You would need further advice, but I believe you would be subject to Portuguese employment law.

At least, you would pay Portuguese taxes for that employee and you would likely need to register with Portugal as an employer.

UK advice: http://www.hmrc.gov.uk/nic/work/new-rules.htm#5

You must hire that employee according to the laws of the country in wich he/she lives. So if that person lives in Portugal, you should make a contract according to portuguese laws, and you must pay for social security in Portugal.

From the worker perspective, he'd have to file his taxes in Portugal. He'd be a resident, because he is in the country for more than 9 months every year. Strangely, however, nothing prevents him being a worker for an entity outside the country (free movement of people, goods and services in the EU market mandate on barriers here).

You'd be in a strange split-brain situation, requiring legal advice. I imagine you could file income taxes in Denmark, and these would be deducted from the worker's Portuguese due taxes under the double taxation prevention agreements.

Not sure about Portugal but suspect it's not much different than other European countries. When I did a freelance job for Nokia in Berlin I effectively worked for a Swiss company, which sent me off to Berlin. I registered myself in Switzerland, got a social security number there, and paid my income tax in Germany. As far as I understand it, Nokia paid the Swiss company, who paid their tax in Switzerland. Much as you'd expect - you (be it an organization or an individual) pay tax in the country in which you're situated.

What you've described is kind of complex. I'm asking about where someone lives and works as a permanent employee (and not a contractor!) in Portugal or Germany or whatever, for a company that is in Denmark.

As far as I know/understand the company would pay its own taxes in Denmark except for employment-related tax, they'd have to abide by portugese laws for those (e.g. social security schemes and the like) when in comes to the contract of that specific employee.

Just a small correction on the last part you said, some countries tax per citizenship and not residence. http://en.wikipedia.org/wiki/International_taxation#Citizens...

If your company is incorporated in Europe, say Denmark, then you have to pay corporate taxes in Denmark. Hiring someone, e.g. in Portugal, Switzerland, etc. Does not force you to incorporate in those countries.

However, the employee will have to pay taxes where he lives, independent for whom he works for.