International Hiring Out of Labour and Tax Liability

The question arises when a Danish company has work carried out in Denmark by staff employed by a foreign company.

What the parties have written in their contract is not the only consideration. The tax rules also look at how the cooperation actually works in practice.

One of the key assessments is whether the work performed by the foreign staff forms an integrated part of the Danish company's own business activity.

If the work is a natural part of the Danish company's ordinary operations, that may indicate the hiring out of labour. If the foreign company has instead taken on an independent and clearly defined task, the arrangement may be a contract for services.

The actual circumstances of the cooperation are therefore decisive.

The distinction gives rise to a large number of tax disputes.

Two companies may have entered into a contract describing the cooperation as a contract for services without this being decisive for tax purposes.

The Danish Tax Agency will consider, among other things, who actually directs the work, who decides how the task is to be performed, who provides the tools and equipment, and who bears the financial risk for the performance of the work.

It is also relevant whether the foreign company itself decides how many workers are needed for the task, and whether it has genuine independence in planning and carrying out the work.

The assessment always depends on the specific facts, so arrangements that appear similar may lead to different tax outcomes.

A central question is whether the task performed by the foreign company falls within the Danish company's ordinary business area.

If an agricultural business has a building constructed, the construction work will normally fall outside its ordinary activity.

If the same business uses foreign workers in the fields or in the stables, the task lies much closer to its own operations.

Likewise, construction work carried out for a company whose own activity is the construction of buildings may, depending on the circumstances, be regarded as an integrated part of that company's activity.

The industry alone is not decisive. The cooperation must be assessed as a whole.

A well drafted contract matters when a Danish company enters into cooperation with a foreign company.

It should state clearly what task the foreign company is to perform, who is responsible for the work, how the remuneration is determined, who provides staff and equipment, and who bears the risk if the work is not performed as agreed.

But a contract cannot stand alone. If the reality differs from the agreement, the Danish Tax Agency will as a starting point attach weight to the actual circumstances.

It is therefore important that both the contract and the way the cooperation functions in practice support the tax treatment applied.

If the arrangement constitutes the hiring out of labour for tax purposes, the Danish company may be obliged to withhold hiring out of labour tax and labour market contributions when paying for the foreign workforce.

Under the rules, the hiring out of labour tax is 30 per cent, and a Danish labour market contribution of 8 per cent is payable in addition.

The consequences can be significant if the company has not made the required withholding. The Danish Tax Agency may raise a claim against the Danish company even though the workers were formally employed and paid by the foreign company.

In cases where the payment to the foreign company covers both labour and materials, questions may arise as to which part of the payment relates to the workforce. Documentation can be decisive here.

Where the dispute also concerns whether an individual should generally have been treated as an employee rather than a self-employed contractor, separate questions may arise concerning the employer's obligation to withhold A-tax and labour market contributions.

If the foreign company genuinely performs an independent contract for services, the Danish company will as a starting point not be required to withhold hiring out of labour tax and labour market contributions for the foreign workers.

Factors pointing towards an independent contractor arrangement include that the foreign company organises the work itself, decides on staffing, brings the necessary equipment and assumes a genuine financial risk for the result.

The way remuneration is set may also matter. A fixed price for a defined task may, depending on the circumstances, support an independent contractor arrangement, particularly where the foreign company itself bears the risk of how many workers and hours are required.

What is decisive is always the overall picture.

In hiring out of labour cases, documentation is often central.

The Danish Tax Agency will typically examine:

A hiring out of labour case is rarely only about how the foreign workers should be taxed. For the Danish company, liability for unpaid withholding tax is at least as important.

If, in the view of the Danish Tax Agency, the company should have withheld tax and labour market contributions, the authorities may raise a claim directly against the company.

The amounts can be substantial, particularly where the cooperation has run over a longer period or involves a large number of workers.

In such cases it is necessary to examine both whether the arrangement was in fact the hiring out of labour, and whether the conditions for imposing liability are met.

In some cases, the Danish Tax Agency will consider whether the failure to withhold may give rise to criminal liability.

Not every error leads to a penalty. The question depends on a specific assessment of the facts and of what the company and the individuals responsible knew or ought to have known.

HAY LAW handles both tax disputes and criminal tax cases and can therefore manage the matter as a whole if the review develops.