Transfer Pricing Denmark

Transfer Pricing authority and tax law

Ministry of Taxation (MT). § 2 of the Tax Assessment Act; §§ 3B, 14(4) and 17(3) of the Tax Control Act; and §§ 26 and 27 of the Tax Administration Act.

Transfer Pricing regulations and rulings

Regulation number 42 of 24 January 2006 pertains to the documentation of the pricing of the intercompany transactions and guidelines for preparation of written documentation. The Regulation sets forth the minimum requirements and guidelines for tax assessment and for disclosing information. The Regulation is referred to as the Consolidation Act.

OECD guidelines of Transfer Pricing

The MT will, for the purpose of its assessment, apply the principles of the OECD Transfer Pricing Guidelines.

Transfer Pricing methods

The MT accepts CUP, Resale Price, Cost Plus, Profit Split and TNMM. However, the MT prefers the traditional transactional methods to profit-based methods.

Penalties in Transfer Pricing

Fines were introduced for income years commencing on or after 2 April 2006, in cases of lacking or insufficient transfer pricing documentation. If, in addition, the income is increased because the arm’s length criterion has not been satisfied, the minimum fine wil be increased by an amount equal to 10% of the income increase. In case of income adjustments, a 6.3% (5.8% for 2007, 5.3% for 2006, 5.4% for 2005, 5.7% for 2004 and 10% for 2002-2003) non- deductible surcharge on al adjustments of prior years’ corporate taxes payable wil be levied. Furthermore, a non-deductible interest of 0.6% (0.6% for income year 2007, 0.5% for the income years 2005-2006 and 0.6% for the income years 2002-2004) for each month since the due date for the corporate tax payable for the income year in question is applicable.

Penalty relief in Transfer Pricing

If the taxpayer prepares the lacking or insufficient documentation and ensures that the documentation meets the requirements, the fine (except that which is related to the increase of taxable income) will be reduced to half of the original amount.

Transfer Pricing Documentation requirements

The documentation must be available upon request from the tax authority within 60 days’ notice. The transfer pricing documentation requirements affect both domestic and foreign intercompany transactions. The transfer pricing documentation requirements are eased for small and medium-sized companies (measured at group level), as well as for entities subject to tonnage tax.

The documentation requirements were tightened as of 2006. According to Regulation number 42, the documentation should include:

• A description of the group, including the legal group structure, the history of the group, including a description of restructurings, operational structure and primary business activities, as well as a description of the industry in which it operates
• A description of the Danish entity, its intercompany transactions and the other entities involved (primary business activities and three years’ key financials for all entities involved)
• A description of each intercompany transaction including (1) parties, types of products/services/assets transferred and the volumes involved, (2) an analysis of functions and risks undertaken and assets employed by the entities involved, (3) contractual terms, (4) economic conditions and (5) business strategies
• Comparability analysis by intercompany transaction, including (1) information about the transfer pricing policy and method applied, and how the transfer pricing principles are implemented in practice, e.g., whether year-end adjustments are made, and (2) an analysis of how the transfer prices satisfy the arm’s length principle
• A list of any written intercompany agreements entered into by the Danish entity and a copy of any written agreements in place with foreign tax authorities regarding transfer prices

According to the new tightened documentation requirements, a taxpayer must, within 60 to 90 days’ notice, provide external comparable searches as part of the arm’s length analysis upon request from the Danish tax authority.

Documentation deadlines for Transfer Pricing

The deadline for preparing documentation is the same as the deadline for filing the tax return. Documentation must be provided upon request. Sixty days’ notice is given.

Statute of limitations of transfer pricing assessments

The statute of limitation for a transfer pricing assessment is May 1 in the sixth year after the end of the calendar year replacing the income year.

Return disclosures/related-party disclosures

discloses information on al controled transactions and whether the company is qualified for relaxed documentation requirements.

Transfer Pricing Audit risk/transfer pricing scrutiny

The risk of transfer pricing issues being reviewed under an audit is high. Six transfer pricing audit centers have been established by the tax authorities with the single purpose of carrying out transfer pricing audits. Consequently, we see a strong focus on transfer pricing. Also, we see a tendency towards most normal tax audits being initiated with requests related to transfer pricing.

Advance Pricing Agreements of tansfer pricing

The Danish legislation provides for unilateral APAs only. There is no APA regime in place, but the MT has entered into a limited number of bilateral APAs.We expect this to be an area that will develop significantly within the next few years.