$Unique_ID{COW01108} $Pretitle{411} $Title{Denmark Industrial Relations in Denmark} $Subtitle{} $Author{Embassy of Denmark, Washington DC} $Affiliation{Embassy of Denmark, Washington DC} $Subject{income tax denmark danish taxes company percent companies corporate labor} $Date{1990} $Log{Table 8.*0110801.tab Table 9.*0110802.tab Table 10.*0110803.tab Table 11.*0110804.tab Table 12.*0110805.tab Table 13.*0110806.tab Table 14.*0110807.tab } Country: Denmark Book: Selected Information on Doing Business in Denmark Author: Embassy of Denmark, Washington DC Affiliation: Embassy of Denmark, Washington DC Date: 1990 Industrial Relations in Denmark Industrial relations in Denmark are highly organized with trade unions and employers' associations representing the interests of their respective constituencies in a constant dialogue based on mutual respect and understanding. Industrial relations are managed through free negotiations between the parties involved. Wages and working conditions are laid down in collective agreements between the trade unions and the employers' associations. The agreements which are usually concluded for biennial periods also cover areas such as working hours, protection against unfair dismissal or dismissal without proper notice. During the term of the contract, the two sides are under an obligation to maintain peace and stability in the conduct of the work. As a consequence the Danish industrial environment is almost strike free when collective labor agreements are in force. A. Labor and Management Organizations 1. Trade Unions More than 80% of all wage-earners, including virtually all blue collar workers and government employees, are members of a trade union. Most trade unions are affiliated with the Danish Federation of Trade Unions (LO). At present LO has 30 affiliated unions with 1.4 million members organized in 1,371 local branches. The largest of these unions are the following: - The National Union of General Workers (SID) with four chapters covering manufacturing, construction, transport and agriculture; membership 320,000. - The National Shop and Office Workers Union (HK); membership 315,000. - The National Union of Metal Workers (including mechanics), membership 140,000. - The National Union of Municipal Workers; membership 120,000. - The National Union of Female Workers; membership 100,000. Other important trade union federations are: - The Salaried Employees' and Civil Servants' Confederation (FTF); membership 360,000. - The Confederation of Professional Associations (AC); membership 140,000. 2. Employer Associations The Danish Employers' Confederation (DA) is the central organization of the private employers' associations and federations in industry, construction, crafts, commerce, and transport. There are 150 employers' associations and 41 individual companies affiliated with DA, which in total comprises 25,000 member companies employing 600,000 people, of which 300,000 are blue collar workers. The five biggest employers' associations are the following: - Danish Industries Employment Federation-formerly the Federation of Danish Mechanical, Engineering and Metal-Working Industries (JERNET) and Association of Employers of the General Danish Industries (Industrifagene); membership 4,600 companies. - Danish Contractors' Association; membership 933 companies. - The Commercial and Office Employers' Association (BKA); membership 3,800 companies employing 72,000 people. - The Federation of Employers in Trade, Transport, and Services; membership 1,400 companies. B. Contract Agreements 1. Collective Bargaining The negotiations about the renewal of labor contracts which normally take place every second year follow a fixed pattern and procedure. Usually, the first step taken by the main labor management organizations is to decide whether the negotiations shall follow a centralized or decentralized pattern. In recent years the trend has been moving towards a more decentralized decision-making process with the individual unions negotiating their special claims (including wages) directly with their employers and the LO negotiating the general claims (e.g., working hours, paid training, and such) with the DA. Negotiations must be completed within a certain time limit, but this limit may be extended. If agreement on a new contract cannot be reached, further negotiations take place between the two parties with the assistance of an independent arbitrator. If an agreement is reached, the result is submitted to the members for approval. If the parties cannot reach an agreement, a first notice concerning industrial action may be served. Industrial action does take place unless the arbitrator decides to use his power to postpone it. The arbitrator may enforce a maximum of two postponements, each covering a period of 14 days. If an agreement is still not reached at the expiry of these extension periods, industrial action is initiated. In recent years, the government has intervened directly in the collective bargaining process on several occasions following breakdowns in negotiations between the trade unions and the employers. On these occasions the government has resorted to specific legislation, usually based on the mediation formula proposed by the independent arbitrator. 2. New Technology With a view to facilitate the introduction of new technology into the work place, the Danish Employers' Confederation and the Danish Federation of Trade Unions signed a cooperation agreement in 1986 providing for prior notification and consultation when the introduction of new technologies is likely to affect the general structure of a company or an industry. This agreement also calls for consultative committees in enterprises with 35 or more employees. As a matter of general policy, the Danish labor movement recognizes that the utilization and development of new technologies are vital for the competitiveness of Danish goods, both at home and abroad, and consequently of paramount importance for employment, the working environment and job satisfaction. 3. Labor Disputes Disagreements concerning the interpretation of a labor agreement are normally sorted out through negotiations between the parties directly involved at the local level. If these negotiations prove unsuccessful, the parties may request the assistance of mediators from their respective main organizations. If these mediation efforts fail to produce a positive result, either party may request that the case be referred to a conciliation committee consisting of representatives of the main labor organizations. If the conciliation committee fails to reconcile the parties, a last-ditch effort to reach an agreement is made by the main organizations. Dismissal cases may be brought before a special Dismissal Board, but the final recourse in all other cases is the Labor Management Arbitration Board which consists of two representatives of each side and an independent arbitrator who is either selected by the parties or appointed by the Industrial Court. The decision reached by the Labor Management Arbitration Board is final and binding for both parties. The procedure followed in cases of breach of labor agreements or breach or interpretation of the main collective labor agreements is similar to the one described above. In the first instance, attempts are made to solve the problems through mediation at the local level. If mediation fails, the case is referred to the conciliation committee and from there to negotiations between the main labor and management organizations. The last instance of appeal is the Industrial Court which is a judiciary body established in accordance with the Industrial Court Act. The Industrial Court operates in the same manner as a normal court, but deals exclusively with issues related to collective labor agreements and its members are elected by the trade unions, the employers' organizations and various public authorities. The verdicts reached by the Industrial Court are final and must be respected by both parties. The sanctions applicable under the Industrial Court Act are exclusively fines. Wage disputes within the framework of existing labor agreements are handled in a way similar to the one which is applicable for legal conflicts. In the first place, attempts are made to reach as amicable solution through direct negotiations at the local level without or with mediation. If these efforts fail to produce results, the matter is referred to the conciliation committee whose decision is final and binding on both parties except in disputes over piece work contracts rescinded by the employers. If the parties cannot agree on new terms of piece work contracts, they may as a last recourse take industrial action. The mechanisms set up for the resolution of labor conflicts are illustrated in figure 1. As a consequence of the harmonious and business-like relations existing between the trade unions and the employer organizations, industrial relations in Denmark are characterized by peace and stability. The number of days lost due to work stoppages resulting in more than 100 lost working days has over the last decade been at an average below 0.1 percent of the total number of days worked. With the exception of 1985, an average of less than 2 percent of the total work force was affected by work stoppages in this period. In 1988 this percentage was as low as 1.05--the lowest level in the last 10 years. Tables 6 and 7 present the historical and current perspectives of work-days lost in Denmark due to labor disputes. Table 8 shows the comparison of lost in Denmark with other OECD countries. [See Table 8.: Work-days Lost Due to Labor Disputes Recent History] [See Table 9.: Work-days Lost Due to Labor Disputes 1988, By Industry] [See Table 10.: Work-days Lost due to Labor Disputes In Selected OECD Countries] RECRUITMENT PRACTICES IN DENMARK Companies needing personnel in Denmark have a variety of recruitment channels at their disposal. The most important of these are: - Advertisements - Informal networks - Company waiting lists - State job centers (AF) - Recruitment consultants - Trade unions - Schools/Universities Advertisements, informal communication networks are the most commonly used means of getting in contact with prospective job candidates. Established companies usually keep lists of persons who have shown an interest in getting a job in the past and these waiting lists are used when vacancies are to be filled. This recruitment practice is particularly important for recruitment of blue-collar workers. The Danish Employment Department (Arbejdsdirektoratet) operates 150 local Job Centers (Arbejdsformidlingen, AF) where employers can get in contact with job seekers of all educational backgrounds. With the use of their "AF Match" computer database, these local Job Centers are able to identify job candidates matching an employer's specific requirements. The services rendered by AF are free of charge. While the AF centers are generally used for the recruitment of blue collar and clerical workers, personnel consultants are generally used for the recruitment of managerial staff or technical experts. Some consultants offer full-scale services for the recruitment of all types of workers. The fees charged for services depend on the complexity and specifications of the recruitment assignment. Others specialize in certain types of personnel only. Business development authorities in local communities assist foreign investors in their search for workers and staff. Their assistance is free of charge. A survey carried out by the Danish National Institute of Social Research in 1987 revealed how a representative sample of 1,000 Danish industrial companies handled the recruitment of their latest personnel addition. As shown in Figure 2, in all categories of workers more than two-thirds of the new hires were recruited through advertisements, informal networks, or waiting lists. The latter accounted for 10-20 percent of new hires for blue-collar workers, but less than 5 percent for white collar workers. The AF accounted for 10-20 percent of new hires for blue-collar and clerical workers, and about 5 percent for salaried employees. TAXATION IN DENMARK The principal direct taxes in Denmark are the corporate income tax (selskabsskat) which is levied on companies, and the national income tax (stasskat), a county income tax (amtskommuneskat), a municipal income tax (kommuneskat), and a special income tax (Saerligindkomstskat) which are levied on individuals. The most important indirect tax is the value added tax (mervaerdiafgift, or moms). Other taxes include social insurance contributions by the employers and employees, AMBI, an employers' tax, a withholding tax and dividends, net wealth tax (which is levied on individuals only), inheritance and gift taxes, real estate taxes, and stamp duties. Resident individuals who are members of the established church of Denmark are also liable to a church tax. A. Corporate Income Taxes Companies registered in Denmark either as a Danish company or as a Danish branch of a foreign company are liable to taxation. A resident company is liable to corporate income tax on its worldwide profits, subject to any modifications under a relevant double taxation agreement. Any company incorporated in Denmark is considered to be resident there. The principal corporate entities that are liable to corporate income tax are the public limited company (Aktieselsab, A/S) and the private limited company (Anpartsselskab, ApS). A nonresident company is liable to corporate income tax only on business income from a branch or other permanent establishment in Denmark, income from real estate in Denmark, income derived from hiring out the company's employees in Denmark that would be subject to personal income tax if earned by the individuals themselves, and fees received for the leasing out of a business in Denmark. A nonresident company's Danish-source dividends and royalties are subject to a withholding tax instead of corporate income tax. Interest payments received by a nonresident company from Denmark are exempt from tax unless they form an integral part of the business profits of its permanent establishment there and are thus subject to corporate income tax. There are no withholding taxes on branch profit remittances. Resident companies and Danish branches of nonresident companies are liable to corporate income tax at a flat rate of 40 percent. This rate applies whether profits are distributed or not. No local income taxes are levied on companies in Denmark. Instead the municipality in which a company is established receives a portion of the national corporate income tax paid to the state. 1. Taxable Income Taxable income comprises gross income less the cost of earnings, securing and maintaining it. The starting point for the determination of taxable income is profit (or loss) of the company as stated in its annual statutory financial statements. - A previous year's inventory write-down is considered taxable income. Inventories may be written down by the creation of a tax-free reserve. This reserve may not exceed 30 percent of the total inventory valuation at the end of the accounting year, although it may be at whatever lower rate that the company chooses. The current year's write-down must be added to taxable income in the following year, and is replaced by the following year's write-down. - The tax treatment of dividend income received by a resident company differs between shareholdings of less than 25 percent and those of 25 percent or more. - Gains realized by a company on the disposal of capital assets are dealt with in a variety of ways for tax purposes, depending on the type of asset, such as machinery and equipment, real estate, shares and intangible assets. 2. Deductions Companies are entitled to make deductions for depreciation according to the provisions in the Danish Depreciation Act. The permissible rate and method of depreciation for tax purposes depends on the asset group being depreciated The company must own the assets concerned and use them on a commercial basis to generate income. Good will and land are not depreciable. - Machinery and Equipment. Depreciation is calculated according to a "balance-owing principle". The main rule is that up to 30 percent may be written off each year. However, only 5/6 of the purchase price of new acquisitions may be written off during a year. The depreciation rate for the year's new acquisitions is therefore 25 percent. The following example illustrates the calculation of depreciation: [See Table 11.: Depreciation] Assets that individually cost less than DKK 4,500 (about $640) (subject to indexation) or have an expected life of less than three years may be fully written off in the year acquisition. - Buildings and installations. Buildings are depreciated individually, not as a group. The basis for depreciation is the building's cash value, subject to indexation. - Intangibles. The straight-line method of depreciation is used to depreciate intangibles. Patents and copyrights may be written off over their effective lives. - Research and Development. These costs may either be deducted in the year in which they are incurred or depreciated over five years on a straight-line basis. If research and development costs are incurred before the company has started to receive revenues, the deduction may be taken or depreciation may commence, in the year in which income first arises. Advance depreciation may be claimed for buildings, machinery and equipment for which a company has made definite commitments for the construction of the buildings and production of machinery and equipment. Other deductions include: - Business expenses - Interest paid to banks and other third parties - Royalties, license fees and copyright fees - Entertainment expenses - Real estate taxes - Bad debts written off and provisions against specific debts - Contributions made by a company to the state pension plan - Donations to charities and welfare institutions - Exchanges losses relating to business activities. 3. Loss Carry Forward A loss may be carried forward to be set off against profits carried in the five years succeeding the year in which the loss arose. No carry-back is permitted. In general, losses by one company may not be carried forward by another company following a merger. 4. Tax Relief Due To Tax Treaties - Dividends - Dividends paid by a Danish resident subsidiary to its foreign shareholders are subject to a 30 percent withholding tax. However, a partial, or full dividend refund relief may be available by virtue of a tax treaty. If the parent company is resident in the U.S., the dividend withholding tax rate is 15 percent. The rate of the withholding tax is only 5 percent when the following conditions are fulfilled: - The recipient parent company in the U.S. owns at least 95 percent of the voting shares; and - No more than 25 percent of the gross income of the paying company is derived from interest and dividends, apart from interest and dividends from its own subsidiaries. - Foreign Business Operations. A resident company is entitled to a reduction in the Danish corporate income tax liability on its worldwide income equal to one half of the part of that liability which is attributable proportionately to income from its foreign business operations. A branch or a subsidiary of a Danish resident company in a foreign country are considered foreign business operations. Relief is granted whether or not the income concerned is subject to foreign taxes. - Foreign Tax Credit. If a Danish resident company derives income from a foreign country that has not concluded a tax treaty with Denmark and that income is subject to Danish income tax, a credit is granted for foreign income tax actually paid on the income against Danish corporate or personal income tax as appropriate. Denmark has an extensive network of tax treaties with other countries. Relief from double taxation under most of the treaties is provided for by a credit in the country of residence for tax paid in the country of source or exemption in the country of source. Some treaties also give relief by exempting foreign-source income in the country of residence. The tax reduction available for foreign business operations is in addition to the relief from double taxation, whether this is in the form of a foreign tax credit or tax exemption in Denmark of foreign-source income. Table 9 shows illustrations of the effect the provisions of foreign business operations allowances and relief from double taxation have on Danish corporate tax for Danish resident companies. The higher the foreign-source income relative to worldwide income the lower is the effective tax on Danish income. [See Table 12.: Illustration of Tax Relief Due to Foreign Source Income (DKK or $)] B. Personal Income Taxes An individual resident in Denmark is liable to pay national, county and municipal income taxes, and church tax on his worldwide income. A nonresident individual does not pay county income tax or the church tax. He is liable to pay national and municipal income taxes, but on certain types of Danish-source income only. If a nonresident works as an employee in Denmark for a foreign employer, his remuneration is not subject to national or municipal income tax unless the employer has a legal presence in Denmark or payment is made through an agent with a legal presence there. 1. Taxable Income For resident tax payers, taxable income is total income from domestic and foreign sources, less allowable deductions that are allowed against the aggregate amount of income or profits from each source. For nonresident taxpayers, taxable income includes remuneration for services performed in Denmark, fees received as a director of a Danish company, income from business activities carried on through a branch or other permanent establishment in Denmark, income from Danish real estate, and fees received for the leasing out of a business in Denmark. Capital gains are subject to a "special income tax" (saerlig indkomstskat) at a rate of 50 percent in lieu of the ordinary income tax. Capital gains include gains from the sale of real estate owned for less than seven years (other than gains realized as part of the taxpayer's business, which are subject to the ordinary income tax); gains from the sale of patents, trademarks and similar rights; lump-sum payments on the termination of employment; and gains from the sale of shares. Danish capital gains taxes may be reduced by foreign tax credits. 2. Deductions - Employment Income Deduction - An employee, whether resident or nonresident, is entitled to a standard expense deduction of 3 percent of earned income, up to a maximum of DKK 3,400 (about $485), subject to indexation. - General Deductions - Deductions allowed against total income include all types of interest paid, premiums for life insurance of the annuity type, and charitable donations. A nonresident individual is not entitled to any of these general deductions. - Personal Allowances - A resident individual is entitled to personal allowances in computing income taxes and social insurance contributions due. These allowances are DKK 28,200 (about $4,030) for the national income tax, and DKK 22,100 (about $3,160) for the local income tax. - Child Allowance - No tax deduction is allowed for dependent children. Instead a nontaxable allowance of DKK 5,000, (about $715) per child per year is paid by the state to parents irrespective of the size of the family's income. 3. Tax Rates Personal income taxes are levied as follows: - National income tax - 22 percent on earned plus unearned taxable income - 6 percent on earned income - 12 percent on earned income exceeding DKK 216,000 (about $30,860) - Less tax credit due to personal allowances - National income tax allowance, 22 percent of DKK 28,200 (about $4,030) - Local income tax allowance, 28 percent of DKK 22,100 (about $3,160) Church tax for resident individuals is levied at flat rates between 0.4 percent and 1.6 percent, varying according to the place of residence in Denmark. There is a limitation on the maximum combined tax rate for individual income taxes. The aggregate burden of national and local income taxes (excluding church tax) may not exceed 68 percent on any slice of an individual's taxable income. If it does so, the national income tax is reduced accordingly. C. Other Taxes Other taxes include: - Net wealth tax - Transfer taxes - Inheritance tax - Gift tax - Real estate tax - Share transfer tax - Transaction Taxes - Value added tax - Excise taxes - Stamp duties TAX STRUCTURE IN DENMARK A. Structure of Tax Revenues Income taxes and transaction taxes constitute more than 90 percent of Denmark's tax revenues. Personal income taxes account for about half of total revenues, and value added taxes about one fifth. Corporate income taxes account for less than five percent of the total tax revenues. Capital gains and wealth related taxes constitute about 7 percent of tax revenues. Social security and employment related taxes account for approximately 5 percent of all tax revenues, half contributed by employers and half by employees. Table 10 presents the structure of tax revenues in Denmark. B. Corporate Taxes - International Comparison Denmark's corporate income tax burden is one of the lowest in Europe and the world. Table 11 presents a comparison of corporate income taxes as a percent of total taxes and as a percent of gross domestic product among selected countries. The share of total income taxes derived from corporate taxes in Denmark is among the lowest in Europe (on a par with Finland, Sweden, and Germany), and is significantly below the U.S. and Japan. Measured in terms of tax revenue relative to gross domestic product, corporate income taxes in Denmark are among the lowest in the EC, at par with the U.S. and significantly below Japan. [See Table 13.: Structure of Tax Revenues in Denmark (In billions and percent, 1988)] [See Table 14.: International Comparison of Corporate Income Taxes Selected Countries, 1987] DENMARK'S FINANCIAL SECTOR - Denmark has a well developed financial sector. Companies domiciled in Denmark may raise funds through the Danish banking system or the Copenhagen Stock Exchange. - Copenhagen is an international financial center. - It is the fourth largest center of foreign exchange in Europe. - It has the world's eighth largest bond market (over $100 billion annual bond sales, no transaction taxes or withholding taxes). - It has an effective stock market (with low listing and commission costs). - It has a sizable commercial paper market. - It has a futures and options market. - It is a regional trading center and the principal link between the Nordic countries (Sweden, Norway, Finland, Iceland) and EC. - Denmark's commercial banks are internationally competitive and offer know-how in international financial matters. - Denmark has an advanced mortgage banking system which exports mortgage loans (e.g. to U.K. and West Germany). - Denmark has a well developed insurance sector. - Denmark's membership in the European Monetary System (EMS) ensures stability of the local currency. AMERICAN AND JAPANESE INVESTMENT IN DENMARK There are many American and Japanese companies with investments in Denmark. These investments are for manufacturing plants, distribution centers, or service and marketing activities. U.S. COMPANIES American Meter Company - manufacturing Allen Aircraft Radio, Inc. - marketing American Cyanamid Co. - marketing Apple Computer, Inc. - marketing AT&T - manufacturing Bell & Howell Co. - marketing Borden International, Inc. - manufacturing Colgate - Palmolive Int'l., Inc. - manufacturing Commodore Business Machines, Inc. - marketing Control Data Corp. - distribution Digital Equipment Corp. - marketing FMC Corporation - manufacturing Hercules, Inc. - manufacturing Hewlett-Packard Corp. - marketing International Business Machines Corp. - manufacturing Kellog Company - manufacturing Milliken & Co. - manufacturing Motorola Inc. - marketing NCR Corp. - manufacturing Parker-Hannifin Corp. - manufacturing Pfizer International, Inc. - distribution Texaco - manufacturing Texas Instruments, Inc. - marketing Examples of Danish operations are as follows: - IBM Denmark (IBM/DK) Founded in 1950, IBM Denmark is the largest computer company in Denmark. It employs about 2,400 people (1,600 in marketing and services). Its international Software Publications Center and European Language Services Center serve IBM customers throughout Europe, the Middle East and Africa. Annual sales are over $750 million. In 1987, IBM/DK founded a telecommunications company jointly with a Copenhagen telephone company, called danNet to sell new services to subscribers. In 1989, IBM/DK and the Danish Software Center Computer Resources International (CRI) entered into a joint venture to market turnkey information systems. Together CRI and IBM have established the largest privately owned software center in Denmark. - Commodore Data Commodore Data, the Danish subsidiary of Commodore Business Machines, located its Commodore Networking Centre (CNC) in Denmark in 1989. CNC assembles and develops communication software products and exports them to Commodore's subsidiaries worldwide. Annual sales are about $30 million. - Lycom Lycom was launched in 1987 as a joint venture company of AT&T (51% interest) and NKT, a Danish telecommunications company. Lycom is involved in developing, producing and marketing optical fibres primarily for customers in Europe and the Third World. Annual Sales are about $11 million. - Motorola Storno Motorola acquired Storno DK, a Danish radio communications firm, in 1986, with the aim of strengthening its sales and distribution position in Europe. In 1989, Storno was established as Motorola's European Development Center entailing an investment of $7 million with 900 employees, 250 of whom are engineers. - Milliken Denmark Founded in 1983 with the acquisition of Clean-Tex, a Danish dust-control technology firm, Milliken Denmark, produces nylon, cotton dust, control mats, soap and towel dispensers, industrial wipers and air-service products, and distributes its products throughout Europe. Some 200 workers are employed in this operation. JAPANESE COMPANIES Brother Industries Ltd. -- marketing Dai Nippon Printing Co., Ltd. -- manufacturing Hitachi Ltd. -- marketing Marubeni Corporation -- marketing Seiko Epson Ltd. -- marketing Sony Corporation - marketing Yamaha Corporation -- marketing Yoshida Kogiyo K.K. -- manufacturing Examples of Danish operations are as follows: - Dai Nippon Printing Dai Nippon Printing Co. Japan (DNP) entered in 1989 into a joint venture with the Danish company JEC Optical Products. The purpose of the new company is development, production and global sales of advanced reprojection TV screens from 67" up to 150" for sales to conference and exhibition centers, educational institutions, sports facilities, train stations, airports and other places needing large scale projections. The initial investment was $3.5 million. - Sony Scandinavia Sony Scandinavia was established in 1987 to take total responsibility for marketing and sales in the four Scandinavian countries (Sweden, Norway, Denmark, Finland). Sony Scandinavia is the leading supplier in Scandinavia of consumer electronics and has a dominant position in professional equipment. Total sales exceeded $140 million in 1989. The central warehouse of Sony Scandinavia and its central computer are situated in Copenhagen. - Epson In November 1988, Epson decided to locate its Scandinavian headquarters in Denmark. The subsidiary Epson Denmark A/S is responsible for marketing, sales, distribution, service and support of Epson's products in the Scandinavian countries. Annual sales are about $17 million.