Withholding obligation when paying non-Danish subcontractors

28 August 2015

Businesses operating in Denmark cannot avoid the obligation to withhold income taxes on remuneration paid to non-Danish consultants and other suppliers simply by claiming that these are independent contractors.

Many businesses operating in Denmark prefer to use non-Danish consultants or subcontractors for certain tasks instead of using their own employees. Usually, this preference is motivated by other factors than taxation.

This implies that the consultant or subcontractor sends an invoice for his work, and that the business in Denmark does not withhold taxes when the invoice is settled.

For tax purposes, the parties cannot themselves simply choose whether the consultant or subcontractor shall be deemed self-employed or not. This depends on an individual assessment of the parties' agreement and on a number of circumstances related to the consultant which the business does not have access to.

If it can be substantiated that the agreement is in fact an employment relationship, the Danish business will likely be deemed obligated to withhold income taxes and liable to pay these taxes to the Danish tax authorities.

Further, any VAT that may have been paid concerning the invoice will be non-deductible.

The problem is illustrated in a recently published ruling from the district court. The case concerned a business operating in Denmark that dealt with personnel hire, and who had entered into an agreement with a non-Danish metal worker to perform work for a shipyard in Denmark.

In the contract between the business and the metal worker, it was stated that the weekly working hours amounted to 37 hours and possibly additional work during weekends and overtime on weekdays.

Further, according to the contract, the metal worker was obligated to use the time sheets of the Danish business and he was prohibited from disclosing to the shipyard that he was working as an independent subcontractor.

The district court took the view that, in reality, the contractual relationship between the metal worker and the Danish business was in fact an employment relationship and the Danish business had been negligent in failing to withhold income taxes when making payments to the metal worker.

Consequently, the Danish business was liable to pay an amount equal to the income taxes that should have been withheld.

Should your business contemplate to engage non-Danish subcontractors or are you going to work in Denmark as an independent subcontractor, BDO can advise you in these matters.

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.