Self-employed consultants and companies that hire consultants must be aware of the risk that the set-up is not considered as self-employment according to Danish regulation and if so companies will be obligated to report and withhold tax of remuneration to consultants, as they then are considered employees of the company.
A lot of companies prefer to use external consultants to certain work and tasks within the company instead of using their own employees. Often for reasons that have nothing to do with taxes. This means that the consultant or the subcontractor sends an invoice – usually including VAT - for his/her work, and that the company does not withhold tax on the payment of this.
For tax purposes the parties cannot decide whether the consultant is self-employed or not, as it depends a specific evaluation of the agreement between the parties. It is important that the contract and day-to-day reality of the relationship must be deliberated together in order to assess whether the set-up is an employment or self-employed consultant.
If the set-up is not correct according to Danish regulation and it is concluded that the individual is on an employment contract at the company, then the company is liable for the missing withholding of labor market contribution and A-tax. Beside of this the company is not entitled to a deduction in the corporate taxable income for paid VAT on invoices. Read more about the VAT related issues in this articlel.
There is a risk for companies being liable for consultants’ tax payments, which can result in a significant expense for the company. This is the case in the new legal judgement from Østre Landsret the 21 April 2021.
Case regarding the 101 divers
The case concerned a Dutch company, which in 2011 was involved in a task of removing redundant installations in the sea at oil platforms in the North Sea. The company hired 101 divers from 15 different countries to manage this task, where most of them were residents in the Netherlands and England. All the divers were hired on contracts as self-employed consultants, and a condition to receive the contract was that all of the divers had to show the company a statement from the Dutch tax authorities including the fact that they were considered as self-employed consultants in according to Dutch tax law.
According to Danish tax law the Danish tax authorities considered the divers as employees of the Dutch company and rejected the set-up as self-employed consultants. Due to the fact that the Dutch company performed work on Danish continental shelf, the Danish tax authorities imposed the Dutch company to pay an amount similar to the missing withholding of the divers salary income, approx. 4.7 mio. DKK.
This decision was joined by the High Court with the legal justification that the divers work was described very detailed in the contract and that they has no freedom on how to perform the work methodically, nor did they have any significant financial risk in performing the work. They were reimbursed for their travel expenses and they only incurred the cost of their personal diving equipment and necessary certificates. Therefore, the divers were considered as employees and not self-employed consultants under Danish tax law.
The decided judgment was determined with the judges voting 2-1. The dissident judge emphasized that the divers could be considered as being self-employed consultants based on the fact that the divers worked in a way that was completely normal for professional and commercial divers and that the form of the contract was not created to avoid Danish tax regulation. Furthermore, the judge referred to the fact that the Danish tax authorities have previously approved IT-consultants as self-employed consultants because they are hired to solve a single specific task.
The fact that a company is liable for the missing withholding tax does not directly impose a cost for the company, as the company under normal circumstances would be able to make recourse to the consultants in question. However, if the consultants are residents outside of Denmark, it can be difficult to enforce the claim, and even if this were successful, it is not certain that they can or will reimburse the taxes at all. Therefore in practice, the company can end up paying the taxes. It is still unknown whether the company will appeal the judgement to the supreme court or not.