The Danish law was part of a larger agreement with the purpose of avoiding that foreign contractors would be chosen instead of Danish contractors because of the difference in the taxation system and salary expenses.
For the Fehmarn project, this means that when the joint ventures purchase services either from a group company or an external subcontractor to perform work in Denmark, the joint venture will now to a larger extent be responsible for payment of taxes and social security from the first day where the persons that are performing the services are present in Denmark.
These aspects are, therefore, relevant to include when considering the costs calculations and compliance for the Fehmarn project.
Changes to Taxation of Hiring out of labor
Taxation of hiring out of labor is tightened with the aim of preventing foreign workers from avoiding Danish tax when working in Denmark for Danish enterprises, joint ventures under certain sub-contractor arrangements, where the responsibility and risk, etc., for the work still lies with the employee's foreign employer, but the work is considered an "integral" part of the Danish business.
The new legislation states that when a foreign employee performs work in Denmark for a Danish company, and the work is considered to be an integrated part of the Danish company's business, the employee will be considered to be "hired out labour" to the Danish company. Many Double Tax Treaties stipulate that the 183-day-rule does not apply to "hired out labour" Thus, although the contract between the companies is an enterprise/construction contract, the employee will be considered liable for taxes according to the hiring out of labour tax regime, even if he does not stay or work in Denmark on more than 183 days.
The taxation is that of 8% AM-contribution tax and a gross 30% hiring out of labour tax (for non-residents). The reporting and withholding obligation of the Danish taxes lies with the Danish company or joint venture.
According to the Danish Ministry of Taxation, the legislation is now in line with the OECD guidelines in relation to hiring out of labor. The new rules have effect on sub-contractor arrangements that are concluded or changed after the effective date of the passed bill (i.e. 20 September 2012). For existing sub-contractor contracts, the new rules have effect from 1 October 2013.
If other countries do not share Denmark's interpretation of subcontractor arrangements as described above, this can give rise to double taxation. Take a German resident who works in Denmark for five months (less than 183 days) as part of a construction contract concluded between his German employer and a Danish company. According to the Double Tax Treaty between Denmark and Germany, the 183-day-rule is not applied to "hired out labour".
As a consequence, the individual becomes subject to Danish tax if the new prerequisites described above are met: Denmark regards him as "hired out labor" for Treaty purposes and taxes his salary regardless of the fact that he did not work in Denmark on more than 183 days. Germany, on the other hand, does not necessarily regard the subcontractor arrangement as "hiring out labour". In this case, Germany would also claim to tax his salary because he did not work in Denmark on more than 183 days.
Change to Taxation of individuals who are in Denmark more then 183- days in a 12 month period
Taxation for individuals that are employed by a foreign company without permanent establishment in Denmark is also tightened with the new legislation.
A regulation has now been incorporated that allows Denmark to tax persons who are working in Denmark for more than 183 days in any 12-month period, i.e. also when working for a non-Danish employer without a permanent establishment in Denmark and without being a person who is hired out labour.
The regulation is now in accordance with most of the Danish tax treaties. Danish taxation can in certain cases still be avoided if the individual is from e.g. Germany where the double taxation agreement is counting days not based on a 12 month period, but based on a calendar year.
The new regulation has effect from 20 September 2012. The calculation of the 183 days will commence on 20 September 2012.