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Article:

Permanent establishment – Home of a sales manager

31 March 2017

The presence in Denmark required for the Danish tax authorities to conclude that a permanent establishment is created when a foreign enterprise hires a Danish resident sales person seems to be ever diminishing.

Over the past few years, in several cases, the Danish tax authorities have ruled formation of a permanent establishment in Denmark of a foreign enterprise by virtue of an employee’s work in Denmark from his home office.

This practice has affected foreign enterprises seeking to establish their businesses on Danish territory, initially applying a tentative approach – for instance by hiring a salesperson to work from his home without authority to conclude contracts on behalf of the enterprise.

However, based on a recent binding ruling by the National Tax Board, the presence in Denmark required for the Danish tax authorities to conclude that a permanent establishment is created when a foreign business hires a Danish resident sales person seems to be ever diminishing.

Definition of a permanent establishment

The primary definition of a permanent establishment entails a fixed place of business through which the business of an enterprise is wholly or partly carried on.

A secondary definition exists entailing that an agent of a dependent status is acting on behalf of an enterprise and has - and habitually exercises - authority to conclude contracts in the name of the enterprise.

The definitions are delimited as the term does not include business solely for the purpose of carrying on activity of a “preparatory or auxiliary character”.

Often, the activity of a salesperson will be considered part of the core business of the enterprise in spite of the fact that the salesperson is unauthorised to conclude contracts independently.

Consequently, a home office often constitutes a permanent establishment and the enterprise must register for corporate tax in Denmark from first day of business.

The binding ruling by the National Tax Board

According to the binding ruling, a Danish resident employee’s work in Denmark as a sales manager would constitute a permanent establishment in Denmark for the foreign employer.

The sales manager shall visit clients, business associates and suppliers in Denmark and other Scandinavian countries.

The sales manager will not be authorised to conclude contracts on behalf of the foreign employer independently.

The foreign employer does not have an office or store etc. at its disposal in Denmark and the employee is not expected to or required by the employer to work from his home.

However, the employee will in fact carry out administrative work and occasional paperwork from his home to a minor extent.

As stated above, a home office often entails a permanent establishment. However, in this case, there is no actual home office and the employee will only perform work from his home to a minor extent – work that could likely be characterised as being of a preparatory or auxiliary nature.

Nevertheless, the National Tax Board ruled that the Danish resident employee’s work in Denmark as a sales manager would constitute a permanent establishment in Denmark for the foreign employer.

The ruling serves to show how insignificant a presence in Denmark is required according to the current administrative practice before a permanent establishment is created.

Hence, foreign enterprises should be aware of the consequences when initiating business activities in Denmark.

The above article is taken from tax:watch, our electronic English newsletter on Danish Tax and VAT matters. tax:watch is issued on the last Friday of each month and is free of charge. Please sign up here.