Will sending an employee to Denmark cause Danish taxation for the foreign employer?

Many foreign companies are interested in selling goods or providing services in Denmark. Some are already active in the Danish market through Danish retailers, but intend to cut out the middle-man and establish a branch or subsidiary directly in Denmark themselves to get closer to the end-customers.

Before going all-in and establishing a subsidiary in Denmark, a business would first entrust an employee with task of moving to Denmark and conduct preparatory work. The employee would be tasked with finding possible customers, business venues, and potential partners.

That makes great sense from a business point-of-view, but not all foreign businesses are aware that sending an employee to Denmark might inadvertently trigger Danish taxation of the Company’s current or future sale of goods and services in Denmark.

When the Danish Tax Authority assesses whether a foreign company’s is to be deemed “limited tax liable” to Denmark, the decisive point is whether the foreign company can be regarded as having a “permanent establishment” in Denmark or not.

What you should know

Permanent establishment in Denmark requires the company to conduct its “business” through a “fixed place” (in Denmark).
Preparatory and supportive work that does not generate any revenue usually fall out of the “business” criterion.
A case-by-case assessment is usually conducted by the Danish Tax Authority to determine whether the requirements for permanent establishment are met.

Permanent Establishment

In general, terms, two conditions need to be met for a foreign company to have a permanent establishment in Denmark. It must i) conduct its “business” through a ii) “fixed place”.

When sending a foreign employee to work in Denmark (or by employing a Danish employee to do the same) the “fixed place” condition is quite difficult to avoid. It usually does not matter whether the employee has an actual office space or if he is working from home.

As the “fixed place” condition is almost unavoidable, the main focus for a foreign company that wishes to avoid becoming limited tax liable in Denmark should be the “business” criterion.

A foreign company is not conducting “business” through the fixed place, if the employee is merely conducting work of a “preparatory and supporting” nature that does not generate any revenue.

Preparatory and supporting

So what exactly is work of a preparatory and supporting nature? Well, as the Danish Tax Authority decides on a case-by-case basis it is hard to provide a bulletproof answer. However, in carrying out the analysis, the following factors could indicate that an employee’s work in Denmark is merely of a preparatory and supportive nature:

The employee is not a part of the foreign company’s management or board of directors;
Although the employee can contact potential and current customers, the employee is not authorized to negotiate or enter into agreements with customers on behalf of the foreign company;
The employee’s role is mainly of an administrative nature;
The employee’s role does not relate to the foreign company’s core business;
The employee’s employment in Denmark is of a relatively short duration (the longer the employment duration, the stronger the presumption of permanent establishment); and
In some cases, part-time employment can also be an indicator in favor of non-permanent establishment.

As you can tell from the above, it is particularly important to get the job description in the employment contract right. Do not just use a boilerplate / standard employment contract.

If you as a non-Danish company are in doubt, whether your contemplated efforts in Denmark will constitute a “permanent establishment”. There are two options; have your attorney and accounting firm make an assessment. In addition, if you need to be absolutely positive, there is the possibility of contacting the Danish Tax Authority and ask for a so-called “binding ruling”, which will bind the Tax Authority in the particular case.

Tax is a complex and ever-changing subject. This article provided a simple overview. You cannot rely on this article as legal advice.

Are you concerned that your presence in Denmark will cause Danish taxation of your goods and services? Contact Nicholas Ørum Keller, Baker Tilly Legal.

Tax Employment