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Introduction to transfer pricing in Denmark
Transfer pricing rules
- When taxpayers in Denmark are calculating the taxable, they must use prices and terms for commercial or financial transactions with related parties, cf. Tax Assessment Act (In Danish: Ligningsloven) § 2, subsection 1, must prepare and keep written documentation of how prices and terms for the controlled transactions are determined, cf. Tax Control Act (In Danish: Skattekontrolloven) section 39. Denmark has fully incorporated the OECD Transfer Pricing Guidelines into the Danish legislation.
- In Denmark companies or branches with have had intercompany transaction with foreign companies or branches must document that the pricing and terms for the intercompany transactions are made at arm’s length principle. The burden to proof that the intercompany transactions has been made on the arm’s length is the taxpayers.
- If a group has more than 250 employees, a written documentation must be prepared in the form of a master file and local file. If it is a smaller group, it is not required to prepare a master file and local file. However, it should be emphasized that pricing of the intercompany transactions must still be documented, and the taxpayer is still subject to the disclosure obligation for intercompany transactions.
- By smaller group is meant companies that together with group companies have 1) less than 250 employees, and 2) either an annual total balance of less than EUR 16,8 million (DKK 125 million) or an annual turnover of less than EUR 33,5 million (DKK 250 million).
- The transfer pricing documentation must be available on the time of the filing of tax return. The documentation for income years, beginning in the calendar year 2021, must be filed no later than 60 days after the deadline of filing the tax return. Documentation for income years, beginning prior to 1st of January 2021, must be filed upon request from the Danish Tax Authorities. A notice of 60 days is given for filing of this documentation.
- The arm's length principle in Tax Assessment Act (In Danish: Ligningsloven) § 2 must be interpreted in accordance with the arm's length principle in Article 9 of the OECD Model Convention.
- For permanent establishments, Tax Assessment Act (In Danish: Ligningsloven) § 2 is interpreted in accordance with Article 7 of the OECD's model agreement, including in accordance with the principles of the OECD's Transfer Pricing Guidelines.
- Denmark has fully incorporated the OECD Transfer Pricing Guidelines into the Danish legislation.
Transfer pricing methods
- In Denmark the taxpayer must freely chose the most suitable transfer pricing method to evaluate whether the price is set at the arm’s length.
- The traditional transaction-based methods are preferred in cases where a traditional transaction-based method and a transaction-based net profit method are equally suitable for pricing the specific transaction. Correspondingly for the CUP method in relation to the Cost-plus method and RPM.
- The taxpayer is not limited to use any specific of the transfer pricing method from the OECD Transfer Pricing Guidelines according to the legislation in Denmark.
- In Denmark the companies as part of the tax return fills out section regarding intercompany transactions.
- The filling in the tax return determines whether the Danish company becomes obliged to submit the transfer pricing documentation.
- The burden of proof is on the taxpayer to ensure that the transfer pricing regulations are adhered to.
Transfer pricing documentation
Preparation of transfer pricing documentation
- In Denmark there are three types of transfer pricing documentation: (1) Local file, (2) Master file, and (3) CbCR.
- The minimum requirements of the content of the (1) Local file, (2) Master file, and (3) CbCR follows the OECD Transfer Pricing Guidelines.
- According to the legislation in Denmark the transfer pricing documentation must be prepared on an ongoing basis. The deadline for submitting is 60 days after the deadline of filing the tax, which makes the typically deadline for submitting the transfer pricing documentation for companies who follows the calendar year the around the 28th of August in the following year.
Master and local file
- The local file and master file is an obligation for taxpayers which is part of a Group who exceed 250 employees or has both an annual total balance of more than EUR 16,8 million (DKK 125 million) or an annual turnover of more than EUR 33,5 million (DKK 250 million).
Some risk factors for challenge
- Persistent losses in any entity
- Transactions with low tax jurisdictions resident related parties.
- Business restructurings
- Transfer of IP
- Duplication of expenses
- In Denmark the Danish Tax Authorities has the right to issues penalties and fines if the taxpayer has made a wrongful and misleading filling of the transfer pricing in the tax return and in case the transfer pricing documentation is deficient.
- A penalty for wrongful or misleading preparation of the section covering controlled transactions in the Danish tax return may be imposed. The fine will be the higher of two amounts:
- 0.5% of revenues up to EUR 67 million (DKK 500m), 0.1% of the remaining up to EUR 134 million (DKK 1bn) and 0.05% of revenues over EUR 134 million (DKK 1bn) (no cap); or
- EUR 33,500 (DKK 250,000) for a company with up to 50 employees, which increases by EUR 33,500 (DKK 250,000) for every 50 employees in the company up to 500 employees. In companies with more than 500 employees, the penalty under this calculation will be EUR 335,380 (DKK 2.5m).
- A specific transfer pricing penalty regime for non-compliance with Danish documentation rules exists or if the transfer pricing documentation is not prepared before filing the tax return. The penalties for non-compliance with Danish documentation requirements amount to:
- an initial penalty of EUR 33,592 (DKK 250,000) for the taxpayer for not submitting adequate documentation within the 60-day period (this is levied independently of any transfer pricing adjustment); and
- a penalty of up to 10% on any adjustment (if the initial penalty has been triggered).
Economic analysis and how to demonstrate an arm’s length result
- The Daish Tax Authorities will prefer to see that a search for potential internal or external comparable transactions has taken place before defaulting to an external database search for comparable companies.
- The Danish Tax Authorities expect the taxpayer to perform a comparability analysis for each type of intercompany transaction they are part of.
- In the case of using comparable companies from a region, the Danish Tax Authorities would like to see an adjustment applied for differences in the markets where the comparable companies operate vs. the analyzed taxpayer.
- From the income year 2022 a new legislation states that it is a requirement to support the arm’s length pricing with a benchmark when using the transactional net margin method and/or if there is not alternative way to illustrate the arm’s length pricing (e.g., internal CUP data)
Advance Pricing Agreements (APAs), dispute avoidance and resolution
- Advanced Pricing Agreements (APAs) are written agreements between a taxpayer and the Danish Tax Authorities to govern the appropriate transfer pricing method for a forward-looking period.
- The only exemptions are if the intercompany transactions only are between Danish entities or if it is smaller Groups, then it is not required to prepare a master file and local file. However, it should be emphasized that pricing of the intra-group transactions must still be documented, and the taxpayer is still subject to the disclosure obligation for intercompany transactions. By” smaller Groups” is meant companies that alone or together with group companies have:
- less than 250 employees and
- either an annual total balance sum of less than EUR 16,8 million (DKK 125 million),
- or an annual turnover of less than EUR 33,5 million (DKK 250 million)
- However, the limited documentation obligation does not apply if the controlled transactions are made with:
- Physical or legal persons domiciled in a foreign state that does not have a double taxation treaty with Denmark and is not a member of the EU or the EEA.
- A permanent establishment domiciled in a foreign state that does not have a double taxation treaty with Denmark and is not a member of the EU or the EEA.
- A permanent establishment domiciled in Denmark provided that the taxpayer is domiciled in a foreign state that does not have a double taxation treaty with Denmark and is not a member of the EU or the EEA.