Permanent establishment and home office

31 March 2016

According to a recent ruling by the National Tax Tribunal, an employee’s work in Denmark from his home office did not constitute a permanent establishment in Denmark for the foreign employer.

In several cases over the past few years, 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 a home office.

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

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

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

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”.

In the recent case before the National Tax Tribunal, the employee – an experienced senior working for an employer in the financial sector – relocated from the UK to Denmark due to illness.

His duties were changed from interaction with clients to solely having a supporting role for his colleagues with limited contact to clients.

Hence, the National Tax Tribunal ruled that his work activities were of a “preparatory or auxiliary character” thereby not constituting a permanent establishment 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.