On 14 November 2024, the proposal for a new Øresund Agreement was passed by the Danish parliament,1 and on 27 November 2024, the proposal was approved in the Swedish parliament. Hence, the amended Øresund Agreement (“the Agreement”) will be applicable as of 1 January 2025. The Øresund Agreement is a tax agreement between Sweden and Denmark concerning cross-border commuters.
WHY THIS MATTERS
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 between the two countries.
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.2
Streamlined Cross-Border Employment Taxation: Simplified Administration and Predictable Taxation for Employers and Employees
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 a person lives in one of the countries and is employed by an employer in the other country (country of the employer) and works at least 50 percent 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.
KPMG INSIGHTS
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.
The Agreement: Highlights of Key Provisions
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.
KPMG INSIGHTS
This is welcome news, especially for commuters who live in Denmark and work in Sweden who can perhaps anticipate that they will not again be subject to an increased marginal tax rate of up to 30 percent if they follow the authorities' recommendations and work from home, as they did during the COVID-19 pandemic.
Civil Servants
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-Percent Criterion Is Measured Over a 12-Month Period Instead of Three 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 three-month period.
KPMG INSIGHTS
The benefit is increased flexibility regarding where to work, and the drawback is that, for those who 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 Agreement, as updated, confirms that Danish employers are not obliged to register and report remuneration when the Agreement is applicable; hence, it will no longer be necessary 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 Danish pension scheme savings. Denmark is now introducing a change that implies a yield tax of 15.3 percent (PAL) will be levied.
What Is Missing?
Pension Schemes, Including Employer-Managed Schemes
For some observers, it is disappointing that the new Agreement’s Article 2 regarding pensions is, in its entirety, unchanged from Article 2 of the current Øresund Agreement.
KPMG INSIGHTS
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, can be significant should the employer company become ‘limited tax liable’ in the employee’s residence country. A permanent establishment means that the employer company needs to file a corporate tax return, that employer obligations are triggered, and that the Agreement is not going to be applicable, thus implying the ‘split taxation’ of the employee’s remuneration between the two countries.
As a result, and bearing in mind that the legislation and practice regarding permanent establishments are both extensive and complex, this could present a barrier for employers considering employing cross-border employees.
KPMG INSIGHTS
There could be ways to mitigate this barrier – it’s possible that the two countries could establish the conditions for when work in the country of residence would be considered a permanent establishment or not. The aim is, for all intents and purposes, an integrated labour market and legislators in the two countries may wish to take on board the fact that remote work is often driven by the employee’s own desire and not by a business interest that the employer has in the employee's country of residence. Perhaps some sort of simplified binding pre-approval process would be possible – this remains to be seen.
KPMG INSIGHTS: CONCLUDING THOUGHTS
As stated initially, the overall framework with easy administration and predictable taxation is a welcome development. Finding ways to facilitate the evolution of an integrated labour market by taking on board new patterns of working cross-border and remote work, it could be argued, would help businesses expand, foster economic growth, and boost competitiveness.
Footnotes:
1 Øresunddirekt, "Äntligen ett nytt Öresundsavtal!".
2 Øresundsinstituttet, "FAKTA: Pendlingen över sundet."
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The information contained in this newsletter was submitted by the KPMG International member firms in Denmark and Sweden.
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