In a binding ruling dated 28 February 2017 (SKM2017.213.SR), the Danish Tax Board (the Tax Board) ruled that a Scandinavian sales manager’s occasional use of a so-called home office (work from home) constituted “core business activities” of the nonresident taxpayer, a German corporation, thereby creating a permanent establishment.
A German corporation requested a binding ruling on the exposure of creating a permanent establishment (PE) in Denmark following the appointment of a Scandinavian sales manager.
The German corporation is engaged in delivering software and hardware solutions and had recently hired a Danish resident sales manager to carry out sales activities and customer service in Denmark and the other Scandinavian countries.
The main tasks of the sales manager include:
- Sales of software solutions in Scandinavia
- Management of key accounts and distributors
- Customer visits and ongoing care, including drafting of quotations
- Identification of new clients and business development
- Market analysis and promotion of products through trade shows, fairs, etc.
- Competitor analysis
- Management of internal customer relations management system
- Forecasting and promotion/introduction of new products to the Scandinavian markets
The sales manager will report directly to the international sales manager of the German company, and will have no permanent office, shop or a similar premise made available in Denmark. All delivery of the German company’s software and hardware products will be carried out from the German corporation straight to the clients.
The sales manager will receive a laptop and a mobile phone from the German corporation and will have his travel expenses reimbursed. Most of his work will be carried out at the premises of the clients, partners and suppliers and he will not in any way be reimbursed for furnishing or in other ways for setting up a home office. The employment contract does require the sales manager to work from home. However, he will carry out a modest amount of administrative work from his home, but decides entirely for himself, where he wants to carry out this work.
The sales manager is not entitled to enter into binding agreements on behalf of the German corporation or in other ways negotiate details of sales contracts or other agreements that is binding for the German corporation.
With reference to art. 5(1) of the Organisation for Economic Co-operation and Development Model Tax Convention (OECD MTC), the Tax Board ruled that the sales manager’s occasional use of a home office for administrative work would constitute a PE of his employer, the German corporation.
The Tax Board ruled that it is irrelevant whether the premises are owned, rented or in other ways made available for the nonresident corporation, as long as business activities of the foreign corporation is effectively and habitually carried out at the premises and that the business activities does not qualify as preparatory or auxiliary, cf. the OECD MTC art. 5(4).
The core business activities are considered to be effectively carried out at the premises, and thus at the disposal of the nonresident taxpayer, if the core business activities of the nonresident taxpayer are effectively carried out at the premises by the employee(s) of the nonresident taxpayer. In this case, it was held that the administrative work carried out at the sales manager’s home was carried out in connection with his work for his employer and qualified as core business of the German corporation.
Furthermore, reference was made that work to be carried out at his home office must be regarded as occurring on a regular basis, and thus not sporadic and occasional, simply due to the fact that the work at home can be planned1 as part of the regular course of carrying out his work as sales manager. Reference was also made to a binding ruling from 2014,2 where a home office was also considered to create a PE for the nonresident taxpayer, even though the majority of the work carried out for the foreign company was outside of the home office.
In relation to paragraph 24 of the commentary to the OECD MTC art. 5, the work carried out at the home office is considered an important and material part of the core business activities, thus beyond what can be deemed preparatory and auxiliary to the core business of the German corporation.
This ruling is generally in line with the narrow interpretation of the fixed place requirement set forth by the Danish tax authorities when ruling whether a PE is at issue or not.
Due to the lack of a detailed description of the administrative work to be carried out from the sales manager’s home, the Tax Board did not discuss whether the administrative work could be preparatory or auxiliary to the core business of the German company, but instead considered this work to be part of the core business activities. In practice, it would be difficult for the German company to argue that the sales manager only carries out core business activities outside of his private home when visiting clients or suppliers.
This was also the case in a previous ruling from 2013,3 where the Tax Board also confirmed a PE for a German corporation because of routine work carried out in Denmark by the sales manager at his home address. In this ruling, however, the sales manager carried out more of his work from his home office than in the present ruling; nevertheless, the employer did not reimburse him for any expenses in relation to his use of his home office.
In line with the comments to the OECD MTC art. 5, it is immaterial whether the premises are owned, rented or in any other way at the disposal of the nonresident taxpayer, as long as the employees of the nonresident taxpayer actually carries out core business activities at a fixed place in Denmark. It should be noted, that it will, in practice, be difficult to argue that a sales manager does not work at home, as long as he/she is resident in Denmark and no other office home or abroad is at his/her disposal.
Accordingly, this ruling further establishes that there is virtually little likelihood of not creating a fixed place PE in Denmark for a nonresident company, when hiring a Danish resident sales manager to cover the Danish or other Scandinavian markets even if there is no office location of some degree of permanency at their disposal.
EYG no. 01721-171Gbl