New Øresund Agreement approved

On 14 November 2024, the proposal for a new Øresund Agreement was passed by the Danish parliament, and on 27 November 2024, the proposal was granted in the Swedish parliament. Hence, the amended Øresund Agreement will be applicable as of 1 January 2025.

The updated agreement will impact people living in Sweden who usually work in Denmark and vice versa. Today, there are about 18,000 individuals living in Sweden who commute to a Danish employer and 2,000 individuals living in Denmark who commute to a place of work in Sweden.

Streamlined cross-border employment taxation: Simplified administration and predictable taxation for employers and employees

The overall framework and rationale of the Agreement are forward-thinking, will ease the administration for employers and provide robust and predictable taxation for employees in cross-border employment. In short, provided the conditions are met, remuneration for work is exclusively taxed in the employer's country in accordance with local legislation. There is a revenue-sharing model balancing arrangement to cover costs for welfare services, etc., in the employee’s country of residence.

Somewhat simplified, the new rules stipulate that if you live in one of the countries and are employed by an employer in the other country (country of the employer) and work at least 50% in that country over a 12-month period, all work is deemed carried out in the country of work. Provided that other work is performed in the country of residence or on business trips and/or ad-hoc work in a third country, this allows the country of the employer to tax the aggregated employment income. The purpose is to make life easy for employers and employees. Tax withholding is made in one country, and the employee pays tax on all employment income in the same country in accordance with local legislation. There is no need for splitting the income based on the number of working days in each country, no need for qualifying benefits-in-kind or incentive schemes in the employee’s residence state, and no need for both a payroll in one country and a shadow payroll in the other country.

Today, there are about 18,000 individuals living in Sweden who commute to a Danish employer and 2,000 individuals living in Denmark who commute to a place of work in Sweden. 

So what changes are there?

Delegation of Power in Case of Travel Restrictions

The Agreement directly authorises the competent authorities to enter into a separate agreement if future restrictions and recommendations on limited movement across the Øresund arise for the sake of public health, safety, or similar reasons. This is good news, since especially commuters who live in Denmark and work in Sweden will hopefully not again be subject to an increased marginal tax rate of up to 30% if they follow the authorities' recommendations and work from home, as they did during the pandemic. 

Civil Servants

News is that the Agreement will be extended to cover civil servants commuting between Sweden and Denmark. Today, the Agreement is only applicable to those who have private employment covered by Article 15 of the Nordic tax treaty.

The 50% Criterion is Measured Over a 12-Month Period Instead of 3 Months

At least half of the work must be carried out in the country of work, and going forward, the threshold is counted over a 12-month period instead of a 3-month period. The benefit is increased flexibility regarding where to work, and the drawback is that, if you meet the condition, the period is for certainty extended beyond the income year. Filing an accurate tax return timely may become more difficult.

No Longer Limited to Work from Home

Another change is that work in the taxpayer’s country of residence no longer has to be carried out in his or her home. The individual can carry out work anywhere in the country of residence, for example, on the premises of a group company of the employer, cf. below regarding permanent establishment.

No Need for Employer Registration in the Employee’s Country of Residence

In the last couple of years, a withholding decision has been available and easily administered by the Swedish tax agency for employees who wish to apply the Øresund Agreement. With such a decision, the Danish employer has not been obliged to register as an employer in Sweden and report remuneration provided monthly. The updated Agreement confirms that Danish employers are not obliged to register and report remuneration when the Øresund Agreement is applicable; hence, there will no longer be a necessity to apply for a withholding exemption in Sweden. 

Danish Yield Taxation

Up until today, employees who live in Sweden have not paid yield tax on a Danish pension scheme saving. Denmark is now introducing a change that implies a yield tax of 15.3% (PAL) will be levied. 

What is Missing?

Pension Schemes, Including Employer-Managed Schemes

The great disappointment in the new Agreement is that Article 2 regarding pensions is, in its entirety, an unchanged continuation of Article 2 of the current Øresund Agreement. This implies that employers and cross-border employees should pay close attention to the taxation of pension schemes to avoid adverse tax consequences.

Permanent Establishments

The consequences, if the employee’s work in the residence country triggers a permanent establishment for the employer, are significant. These include the employer company becoming limited tax liable in the employee’s residence country, employer obligations being triggered, and the Øresund Agreement not being applicable, implying a split taxation of the remuneration between the countries. Due to the significant consequences and bearing in mind that the legislation and practice regarding permanent establishments are both extensive and complex, it will still be a barrier for employers considering employing cross-border. To mitigate this barrier, the two countries should establish the conditions, preferably in the form of a relatively objective assessment, for when work in the country of residence should be considered a permanent establishment or not. Considering the purpose – an integrated labour market –the rules should be as lenient as possible when remote work is driven by the employee’s own desire and not by a business interest that the employer has in the employee's country of residence. To provide the employer with the assurance to allow remote work across the Øresund, it would be advantageous if it were possible to obtain a simplified binding pre-approval.

Final Remarks

As stated initially, the overall framework with easy administration and predictable taxation is forward-thinking. With the proposed improvements regarding pensions and permanent establishments, it would truly facilitate the vision of an integrated labor market in the greater Copenhagen area. In fact, with these amendments, it would stand as a role model for other bilateral treaties and also for the OECD in upcoming work regarding amendments to the new way of working cross-border and remote work.