Decision on employment income vs. business income

The Tax Office argued that the company was not conducting business activities and that the hiring-out of labour was largely characterised by features of an employment relationship. Based on the Tax Office view, the limited liability company was not responsible for and did not bear the risks relating to the results of the work performed for its clients. 

The classification of income as either employment or business income requires a comprehensive assessment, depending on whether the activity is conducted at the taxpayer's own account and risk, with risk relating to the result for the worked performed often being a decisive factor. 

The Tax Appeal Board conducted a detailed review of the contracts and found that the wording of the agreements supported the conclusion that the limited liability company had the risk relating to the result towards the clients. This was further substantiated by the fact that the limited liability company had business insurance to cover potential liability claims from the clients. However, the payments from the clients were made to the shareholder's personal bank account, which was a factor suggesting an employment relationship. 

The Tax Appeal Board did not find it decisive that the hiring-out of labour engagement appeared to be the shareholder's full-time occupation and that the engagement had been of a long duration. It was concluded that the agreements, combined with the insurance requirements imposed by the clients, indicated that the taxpayer had the risks relating to the results of the work performed. Consequently, the income was classified as business income. 

The decision shows the inherent tax and VAT risks associated with hiring-out of labour from private limited liability companies with one shareholder where that shareholder is the person being hired out. Careful structuring should be made to ensure a robust arrangement that can withstand scrutiny by the tax authorities.