Tax liability when companies cross national borders

30 August 2019

Anders Kiærskou, Manager, Tax |

When a company begins operating in another country, tax liability in the country of the new activities depends on whether the activities constitute a permanent establishment. This is subject to an individual assessment.

If the activities in another country is carried out through a local subsidiary, the subsidiary will generally be subject to tax in that country from the first day of operations.

Often, however, activities in another country start at a slightly lower level, which makes it a bit more difficult to determine whether tax liability commences due to the creation of a permanent establishment.

A permanent establishment can exist in different ways - for example in the form of a building site or construction or installation project, or through an office, a shop, a workshop or another place of business.

A permanent establishment can also be created by hiring a salesperson, an agent or representative, or conclusion of other agreements with such persons.

A place of business can include a home office of an employee such as a salesperson or another representative. Whether the salesperson is authorized to conclude agreements on behalf of the company is not in itself decisive.

Danish case law

The Danish tax authorities’ view on when a permanent establishment exist can be illustrated by a ruling from the National Tax Board.

The case concerned a Swiss company that wanted to establish itself on the Danish market and therefore hired a Danish resident salesman. The salesman had a home office, and his job consisted of looking for leads.

He was not authorized to conclude binding agreements, however. All contracts where concluded between customers and the company in Switzerland. Nonetheless, the National Tax Board ruled that the Swiss company had a permanent establishment in Denmark and consequently, the company was liable to Danish tax on the profits from the activities in Denmark.

According to the ruling, the responsibilities of the salesman constituted a significant and essential part of the Swiss company’s Danish activity, and the salesman’s home office constituted a permanent place of business for the employer. It was irrelevant that the salesman was not authorized to conclude binding agreements.

Foreign case law

The above described case may have had another outcome in other countries. The view on when a permanent establishment exist – including in relation to employment of sales personnel – is not identical in all countries.

However, also in Sweden, a home office is considered to be a place of business. Hence, companies should investigate the issue before commencing businesses in other countries in order to be aware of their tax position and responsibilities.

Tax liability in another country seldom poses the biggest problem. This is rather the often heavy administrative burden that the tax liability entails in relation to bookkeeping, payroll taxes, VAT returns and tax returns.

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.