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Are Danish transactions exempted from transfer pricing documentation?

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Clara Maria Grassi

Senior Manager, International Tax and Transaction Services – Transfer Pricing, EY Denmark

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18 Mar 2024
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There are several exceptions to the general exemption introduced by Law nr. 2194 from 30/11 2021, some of which not entirely clear.

In brief: 

  • It is key for Danish companies to understand whether their domestic transactions are subject to the exemption established by Law nr. 2194 from 30/11 2021.
  • While the law clearly lists some exceptions to the general exemption rule, it also creates some area of uncertainty.
  • The Lovudkast partially clarifies the wording of the law, but also leaves some questions unanswered, and thus currently subject to a case-by-case assessment.

Historically, Danish companies have been obliged to prepare transfer pricing documentation for all intercompany transactions, including domestic controlled transactions. However, with law nr. 2194 from 30/11 2021 the requirement to include domestic controlled transactions in the transfer pricing documentation has been –to a large extent – abolished for income years starting 1 January 2021 or later.

While this change represents a relief of the transfer pricing compliance burden for many multinational companies, it also triggers some new questions and gives rise to areas of uncertainty for taxpayers. In fact, the law itself mentions some exceptions to the general rule according to which domestic controlled transactions should not be documented. Further, the Lovudkast (i.e. the background materials to the law) gives a more clear indication of which situations would fall within such exceptions. However, as we will discuss later, there are a number of other potential exceptions not covered by the word of the law nor by the Lovudkast, which are currently controversial and on which it is expected – and hoped - that some clarity will be shed by future case law.

According to the new rules, as a general principle, affiliated Danish companies or permanent establishments that conduct transactions between themselves are no longer required to prepare transfer pricing documentation. Same considerations apply for domestic transactions between a majority shareholders and their companies. There are however a number of exceptions to this rule, which will be addressed in the following sections.

Contracting parties taxed according to different tax regimes

Exceptionally, purely national intra-group transactions must still be included in the written transfer pricing documentation. This is the case if:

  • The parties are taxed according to different tax rules, i.e.:
    • the Tonnage Tax Act (except if all parties to the transaction are only taxed under the Tonnage Tax Act),
    • the Hydrocarbon Tax Act (except if all parties to the transaction are only taxed under the Hydrocarbon Tax Act),
    • the rules for cooperatives included in certain sections of the Corporation Tax Act, or
    • the rules for associations included in certain sections of the Corporation Tax Act
  •  A party of the transaction is tax exempt under Section 3 of the Corporation Tax Act 

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Domestic transactions forming the basis for cross-border transactions

The Lovudkast also clarifies that transfer pricing documentation will need to be prepared also when a purely national intra-group transaction forms the basis for a cross-border transaction. For instance, this would happen in case of:

  • intermediate invoicing companies (i.e. controlled companies – often located in tax heavens –whose sole purpose is to act as intermediaries in the international redistribution of income, performing no other economic activity than bookkeeping/reinvoicing), or
  • products sold to a foreign related company at a price based on a cost-plus method, if the cost base includes services provided in a purely national intra-group transaction, or
  • services provided to a foreign affiliated company, which includes intangible assets owned by another Danish group entity.
     

It is however important to stress that the above-mentioned exceptions listed in the Lovudkast are only examples, and do not therefore represent an exhaustive list. This means that a case-by-case assessment will be necessary in any other instances where a purely national intra-group transaction could be seen as forming the basis for a cross-border transaction, and therefore to identify whether transfer pricing documentation should be prepared. For instance, in cases where a Danish entity is lending to another Danish group entity which, in turn, uses the funding to fund a loan granted to a foreign affiliate, the domestic loan could potentially be seen as forming the basis for the cross-border loan and therefore be subject to the transfer pricing documentation requirement. However, based on our experience, the Danish Tax Authorities generally assess such “pass-through loans” as two separate transactions, one domestic and one cross-border. Based on this approach, it could then be argued that the domestic loan would not need to be documented but on the other hand it can be argued to be irrational by the Danish entity to lend at e.g. a lower interest than what accrues on the Domestic loan, that way bringing the arm’s length terms and conditions of the domestic loan into relevance when assessing the arm’s length nature of the cross-border loan.
 

Permanent establishments

Pursuant to law nr. 2194 from 30/11 2021, transfer pricing documentation will always need to be prepared when a party of the controlled transaction is a foreign natural or legal person, or constitute a permanent establishment located in a foreign state. However, written documentation does not have to be prepared if all parties to the controlled transaction are Danish based permanent establishments of companies located in a foreign state or head offices of companies resident in Denmark.
 

The Lovudkast provides additional clarification on which inter-company transactions involving permanent establishments should be considered as pure domestic transactions and therefore would not – as a main rule - need to be included in the transfer pricing documentation. This would be the case, for example, for transactions between Danish based permanent establishments which are part of two foreign affiliated entities or part of one foreign and one Danish entity.
 

From the Lovudkast wording, however, it emerges that there may be other specific cases where transactions between affiliated permanent establishments could be considered as pure domestic transactions and therefore would not need to be covered by transfer pricing documentation. As of now, such potential exemptions will need to be assessed on a case-by-case basis, waiting for case law to shed some light on the topic.
 

Transactions between a Danish natural or legal person and a foreign permanent establishment of either a Danish or a foreign affiliated entity must continue to be included in the transfer pricing documentation, as well as transactions between foreign natural or legal persons and Danish permanent establishments of either a Danish or a foreign affiliated entity.
 

Final key considerations

It is critical to assess whether purely domestic intercompany transactions fall within one of the exceptions to the general rule established by law nr. 2194 from 30/11 2021, because in these cases companies will still need to prepare a full transfer pricing documentation (comprising of Master File and Local File) and submit it to the Danish Tax Authorities, even if not engaged in any other transactions (unless these companies belong to a multinational group which on a consolidated basis has less than 250 employees and either a) less than DKK 250 million in revenues, or b) Less than DKK 125 million in total balance).
 

Regardless of the above-mentioned exceptions, purely national intra-group transactions must always follow the terms which would be agreed between independent parties and companies may continue to be asked to demonstrate that the domestic controlled transactions fulfil the arm's length principle, especially in situations where there may be an incentive to deviate from it, for example;

  • If there are special losses in some group companies, where there may be an incentive to increase the earnings of those companies; 
  • If intangible assets have been transferred, where the group may have a tax interest in setting the price lower than the market price when exercising tax depreciation.

Same considerations apply also for domestic transactions between a majority shareholders and their companies, as there are common tax interests between these parties, too.

Summary

Pure domestic transactions should carefully be analyzed to assess whether they can be considered covered by Danish transfer pricing documentation exemption. Such assessment may require in depth transfer pricing expertise, particularly in those cases where the wording of law and the Lovudkast are not entirely clear. Regardless, pure domestic transactions should be conducted in line with prices and conditions that would be applied between independent parties. In fact, companies may continue to be asked by the local authorities to demonstrate that such transactions have been conducted at arm’s length.

About this article

Picture of Clara Maria Grassi
Clara Maria Grassi
Senior Manager, International Tax and Transaction Services – Transfer Pricing, EY Denmark
Danish-Italian hearted. Enjoys helping clients navigate the complex transfer pricing landscape. Believes in the power of humor also in the workplace. New mother. Pasta lover.

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