving Danish-source income, IRS Form W-8BEN (for individuals) or W-8BEN-E (for entities) must be submitted to the Danish payer to claim reduced withholding rates on dividends, interest, or royalties. U.S. businesses operating in Denmark may need to file Form 8833 to disclose treaty-based positions that reduce or exempt certain income from U.S. taxation. Failure to file this form when required can result in penalties and loss of treaty benefits.

Danish taxpayers earning U.S.-source income must report it to the Danish Tax Agency and provide documentation supporting any foreign tax credits or exemptions claimed. Businesses with U.S. operations may also need to file U.S. tax returns, such as Form 1120-F for foreign corporations with U.S. income. Compliance with both countries’ tax authorities is necessary to avoid audits, penalties, or double taxation.