The Danish tax authorities cannot define non-existent intra group transactions and use the lack of description of such transactions in the TP documentation as grounds for increasing the taxable income.
Two rulings from the National Tax Tribunal have recently been published, which – in both cases – rejected increases instigated by the Danish tax authorities of the taxable income of multinational groups’ Danish subsidiaries.
The case of compensatory remuneration
One case concerned a Danish trading company, which had generated significant deficits over several years.
The Danish tax authorities believed an independent company with the same activities would not have continued its business for so many years, had it realised similar deficits.
Hence, the explanation had to be that, through its presence in the Danish market, the company had been beneficial to the entire group.
Accordingly, the company had provided a service to the group, which the company should have received compensatory remuneration for.
Consequently, the Danish tax authorities increased the taxable income of the company for the years 2007 – 2011 on a discretionary basis, to compensate for the lack of such remuneration.
The National Tax Tribunal agreed that the company’s transfer pricing documentation was insufficient.
Nevertheless, the National Tax Tribunal found no grounds for increasing the taxable income and ruled in favour of the taxpayer.
The ruling stated that the tax authorities had not criticised the actual intra group transactions.
Instead, the tax authorities had defined a transaction that had not taken place and used it as basis for increasing the taxable income, which, according to the guidelines issued by the OECD, should only take place under exceptional circumstances not warranted in the present case.
The case concerning termination of activities in Denmark
The other case concerned a Danish subsidiary which, despite generating profits in most years, closed its business in Denmark as part of a European efficiency plan decided at group level.
This caused the company to incur significant costs related to the termination of activities in Denmark.
The tax authorities argued that the entire group had undoubtedly benefited from the termination of activities in Denmark, and compensation would therefore be paid between independent parties.
Consequently, the tax authorities increased the company’s taxable income with an amount corresponding to the costs incurred.
The National Tax Tribunal disagreed.
In its ruling, the National Tax Tribunal stated that, according to the rules in force at the time, the company had not been obligated to describe intra group restructuring in its transfer pricing documentation which, in its own view, did not involve controlled transactions.
Further, the National Tax Tribunal found that no (intangible) assets had been transferred to other group companies in connection with the termination of activities in Denmark, and the termination of activities in Denmark could not be considered to have benefitted the other group companies in the form of higher prices.
Finally, in the view of the National Tax Tribunal, the tax authorities had not substantiated that the Danish company could have claimed compensation based on the contractual terms agreed with the other group companies.
The above article is taken from tax:watch, our electronic English newsletter on Danish Tax and VAT matters. tax:watch is issued on the last Friday of each month and is free of charge. Please sign up here.