Tightened rules on the withholding of hiring-out of labour tax
From 1 October 2013 the stricter rules on the hiring-out of labour will also apply to agreements on hiring-out of labour concluded before 20 September 2012. Once again the rules draw attention to the obligation of Danish businesses to withhold and settle tax on the hiring-out of foreign labour.
When a Danish business enters into an agreement with a foreign business on the foreign business's employees to work in Denmark for the Danish business for a period of time, it should be clarified already when entering into the agreement whether the agreement entails an obligation for the Danish business to withhold and settle Danish hiring-out of labour tax on the remuneration for foreign workers' work in Denmark.
The rules of the Danish Tax at Source Act on the hiring-out of labour apply when a foreign employee, who is not subject to full tax liability in Denmark, is employed by a foreign employer and is then hired out to a Danish employer to perform work in Denmark.
Previously, an employee was deemed to have been hired out when, following a specific overall assessment of a number of criteria, the employee was deemed to have been made available to the Danish business. Among the criteria were whether the Danish business bore the risk of the result of the work, whether the Danish business had the right of instruction, whether the business hiring out the labour supplied the work tools and whether the employee was an expert in his/her field.
In September 2012 the rules on the hiring-out of labour were simplified and tightened and they now apply to all cases where foreign employees performed work in Denmark that constitutes an integral part of the Danish business.
Since 20 September 2012 the rules have applied to all new agreements concluded on the hiring-out of labour. However, as of 1 October 2013 the tightened rules will also apply to earlier agreements concluded before 20 September 2012.
The rules entail that the foreign employee will be subject to limited tax liability in Denmark for the remuneration for the work performed in Denmark and that the Danish business is under an obligation to withhold and settle tax on the hiring-out of labour, which, as a rule, is a gross tax of 30% on the remuneration for work performed in Denmark as well as the labour market contribution of such remuneration. However, the employee may decide to be taxed as an ordinary employee subject to limited tax liability. The result is a higher tax rate but it allows for certain deductions in the gross income.
Since changing the rules, the Danish National Tax Board has issued some binding rulings on the limitation of the new concept of hiring-out labour.
The work is an integral part of the Danish business if the work concerns a part of the business's core services or if the work is a natural part of the business's other operation, for instance cleaning, canteen operation or bookkeeping.
But if the work does not directly concern the business's core services and can only be characterised as being accessory, for example the repair of one of the business's machines, the work is not an integral part of the business. The same applies even if the work in itself is necessary for the business to be able to continue supplying its core service.
Even if the work is generally deemed to be an integral part of the Danish business, the rules on the hiring-out of labour do not apply if a Danish business outsources a task and permanently separates such part of the business to another independent business.
In cases of doubt other factors could be important, for example whether the Danish business is in charge of the overall management of the work (the right of instruction), whether the Danish business makes work tools and materials available for the work and whether the remuneration is settled in accordance with the time spent on doing the work.
Each case will be subject to a specific assessment. The consequence of not withholding tax on hiring-out of labour and the labour market contribution is that the Danish employer is liable for the tax at source and can be subject to fines.
For any further information, please do not hesitate to contact Jakob Krogsøe, Attorney-at-Law, Associate Partner, or Jef Nymand Hounsgaard, Attorney-at-Law.