Permanent Establishment -Denmark

OVERVIEW
On 2 September 2024, the Danish Tax Authority concluded in a binding ruling that a Swedish company had a Permanent Establishment (PE) in Denmark as its CEO, a Danish resident, was working 40% of the time from a home office and 60% at the company’s offices in Sweden. Even though the company’s management is in Sweden, the CEO triggered a PE.

What’s new?
Given the consideration that the CEO performed key management functions for the Swedish company from Denmark, the Danish Tax Authority concluded that – given the CEO’s significant influence on the management decisions – a PE is of application even though the time spent in home office was only 40%.
Even though the CEO’s functions did not target the Danish market directly the relatively small size of the company, and the relevance of the CEO’s participation in business decisions justified the PE consideration. Planned and sustained work from a home office has therefore been stated to trigger a PE.
In 2022 a similar case was presented where a sales employee hired by a German company was working 40-50% of his time in Denmark and 50-60% outside, with only 5% dedicated to the Danish market, yet a PE was deemed to exist given the employee’s contribution to the company’s sales to its customers.

Impact on Transfer Pricing
Regardless of the time dedicated to the Danish market, non-resident companies are tax liable in Denmark if business profits are derived from their activities based in Denmark. As such, in the case concluded recently, the CEO was considered a Permanent Establishment and, as such, it was attributed part of the Swedish company’s benefits and taxed accordingly.
Business interest and impact on the crucial decisions shall be taken into consideration when analyzing the risk of a PE consideration, regardless of the time dedicated to the local/foreign market.
The profits shall be allocated to the PE taking into consideration all the circumstances surrounding the situation, justifying the selection of the Transfer Pricing method and performing the corresponding benchmarking study or studies. The supporting documentation shall be kept at the registries of the taxpayer and, upon request, be provided to the Tax Authorities.

Key actions
To mitigate the risks that may arise from the potential application of the binding ruling to similar situations, taxpayers with C-level employees working from Denmark for their companies, tax resident in another country, shall revisit the operative structure and assess whether the local activities contribute significantly to business results. If applicable, proper Transfer Pricing Analysis and Documentation shall be prepared in a timely manner to avoid discussions, adjustments in tax bases and potential penalties. Contact us. At TPS, we can assist in this analysis.