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Denmark Gives Pension Tax Rebate To Avoid EU Rebuke

by Ulrika Lomas,, Brussels

07 October 2014

Following indications that Denmark's fiscal deficit could deteriorate in 2015, its Government has resorted to a change in tax arrangements on certain pensions to try and ensure that it does not breach the European Union's (EU) maximum deficit target of three percent of gross domestic product (GDP).

In the latest Article IV report at the end of last month, the International Monetary Fund had noted that, although Denmark's fiscal consolidation was sufficient for its exit from the EU's Excessive Deficit Procedure in 2013, its deficit is likely to expand in 2014 to about the three percent target, and can be expected to deteriorate further in 2015 as one-off tax revenue measures expire.

As Denmark's central bank has also forecast a fiscal deficit of up to 3.2 percent of GDP next year, the Government has tried to give itself some room for maneuver by bringing forward taxation on pensions to yield an expected 0.75 percent of GDP, or some DKK15bn (USD2.5bn).

On October 3, it was announced that, from April 1, 2015, eligible pension fund members over the age of 60 years will be able to achieve a tax rebate of 2.5 percent. Currently, a 40 percent income tax rate is imposed on withdrawals from the fund but, for next year, that tax rate will be reduced to 37.5 percent.

The rebate will be allowable on pension withdrawals or, if desired, a member can immediately pay the reduced tax rate on his or her total share in the fund but continue to leave the money as retirement savings. In the latter case, pensions in the future would be paid free of tax.

The Government confirmed that the measure should ensure room for it to support growth and employment, while at the same time minimize the risk that Denmark would receive a new EU fiscal deficit recommendation.

Finance Minister Bjarne Corydon stated that, "for the Government, it is essential that we continue to support growth and employment as far as possible. But it should also be seen that, at the same time, we are conducting a responsible economic policy which meets our EU requirements."

TAGS: individuals | Finance | tax | economics | pensions | Denmark | fiscal policy | retirement | tax rates | tax breaks | individual income tax | Europe

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