Expertise
Permanent establishment and labour hire
For foreign companies with employees or activities in Denmark, and for Danish companies using foreign subcontractors or hired-out labour.
The actual working arrangements determine whether a business has a Danish taxable presence or hires labour for tax purposes.
We review projects, employees and contracts before work starts and assist with enquiries about existing arrangements.
How we can help
- Permanent establishment assessment
- Labour hire versus subcontracting
- Withholding and reporting
- Contract review
- Representation in tax enquiries
When does a foreign company have a permanent establishment in Denmark?
A permanent establishment is a fixed place of business through which the company's business is wholly or partly carried on, such as an office, a workshop or a branch. Denmark interprets the concept in line with the OECD Model Tax Convention. Activities of a purely preparatory or auxiliary nature do not create a permanent establishment.
A permanent establishment can also arise without an office of your own. This happens if a person in Denmark habitually concludes contracts on the company's behalf, or if a building or installation project lasts longer than the period set by the tax treaty, typically 12 months.
The consequence is Danish corporate tax on the income attributable to the establishment, calculated as if it were a separate business. On top of that come registration and the obligation to withhold tax on the salaries of employees in Denmark.
Can a home office create a permanent establishment?
Yes. Work from a home office in Denmark can amount to a permanent establishment if the work is ongoing and long-term, if the employee carries out the company's core business, and if the company has a business interest in the work being done from here.
Occasional home working is not enough, and neither is working from Denmark solely because the employee has moved here for private reasons. The Danish Tax Agency's practice looks at the employee's role, for example whether they have a central sales function or were hired to build a market from here.
What is hiring-out of labour, and who has to withhold the tax?
Arbejdsudleje (hiring-out of labour) applies when someone employed by a foreign employer carries out work that is an integral part of a Danish company's business. What matters is who actually directs the work and bears responsibility and risk for the result, not what the contract is called.
The salary is taxed with 8% AM-bidrag (labour market contribution) and a 30% hiring-out tax on the remainder. Since 1 September 2015, the Danish client company has had to withhold the tax. If the fee also covers materials or other services, the split must reflect market terms.
The employee can instead opt for ordinary taxation by filing a tax return no later than 1 May of the year after the income year. Hiring-out of labour also overrides the 183-day rule, so the salary can be taxed in Denmark from day one.
Common pitfalls with permanent establishments and hiring-out
The client company is generally liable for tax it failed to withhold, unless it can show that it was not negligent. The assessment should therefore be made before the work starts, not when the Danish Tax Agency asks.
- A contract for services covers a set-up where the Danish company in reality directs the work.
- The invoice does not split materials and labour, so the tax has to be calculated on the entire fee.
- An employee's home office gradually becomes the company's real base in Denmark.
- Intra-group postings are assumed to be exempt without the conditions being assessed.
Frequently asked questions
Does a single employee in Denmark create a permanent establishment?
Not necessarily. It depends on whether the employee works from a fixed place over a longer period, carries out the company's core business or concludes contracts on its behalf. A salesperson or managing director working from here can be enough.
What is the difference between hiring-out of labour and a contract for services?
Under a contract for services, the foreign company delivers an independent result and bears the responsibility and risk itself. Under hiring-out, it provides labour that the Danish company directs and integrates into its own business. The actual course of events decides it.
How much is the hiring-out tax?
The salary is subject to 8% AM-bidrag and then 30% tax on the remainder. The Danish client company withholds the tax. The employee can opt to be taxed under the ordinary rules instead.
What happens if the client company does not withhold hiring-out tax?
The client company is generally directly liable for the shortfall, unless it can show that it was not negligent. That is why the contract and the actual nature of the work should be assessed before the work starts.
Do the hiring-out rules also apply within a group?
Yes, as a starting point. There are exceptions, for example when a specialist is sent to transfer specific know-how within the group. The exception requires a case-by-case assessment.
What does this mean for you?
This page is general. Your own situation may be different, so talk to us before you act on it.