By attorney Ann Rask Vang, Bachmann/Partners Law Firm
On 17 June 2021, Bachmann/Partners Law Firm won an appeal case concerning the discretionary distinction between when a person is carrying on independent business activity and when a person should be regarded as an employee. The decision also includes a delimitation of the concept of gross negligence as a basis for extraordinary reopening of a tax assessment. However, the decision of the National Tax Tribunal is of interest in several respects, and the main points will therefore be highlighted below.
The taxpayer, as a co-owner (less than 50%) of two startup companies within the venture and innovation environment, had undertaken research work through another business on a consultancy basis, as this was considered most appropriate due to the lack of liquidity in the two startup companies. The taxpayer initially worked without any form of remuneration. It was only at the point when external grants and loans made remuneration possible that the taxpayer received payment. However, this did not occur until after a couple of years. The taxpayer required flexibility, as he was engaged as a consultant in several places. At that time, the startup companies did not have the liquidity to employ permanent staff.
There was agreement in the case between the tax authorities and the taxpayer that the taxpayer was resident in Germany.
Correct income recipient – distinction between the concepts of independent business activity and employee
The tax authorities argued in the case that the doctrine of the correct income recipient could justify disregarding the consultancy agreements entered into, so that the income earned by the taxpayer should instead be regarded as employment income. Under the double taxation agreement between Denmark and Germany and the internal Danish rules, employment income could be taxed in Denmark. Income from independent business activity, on the other hand, could as a general rule not be taxed in Denmark.
The doctrine of the correct income recipient entails that income must be attributed to the taxable entity that has a legal claim to the income. However, the taxpayer argued that, according to practice, the doctrine of the correct income recipient only applies where there is a community of interest between the parties and the agreement, as a result, does not reflect the actual circumstances.
The National Tax Tribunal ruled in favor of the taxpayer on this point. The Tribunal found that it had not been demonstrated that there was a community of interest, as the taxpayer at no time – neither directly nor indirectly – owned more than 50% of the capital or voting rights in the two startup companies. The taxpayer had paid full tax in Germany, where he was in fact resident. The consultancy agreements therefore had not had tax evasion or avoidance as their purpose.
As a result, the National Tax Tribunal likewise found that there were not sufficient grounds to consider the taxpayer to be an employee, as the consultancy agreements had to be upheld.
Permanent establishment – introduction of a new argument before the court hearing
According to the principle of official investigation, the Danish Tax Appeals Agency must ensure that a case is sufficiently clarified for a correct decision to be made. This implies that the Danish Tax Appeals Agency is, as a general rule, both entitled and obligated to obtain and consider all relevant information in a case before a final decision is made.
Notably, however, in the present case it was only just before the hearing before the National Tax Tribunal, during the preparation of the case, that it was asserted in the proposed decision that there was a permanent establishment in Denmark for the taxpayer. The position was subsequently that even though the activity constituted independent business activity, the income could nevertheless be taxed in Denmark pursuant to the double taxation agreement in force at the time. This resulted from the fact that the Danish Tax Appeals Agency’s proposed decision entailed that the income earned, in accordance with the taxpayer’s claim, should be regarded as earned from independent business activity. The new argument was not prompted by newly emerged information at a late stage, and the Danish Tax Appeals Agency chose, without further reasoning or documentation, to conclude that a permanent establishment existed.
Without further reasoning, the Danish Tax Agency endorsed this recommendation.
Without addressing the conditions for establishing a permanent establishment and without further documentation of this, the Danish Tax Appeals Agency assumed that the taxpayer’s business was carried out through premises in Denmark that the taxpayer’s customers had made available. The taxpayer’s use of the premises was only to a limited extent, which the taxpayer was able to document, as he had retained all time records that had been submitted to the companies.
As the taxpayer was able to present lease agreements and other detailed documentation, the tax authorities did not succeed in establishing that there was a permanent establishment, and therefore the income could not be taxed in Denmark. In short, the National Tax Tribunal thus concluded, after nearly five years of case processing, that the taxpayer’s original tax assessments were 100% correct.
The National Tax Tribunal also stated in its decision that it is questionable to consider the premises in question as a permanent establishment (emphasis added).
Delimitation of gross negligence as a basis for extraordinary reopening
The tax authorities may carry out an extraordinary reopening of the income assessment for previous income years if the taxpayer or someone acting on their behalf has intentionally or through gross negligence caused the assessment to be based on incorrect or incomplete information. It is a prerequisite that the tax authorities carry out a specific assessment of all relevant circumstances.
Current practice, however, is to a large extent that the tax authorities, in cases of discrepancies, always consider this to constitute gross negligence. It can also be expressed in such a way that any error on the part of the taxpayer is regarded as an expression of gross negligence that justifies making an extraordinary assessment. This was also the case in the present matter. However, the National Tax Tribunal did not agree that gross negligence had been demonstrated on the part of the taxpayer.
The taxpayer held a degree in engineering and had no particular knowledge of tax matters and technicalities. In connection with the preparation of the consultancy agreements and the operation of his other business, he had used professional assistance in the form of both a Danish and a German auditor. Full tax was paid in Germany, as the taxpayer was resident in Germany. The German consultancy business had also been approved for business support in Germany. The German authorities thus did not share the same view as the Danish authorities in the case.
The outcome of the case was further reinforced by the fact that the tax authorities themselves acknowledged that the matter involved complex circumstances.
With the decision of the National Tax Tribunal, it has been established that it is not sufficient that – in the view of the tax authorities – an error or an incorrect interpretation of a given situation has been identified, as such an alleged error must be attributable to the taxpayer as either intentional or grossly negligent.
If you need an assessment or a discussion of your tax case, please contact Christian Bachmann at tel. 30 30 45 21 / chb@bachmann-partners.dk, Ann Rask Vang at tel. 20 94 78 21 / ava@bachmann-partners.dk or Peter Hansen at tel. 40 32 35 35 / pha@bachmann-partners.dk.
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