Hiring-out of labour: The rules in terms of tax
29 March 2021
When a foreign company sends employees to Denmark to work for a Danish company, the tax rules on Danish work rental may apply. Therefore, it may be a good idea to adhere to the rules in advance and maybe agree with the Danish company on how to ensure that you live up to the rules without making it to administratively burdensome.
The Danish rules on hiring-out of labour can be difficult, but our experiences tells us that it is more difficult to handle the rules after the Danish tax authorities have been on inspection, than if you ensure correct and timely settlement of potential hiring-out of labour tax.
What is hiring-out of labour?
In terms of tax, it is hiring-out of labour if a foreign employee is sent to Denmark by his foreign employer to do work in Denmark for a Danish company within the Danish company’s business area. In such cases, the Danish company must include labour market contribution AM contributions (8%) as well as withholding tax on the gross cross income (30%).
If the Danish company does not know the actual salaries of the foreign employees, the Danish company must withhold include the amount in the invoice from the foreign company. This is regardless of whether it is a subcontract or how the working relationship is otherwise organized.
Situations where the rules do not apply
The above rules apply if the foreign employees do work in Denmark within the business area of a Danish company. However, there are some exceptions to this:
- The work done by the foreign employees is not within the business area of the Danish company.
- The work concerned, which is performed by the foreign employees, is permanently outsourced/spun off from the Danish company.
Note that the Danish tax authorities have a very strict interpretation of this area, and you must therefore be very detailed when deciding whether the Danish rules on temporary employment apply. The Danish tax authorities relate to the rules based on a consideration of “substance over form”. This means that the Danish tax authorities see contracts etc. in the case of foreign employees who work within a Danish company’s business area.
Foreign companies have an obligation to register with the Danish authorities when doing services in Denmark (RUT registration). This means that it is very easy for the Danish tax authorities to identify where the foreign companies work when they are in Denmark.
Therefore, we recommend both Danish and foreign companies to check out whether they are covered by the rules, and if so, how to handle them in the best possible way.