Documentation rules for domestic transactions abolished, but rules for cross-border transactions unchanged
A bill passed in Denmark on 25 November 2021 contains measures affecting the preparation of transfer pricing documentation for domestic transactions in Denmark (i.e., DK-DK transactions).
Overall, the new law provides that—for tax years starting on or after 1 January 2021— transactions between Danish group entities (purely Danish transactions) are no longer subject to the requirement that transfer pricing documentation be prepared on an ongoing basis and be available within 60 days after the deadline for filing the annual corporate income tax return (subject to a few exceptions). However, DK-DK transactions still must be on arm's length terms.
Under Denmark’s general transfer pricing rules, a company must prepare transfer pricing documentation if it (measured at a group level) employs 250 or more employees or has revenue exceeding DKK 250 million and a balance sheet amount exceeding DKK 125 million.
A law enacted on 3 December 2020 requires Danish companies engaged in cross-border related party transactions to submit a master file and local file to the Danish Tax Agency within 60 days after the deadline for filing the annual corporate income tax return (see our article in the April 2021 issue of Transfer Pricing News). Before this law became effective, contemporaneous transfer pricing documentation had to be prepared by the deadline for filing the annual return (30 June of the year following the tax year for most taxpayers), but the documentation did not have to be submitted to the Tax Agency unless the authorities requested it. Under the revised rules, which apply to tax years starting on or after 1 January 2021 (the same date as the abolition of the transfer pricing documentation requirement for DK-DK transactions), contemporaneous transfer pricing documentation must be submitted to the tax authorities no later than 60 days after the deadline for filing the annual return.
Penalties may be imposed for failure to comply with the deadlines and it is possible for the Danish Tax Agency to issue a discretionary (i.e., estimated) assessment. The law clarifies the tax authorities’ power to issue a discretionary assessment in cases where transfer pricing documentation has not been prepared in a timely manner, with the decisive factor being whether sufficient transfer pricing documentation was submitted by the relevant deadline, regardless of whether the taxpayer subsequently prepares supplementary documentation.
The penalties for failure to comply with the submission deadline and/or transfer pricing documentation requirements can reach DKK 250,000 per company per year, plus 10% of any income adjustment. In addition, the burden of proof shifts to the taxpayer in transfer pricing-related tax disputes.
Affected taxpayers should ensure that they have compliant documentation and that the master file and local file are submitted in a timely manner.