Contract relationship

If you have entered into a construction contract with a foreign company; read on!

A construction contract means that the foreign company performs a task at its own expense and risk, with its own employees and under its own instruction. In case of an enterprise contract, the Danish company is not obliged to withhold income tax (A‑tax) or pay labour market contributions (AM‑bidrag) for the foreign employees carrying out the work.

In the other hand, the cooperation may be classified as hiring-out of labour if the work is performed under the management of the Danish company and is integrated into its operations. In such cases, the Danish company incurs obligations to both withhold tax and pay VAT. You can read more in our article on hiring-out of labour.

When assessing the arrangement, it is important to focus on reality, not formality. The mere drafting of a “construction contract” does not automatically constitute a contract relationship.

What is a contract relationship?

A contract relationship can be defined as an agreement by which a contractor undertakes to perform a specific task or deliver a service to another party—typically a client or developer—in return for payment. The contractor bears the financial risk for completing the work, leads its own employees, and often supplies the necessary materials and equipment. The contract sum is commonly agreed as a fixed price and the contract may be time limited.

Construction contracts differ from hiring-out of labour in that the contractor retains the right to issue instructions and bears the risk of the outcome of the work. From a tax law perspective, it is essential that the contractor does not establish a permanent establishment (PE) in Denmark, and that the work is performed at a specific location with a certain duration.

Tax liability in contract relationships

First and foremost, it is crucial to determine whether the arrangement qualifies as a contract relationship. In contract relationships, the worker/employee will become liable for taxation in Denmark only when they meet the residency conditions under the Danish tax withholding law—unless the foreign company has a permanent establishment in Denmark.

If the foreign company does have a permanent establishment in Denmark, the company will be liable for taxable of its Danish income, and the employees will be considered limited tax residents of Denmark. In this case, provisions regarding hiring-out of labour do not apply, as the foreign company’s permanent establishment effectively supersedes them.

Where a contract relationship exists—with the foreign company carrying out the work at its own cost and risk, with its own employees and under its own instruction—the Danish company generally is not required to withhold A‑tax or pay AM‑bidrag for the foreign employees. However, the Danish company must submit a report to the Danish Tax Agency if the contract concerns construction and civil engineering work (per SKM2007.608.SKAT Construction Contracts – guidance).

In case of a contract relationship, the Danish company may deduct Danish VAT, provided the work is used for VAT‑taxable activities.

The foreign company will only be taxable in Denmark if it has a permanent establishment here. In that case, the company will be taxed on the income attributable to that establishment, and the employees may become limited tax residents in Denmark.

If the foreign employees stay in Denmark for less than 183 days within a 12‑month period and there is no permanent establishment, they will generally remain taxable in their home country—depending on the specific double taxation agreement.

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It is crucial to ensure that the contract clearly defines the relationship as a contract relationship, as the Danish Tax Agency may reclassify the arrangement as hiring-out of labour if the work is deemed to be integrated into the Danish company’s operations. This may result in significant tax and VAT obligations for the Danish company (and the employees).

The important thing is that the contract reflects the actual circumstances. It is not uncommon for the Danish Tax Agency to conduct unannounced inspections along with the Danish Working Environment Authority, the police, etc.

Do you need assistance?

Hulgaard Advokater has specialized advisors and attorneys who can assist you – whether you are involved in a tax dispute with the Danish Tax Agency regarding whether the arrangement constitutes a contract relationship or hiring-out of labour, or you need your contract assessed.

Contact Business Law Attorney Trainee Selina Musa (sm@hulgaardadvokater.dk) or Attorney Lars Lauge Nielsen (lln@hulgaardadvokater.dk).