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25 May 2018

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Danish Tax Board Holds Nature of Employee's Activities and Not the Authority to Conclude Contracts is Decisive Factor in Existence of a PE

On 22 May 2018, the Danish tax authority (SKAT) published a binding ruling from the tax board concerning the existence of a permanent establishment (PE) under the 1996 tax treaty between Nordic Countries. The binding ruling was requested by an unnamed foreign company (covered by the Nordic treaty) that supplies products to restaurants, cafes, and grocery stores. Because of profitability issues, the foreign company decided to close its wholly-owned Danish company and engage a third-party distributor to supply its products in Denmark and other Nordic countries. As part of the change, the foreign company intends to have the prior country manager of the Danish company remain in Denmark and conduct supervisory and marketing support activities.  

The foreign companies position was that no PE would exist in Denmark as a result of the employee, because the employee would have no authority to enter into contracts with third parties and the employee's activities would be preparatory or auxiliary in nature. In the ruling, however, it was found that whether the employee would have authority to enter into contracts was not a decisive factor. The main factor is the nature of the employee's activities, which were found to constitute a significant part of the foreign company's continued business in Denmark. As such, the activities could not be considered preparatory or auxiliary in nature and a PE would exist.

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