Reporting all controlled transactions in tax return
The reporting requirements in Denmark for controlled transactions have recently changed. Previously, Danish companies were only required to disclose information on controlled transactions in the tax return if the volume of the controlled transactions exceeded DKK 5 million for the income year in scope. This threshold no longer applies. Hence, going forward all companies with controlled transactions are required to provide information on such transactions. As a direct consequence, many small and medium-sized companies must provide information on controlled transactions for the first time.
High Court – Royalty not a deductible operating expense
Case SKM2019.537.ØLR from July 2019 concerned whether royalty payments from a Danish subsidiary, arising from the use of trademarks and trade names, knowhow, international network intangibles and business concept, to its Swiss parent company, were deductible operating expenses or not. The subsidiary paid a total of DKK 83,860,000 during the years 2006-2009 under audit.
Despite the fact that there was some evidence to suggest that the royalty payments were a deductible operating expense, the High Court found that the taxpayer had not met the burden of proof, and concluded that the payments of the royalties to the parent company did not constitute a deductible operating expense. In addition, the subsidiary had to pay DKK 400,000 to the Ministry of Taxation to cover legal costs. The Danish audit was part of the simultaneous tax examinations in Norway and Sweden.
The High Court based its decision on multiple circumstances. It emphasised that the Danish subsidiary operated in the Danish market where the price, as opposed to brand, is the most important competitive parameter. Moreover, the Danish subsidiary had realised a loss for most of the years in scope. It is therefore unlikely, that an independent party would have paid for the rights to use an international trademark under the same conditions. The Danish subsidiary had also incurred significant marketing expenses. Moreover, the High Court stated that the Swiss parent company must be assumed to have had a benefit of being represented on the Danish market to service the global clients, and that the royalty payments were a standard condition imposed by the parent company irrespective of the market. Finally, the Danish subsidiary had also failed to answer multiple information requests from the Ministry of Taxation.
New draft legislation: Significant transfer pricing rule changes
On 6 November 2019 the Danish Ministry of Taxation proposed draft legislation containing two notable transfer pricing rule changes. If the proposed draft legislation is passed, taxpayers can expect a significant rule change in relation to the deadline for submission of transfer pricing documentation, and a change to the legal basis for discretionary assessments. The rule will apply for income years starting 1 January 2020 or later. The proposal is scheduled for voting on 19 December 2019.
Under the current legislation, the documentation must be finalised at the time the tax return is submitted, meaning that the transfer pricing documentation must be prepared contemporaneously. Once requested by the tax authorities, the taxpayer must submit the transfer pricing documentation within 60 days.
Under the proposed draft legislation, the transfer pricing documentation would have to be submitted no later than 60 days after the deadline for filing the tax return. However, the proposed draft legislation offers a possibility to extend the taxpayer’s deadline under certain circumstances. Non-compliance with the deadline can result in penalties and potentially a discretionary assessment of the taxable income.
The proposed draft legislation does not reflect any major changes in respect of the current penalty rules. There are penalties for companies that fail to prepare sufficient TP documentation or do not file within the deadline. The penalty is a fixed amount of DKK 250,000 per year per entity. However, this can be reduced by half if satisfactory documentation is subsequently submitted. Moreover, the penalty is increased by 10% of any increase of assessed income resulting from a potential income adjustment. In addition to the current penalty rules, the proposed draft legislation offers a possibility of imposing a daily fine for late submission.
If the proposed draft legislation is passed, the Danish Tax Agency will be allowed to make a discretionary assessment if the transfer pricing documentation has not been filed by the deadline. The Danish Tax Agency is still obliged to request additional documentation from the taxpayer and to consider this documentation prior to a discretionary assessment. A discretionary assessment must also be in accordance with the arm’s length principle. When the Danish Tax Agency can make a discretionary assessment, the taxpayer bears the burden of proof.