The rules apply when a foreign employer makes employees available to a Danish company that has jurisdiction or a permanent establishment in Denmark. They also apply even if the foreign company is VAT registered in Denmark. The decisive factor is that the work is performed in this country and that it is in substance the Danish company that has control over the work.

Employment leasing occurs when an employee is employed by a foreign company (the hirer), but performs work in Denmark for a Danish company (the principal), which has responsibility for the work and the result. Although the employee is formally employed abroad, he or she is considered tax-wise as leased labor because the Danish company in reality has the authority to give instructions and bears the risk for the result. This triggers special Danish taxation rules that ensure tax is paid in Denmark on the salary for work performed here in the country.

The Danish company using the leased employee has an obligation to withhold labor market contribution (AM-bidrag) and employment leasing tax on the salary. The principal must both withhold and pay the amount to the Danish Tax Agency and is liable if this is not done correctly. Thus, the principal is treated tax-wise in the same way as a Danish employer, even though the employee is employed abroad.

Income is taxed with 8% labor market contribution and then 30% employment leasing tax on the remaining amount. The tax is calculated on the entire gross income including the value of any fringe benefits. This form of taxation is final unless the employee actively chooses a different form of taxation.

The leased employee can choose to be taxed as an ordinary limited taxpayer employee. This provides access to the usual employee deductions, such as commuting deductions. If you choose this model, there is an obligation to submit an information form. The choice must be made no later than May 1 of the year after the income year, and it can be reversed no later than June 30 of the second calendar year after the end of the income year.

Employment leasing tax cannot be used if the stay in Denmark exceeds 183 days in a period of 12 months, or if the employee becomes fully taxable in this country, for example by having a residence. If a tax card is not available, 8% AM-contribution and 55% tax must be deducted. If 183 days are exceeded and only employment leasing tax has been deducted, the company is liable for the missing tax.

Free board and lodging can in certain cases be kept outside the taxable income if the expenses are covered directly by the foreign employer, and if the travel rules (maintains residence in home country and is in Denmark temporarily) are met. Other fringe benefits are generally taxed on par with ordinary salary.

If the Danish company fails to withhold AM-contribution and employment leasing tax, it may become liable for back payment of the tax, including interest. Therefore, it is important that companies using foreign labor know and comply with the rules for employment leasing.