Chapter 3: Business or Recreational Activities?

Preconditions
For your actions to be regarded as business activities, they must involve transactions of an economic nature. What you do must show the potential of producing a profit. However, not necessarily immediately; - business resulting in losses over the first few years is still considered business as long as the activities may generate a profit in the future.

The tax authorities² decide on how your activities will be regarded. They will consider the period over which the activities are carried out, as well as the extent of these activities when deciding on the nature, i.e. business or hobby.

Note that these conditions are not absolute – there are no definite thresholds that must be exceeded for the hobby to be regarded as business. However, in one case (business) all costs related to the activities are deductible on your tax return, in the other (hobby) they are not. It is therefore very important that you engage in a dialogue with the Tax Office at an early stage to prevent any surprises later on.

Will your plans lead to real business or are you actually a wage earner?
The distinction between one and the other may be hard to detect. However, if you are going to own the operating assets, decide the working hours yourself and possibly experience losses, then you are most likely running a business in the perspective of the tax authorities.

If you, on the other hand, only work for a single principal who provides all necessary tools/operating assets and furthermore, decides on when and how the work is to be carried out, then you probably will be considered an employee.

By own expenses and risks
An important condition is that the activities of the business enterprise shall be carried out on the executive's - often the owner's - own expenses and risks.

“By own expense” means that the executive covers the expenses related to the work. These can be costs of materials, purchasing costs and running expenses, etc.

“By Own risks” means that the executive has the responsibility for the results of the assignment. The principal can, for instance, complain if not satisfied with the results.

Financial profit
The business must be able to generate a financial profit over some period of time. It is not necessary to have a profit immediately if it is conceivable that a profit will occur at some later stage.

Activity
The business must imply activities. Passive capital dispositions such as stock investments and letting of own residence do not constitute a business enterprise. However, the self-employed person does not have to be active himself/herself, but may instead have employees who carry out the work.

One of the decisive conditions for acceptance by the Tax Authorities is that the business both involves activities of a certain extent and duration of a certain period of time. Neither term is actually defined. The extent and duration will be assessed by the Tax Authorities. Single assignments or casual assignments are not enough to constitute a self-employed business.

If several of the following points are true, you are most likely running a business:

• You have several principals on a regular basis, consecutively or at the same time.
  
• You have your own office or workshop.
  
• You provide the necessary raw materials yourself.
  
• You use your own operating assets such as machines, transportation, computers.
  
• Your turnover/revenue is generated by delivered goods or services rather than per time unit. However, as a consultant, you may very well be paid by the hour.
  
• The work does not necessarily have to be carried out by you. Instead you may use someone employed by you.
  
• The assignment is limited, both with respect to time and extent.
  
• When the assignment is completed, you cannot demand another from the principal.
  
• The principal has no professional nor managerial authority over you.
  
• The principal may complain and seek compensation if not satisfied with the result.
  
• The principal pays for the assignment as a whole, not for the individual elements such as materials, management, use of machinery etc.
  
  

The above list is not complete. Note that there is no single point that is considered decisive. In fact, you must expect the tax authorities to examine your business as a whole before a decision on business or hobby is reached.

2. The relevant sections of the tax administration are explained in a later chapter. Regarding the question of business or hobby, the Tax Office is the proper authority.