Principal Danish transfer pricing case: High Court rules against Ministry of Taxation

The legal issues

The Ministry of Taxation maintained that the Danish group company's taxable income should be increased by more than 300 million DKK or, alternatively, that the assessment of the company's taxable income should be remitted to the Revenue for renewed processing.

First, it was argued, the company did not ensure timely preparation of the statutory TP documentation, and the documentation – had it been submitted in due time – was compromised by omissions so essential as to effectively render the tax authorities unable to assess, on the basis of the documentation, whether the prices and terms agreed were in accordance with the arm's-length principle.

Furthermore, the Ministry of Taxation alleged, the company was contractually obliged to market products in Denmark, and its marketing activities were in fact aimed at and did affect total sales of the company's products on the Danish market, as well as foreign group entities' sales outside Denmark.

The ruling of the High Court 

The case started in the High Court as court of 1st, instance, because it raises legal questions of principle and general importance.

The High Court concluded that it was not proved that the the statutory TP documentation had been timely prepared and that "timely" means prepared not later than by the time of filing the annual tax return. The High Court also considered that the TP documentation was to some degree non-compliant. However, given the circumstances, this was considered immaterial and could not justify a discretionary income adjustment.

Moreover, the High Court ruled, the company had not carried out marketing activities that were not already remunerated under intra-group agreements. The mere possibility that there could be an effect on foreign group entities' sales could not lead to another result. In any event, such alleged effects were neither proven by the Ministry of Taxation, nor measurable.

Comments by Kromann Reumert

The Danish Revenue aggressively pursues procedural arguments to substantiate very significant transfer pricing adjustments. It is laudable that the High Court confirms that procedural justifications as a basis for substantial income adjustments can only be upheld if the errors are material and relevant for the arm's length-assessment. 

The Ministry of Taxation's alleged substantive justification, i.e., that non-measurable, potential marketing effects at group level should be remunerated, was extremely far-fetched and would have constituted a solitary Danish position in international tax law, had it been accepted by the Court. The judgment thus gives Danish corporate taxpayers further guarantees against double taxation.