Hiring-out of Labour under Danish Tax Rules

Definition and Basic Principles of Hiring-out of Labour

In Danish tax law, hiring-out of labour is regulated under the Withholding Tax Act (kildeskatteloven). The rule means that foreign employees working in Denmark as part of a hiring-out arrangement become subject to limited tax liability in Denmark. Hiring-out occurs when a foreign employer “hires out” employees to a Danish company, and the work is effectively performed as an integrated part of the Danish company’s activities.
It is important to note that the formal designation in the contract—whether it is called a contract for services, a consultancy agreement, or a staffing agreement—is not decisive. What matters are the actual facts and circumstances of how the work is carried out, which determine whether, for tax purposes, it constitutes hiring-out of labour.

Characteristics of Hiring-out of Labour

When determining whether there is hiring-out of labour, the focus is primarily on whether the work is integrated into the Danish company’s operations and whether the Danish company has the authority to instruct, manage, and control the work in practice. This will typically be the case if the employees perform tasks side by side with the company’s own staff, use the company’s tools and materials, and follow instructions from the company’s management.
For example, a foreign bricklaying company sending bricklayers to Denmark to work on a major construction project under the supervision of the Danish main contractor will often be covered by the rules. The same applies to foreign IT consultants working on a Danish company’s internal projects under its project management.

Tax Liability and Method of Taxation

In hiring-out situations, foreign employees are subject to limited tax liability in Denmark. Taxation follows a special scheme whereby 8% social security contribution (arbejdsmarkedsbidrag) is first withheld from the total remuneration for the work, including any payments for board, lodging, and transport. On the remaining amount after the social security contribution, 30% hiring-out tax is then levied.
This tax is final in Denmark, but the employee may still be taxable in their home country. In such cases, double taxation will often be avoided under a tax treaty, which obliges the domicile country to grant relief for the Danish taxes.

The Boundary Between Hiring-out of Labour and Contracting (Entreprise)

In practice, it can be difficult to distinguish between hiring-out of labour and independent contracting. If a foreign company undertakes a clearly defined task, performs the work with its own materials and tools, manages and organizes the work independently, and bears the economic risk for errors and defects, it will generally be considered a contract (entreprise), not hiring-out of labour.
The distinction has significant tax consequences: in a genuine enterprise situation, hiring-out tax does not generally need to be withheld. However, the foreign company may still have a permanent establishment in Denmark, which would be subject to other tax rules.

The Danish Company’s Responsibility and Risk

A Danish company hiring labour or services from a foreign company bears a significant responsibility for correctly identifying whether the arrangement constitutes hiring-out of labour. If the company fails to withhold the mandatory hiring-out tax, the Danish Tax Agency (Skattestyrelsen) can demand the amount directly from the Danish company—even if payment has already been made to the foreign supplier.
Therefore, Danish companies should carefully assess the agreement and the actual working conditions before work begins. In cases of doubt, it may be prudent to obtain a binding ruling from the Danish Tax Agency.

Practical Consequences and Compliance

The rules on hiring of labour have both administrative and financial consequences. The Danish company must ensure that information about the foreign workers is reported correctly to the Danish Tax Agency and that documentation regarding the scope, duration, and nature of the work is properly maintained.
Failure to comply may result not only in tax claims but also fines. Conversely, proper handling of the rules can ensure that cooperation with foreign suppliers runs smoothly and without unpleasant surprises.

How We Can Assist Your Company

The rules on hiring-out of labour can appear complex, and the consequences can be financially heavy and administratively burdensome. As tax advisors, we help companies navigate the rules safely—from the initial assessment through ongoing compliance.
We offer, among other things:

• Analysis of contractual arrangements to determine whether the situation constitutes hiring-out of labour or independent contracting.
• Review of the actual performance of the work with a focus on the criteria emphasised by the Danish Tax Agency.
• Calculation and correct withholding of the social security contribution and hiring-out tax, so the company avoids liability.
• Dialogue with the Danish Tax Agency, including obtaining binding rulings in cases of doubt.
• Assistance in tax disputes concerning hiring-out of labour, including drafting objections, complaints, and representation before administrative appeal bodies.

By involving us early in the process, companies can minimize the risk of reassessments, fines, and unnecessary disputes with the tax authorities, while achieving a more efficient and predictable handling of foreign labour.

FAQ on Hiring-out of Labour under Danish Tax Rules

What is hiring-out of labour?‍

Hiring-out of labour means that a foreign employer hires out employees to a Danish company, where the work is performed as an integrated part of the company’s activities.

How do you determine if it is hiring-out of labour?‍

The assessment is based on whether the work is part of the Danish company’s regular operations and whether the company has the authority to instruct and actually manage the work.

Is the content of the contract decisive for determining hiring-out of labour?‍

No, it is not the contractual wording but the actual working conditions and the way the work is carried out that determine whether the rules on hiring-out of labour apply. The assessment is made on a case-by-case basis, based on the specific facts.

How are foreign employees taxed in a hiring-out situation?‍

Taxation follows a special scheme in which 8% social security contribution is first withheld from the total remuneration, including payment for board, lodging, and transport. On the remaining amount, 30% hiring-out tax is then withheld. This tax is final in Denmark, but the employee may still be taxable in the country of residence, where double taxation is usually avoided through a tax treaty.

What is the difference between hiring-out of labour and contracting?‍

In a contracting arrangement, the foreign company performs a clearly defined task with its own materials and tools, manages the work independently, and bears the risk of errors and defects. In hiring-out of labour, the work is part of the Danish company’s operations, and it is the company that manages and instructs the work.

What happens if a Danish company misclassifies the arrangement?‍

If the company fails to withhold hiring-out tax, the Danish Tax Agency can require the amount to be paid directly by the Danish company, even if payment has already been made to the foreign supplier. The Danish company will therefore be liable for any hiring-out tax.

How to avoid Unintended Classification as Hiring-out of Labour?‍

To minimize the risk, a thorough legal and tax assessment of both the contract and the actual working conditions should be carried out before the project starts. In case of doubt, it may be a good investment to obtain a binding ruling from the Danish Tax Agency to ensure clarity on the tax treatment of the arrangement in advance.

What administrative requirements apply in hiring-out situations?‍

The Danish company must report information about the foreign workers and keep documentation of the scope, duration, and nature of the work.

‍