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Amendments to Hire of Foreign Labour - one year later

Logo Lead - Legal Advice Denmark
24. September 2013

A year ago, the Danish laws for hiring-out of labour have been tightened.

According to the Danish tax rules a work is considered to be hiring-out of labour, if a Danish company hires work force from a foreign company to carry out works in Denmark and these works form an integral part of the Danish company’s business.

The term ”integral part of business” is not defined in the Amendment Act, but the official remarks to the law proposal contain one example of what an integral part of the business could be: If a Danish farmer hires tomato pickers from a foreign company, this shall constitute hiring-out of labor, as the foreign tomato picker performs a task, i.e. harvests the tomatoes, which would normally be performed by the farmer himself. Same applies, if a Danish hotel hires a receptionist from a foreign hotel. However, the rules shall not be applicable, if the Danish hotel hires a foreign contractor to remodel the kitchen of the hotel as this will not be seen as an integral part of running the hotel business. Whether or not the Danish business carries responsibility or has the right to instruct on how to perform the work is no longer a decisive element when establishing the scope of the rules.

If a Danish company on a permanent basis outsources a certain type of task, it may not be considered as hiring-out of labor. This requires that the Danish company has made the decision not to perform this line of work within their business on their own and that this type of work is outsourced to the same subcontractor on a permanent basis. The consequences of falling within the scope of the rules regarding hiring-out of labor are that the Danish company must withhold labor market contribution (8%) and Danish tax at source (30%) for the part of the remuneration that represents the salary of the respective employee. If the Danish company has no knowledge of how the total remuneration is broken down, and how much of the remuneration is actually the salary of the employee, the Danish company is obliged to withhold 30% of the entire remuneration that is paid to the foreign company for the performance of the works. The tax of 30% is a definite tax, which means that it is not possible to deduct any costs for travel, hotel etc.

At the time the Amendment Act was passed, it was very unclear what the consequences of the Act would be. Now, one year later, the picture has been clarified –due to case law as well as due to binding rulings of the Danish tax authorities: We now know that it is the rule rather than the exemption that using foreign subcontractors, foreign consultants and specialists will be considered as hiring-out of labor. It is therefore extremely important to be well aware of this problem, if a foreign company enters into a cooperation- agreement with a Danish company – either with regard to construction works or with regard to the performance of specific tasks for one of the Danish partner’s customers, for a Danish general contractor or other employers.

As mentioned above it is possible to avoid the application of the rules regarding hiring-out of labour, if the Danish company outsources the respective type of task on a permanent basis. However, recent case law shows that it is very difficult to produce proof for that. Especially the prerequisite, that the Danish and foreign company must establish a permanent business relationship, appears hard to proof. Thus, it is decisive, first, whether the respective task can at all be out-sourced without caving out the core business of the Danish company and second, whether the Danish company permanently outsources this particular task to a third company. Thus, it will not be sufficient that the task is outsourced with regard to one single project, if the Danish company performs that same task on its own in other projects. Moreover, it is decisive that the task is outsourced to the same foreign company on a permanent basis.

One year after the implementation of the new rules, we must therefore conclude, that the amendments have made it extremely difficult for foreign companies to provide an offer as subcontractors in Denmark. In the event that a foreign company performs several tasks in Denmark on a regular basis, we advise those companies to consider a permanent subsidiary in Denmark in order to employ own consultants. This will have the advantage that the foreign company does not have to reveal the salaries of their employees to the Danish customer and/or cooperation partner. As the founding costs for companies are limited in Denmark and the procedure is simple, we consider it a very good alternative to establish a Danish subsidiary.

For more information please do not hesitate to contact
 LEAD - Legal Advice Denmark , Alexandra Huber, phone 44 45 50 00

If you as an Austrian company have already encountered problems in regards of taxation in connection with “Hire of Foreign Labour” in Denmark you are also invited to contact Advantage Austria Copenhagen , who will be happy to assist you also in co-operation with Austrian authorities.