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LEGAL NEWS - Review your employment agreements – new interpretation of OECD rules may lead to tax liability in Denmark

Logo LEAD Legal Advice Denmark
16. December 2013

This spring the Danish tax authorities have rendered a decision which is part of a new and very restrictive interpretation of the OECD Model Tax Convention and has tightened their practice on permanent establishment (PE) of foreign companies with employees in Denmark.

The Danish rules on permanent establishment follow the OECD Model Tax Convention. A non-resident company can thus be classified as a permanent establishment solely on grounds of the activities performed in Denmark. The threshold of activity that triggers the existence of a PE has up until recently been determined by a fixed place of business through which the non-resident company carries out business in Denmark wholly or partly.

If a company in whole or in part uses a physical place of business in Denmark to conduct business, this will be seen as a fixed place and classified as a permanent establishment in Denmark. The physical place of business can be anything from premises, facilities, installations or merely an area – as long as the company conducts its business at this place. Home offices of sales people, however, have usually not been considered as physical places of the business.

This seems to have changed now. In a recent decision the Danish tax authorities have found that a German company had a permanent establishment in Denmark, because the German company had hired a sales man, who worked from a home office, had received a company car and performed sales activities in Denmark, hereunder visiting and adding sales to already existing clients in the course of performing service works for those existing clients. The tax authorities particularly emphasized the volume of the total activities in Denmark. The Danish tax authorities did not find that the employee was only carrying out preparatory or auxiliary activities, but the tax authorities concluded that the employee was carrying out individual sales activities, even though the employee was not entitled to accept orders or conclude contracts.

This decision has undergone heavy critics. However, until a contrary decision on this matter is rendered, the tax authorities will refer to said decision as case law and it looks like the Danish tax authorities intend to continue with this very restrictive interpretation of the rules. Foreign companies with employees and/or a certain volume of activities in Denmark are therefore urged to review their employment contracts in the light of activities performed by the employees and in the light of the establishment of a home-office.

If a company is viewed as having a permanent establishment in Denmark, it will be liable to limited taxation in Denmark. The taxable income is the income pertaining to the Danish activities. Additionally, the non-resident company will be liable to withholding taxes on the salaries of the employees performing work in Denmark.

Yet, despite the reputation of the Danish tax rates as extremely high, it may actually be preferable to establish a subsidiary when starting activities in Denmark. As of 1 January 2014 the minimum share capital of private limited companies is reduced to 50.000 DKK (ca. EUR 6.700), the corporate tax will be reduced to 22% over the next two years and there are advantageous tax incentives available for key employees.

You are more than welcome to contact LEAD - Legal Advice Denmark , Alexandra Huber, phone 44 45 50 00 if you wish a review of your contracts or wish to discuss your engagement in Denmark.