Transfer Pricing Regulations in Denmark

Transfer Pricing Regulations in Denmark

The formal introduction of transfer pricing (TP) regulations into Danish legislation began in 1998. Since then, a few regulations and circulars regarding TP have been introduced. This resulted in the rise of the importance of TP for the Danish Customs and Tax Administration (SKAT), which led to an increased number of TP audits in the country.

Currently, the transfer pricing rules in Denmark are governed by the Tax Assessment Act -section 2; Tax Control Act – sections 37-52, and Tax Administration Act– sections 26-27. The Danish TP rules largely follow the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (The OECD TP guidelines).

Arm’s Length Principle

The arm’s length principle, based on Article 9 of the OECD Model Treaty, was first included in Danish law through section 2 of the Tax Assessment Act and served as a key tool for the Danish Customs and Tax Administration (SKAT) in handling transfer pricing cases. Article 9 stipulates that where the transactions between connected enterprises had been conditioned on non-market premises, the profits that could have been derived had the transactions been under arm ‘s-length conditions are deductible for tax purposes to levy taxes fairly across borders.

Section 2 of the Tax Assessment Act provides the following transfer pricing rules on arm’s length principle:

The requirement for transactions between related entities to be performed under conditions which would have prevailed had the business been conducted with independent parties under market conditions: entities having a controlling influence; associated entities, and foreign entities having a permanent establishment or independently performing hydrocarbon-related business within Denmark.

Related Party Definition

Danish tax legislation defines related parties under Section 2 of the Tax Assessment Act (TAA), covering entities with a controlling influence or association in financial or operational decisions. This includes entities under common control, parent-subsidiary relationships, and associated entities with significant influence over each other. It also applies to Danish entities with a foreign permanent establishment (PE), foreign entities with a PE in Denmark, and foreign businesses engaged in hydrocarbon activities under the Hydrocarbon Tax Act (HTA). Following OECD Guidelines, control is generally considered to exist when a party holds more than 50% ownership or voting rights, ensuring compliance with the arm’s-length principle in transfer pricing.

Transfer Pricing Methods

The methods that can be used to determine the arm’s length price in Denmark are:

  • Comparable uncontrolled price method
  • Resale price method
  • Cost plus method
  • Transactional net margin method
  • Profit split method

Denmark does not have a preferred method, rather the choice is dependent on the method that is most appropriate to the case and follows the arm’s length principle.

Comparability Analysis

An important part of the transfer pricing compliance is the comparability analysis. Below is a summary of the main points regarding comparability analysis in Denmark:

While Denmark’s policy on comparability analysis aligns with the OECD Transfer Pricing Guidelines, it does not prioritize internal comparables over external ones. Denmark typically relies on external databases such as Amadeus, Orbis, and RoyaltyStat to identify suitable comparables for transfer pricing purposes. Comparability analysis for transfer pricing considers several key factors to ensure transactions align with the arm’s length principle, such as characteristics of the market and the availability of comparable data.

Documentation Requirements

Since January 1, 2021, transfer pricing documentation requirements in Denmark are based on the three-tiered approach set forth by the OECD. This requires multinational groups to submit the following documentation to the Danish tax authorities:

  • Master file;
  • Local file; and
  • Country-by-Country (CbC) report.

The local file and master file are required for taxpayers who are part of a Group which:

  • The Group has more than 250 employees.
  • The Group has an annual total balance above EUR 16.8 million (DKK 125 million).
  • The Group has an annual turnover of over EUR 33.5 million (DKK 250 million).

In Denmark, transfer pricing documentation must be prepared regularly. It must be submitted within 60 days after the tax filing deadline. For companies following the calendar year, this means the documentation is typically due around August 28th of the following year.

Country-by-Country Reporting

Companies whose ultimate parent or substitute parent company is a so-called multinational group, in Denmark, are required to submit a Country-by-Country (CbC) report to the Danish Tax Authority (DTA). If the revenue of the group is more than 5.6 billion DKK, the ultimate parent shall submit the report in a maximum time of 12 months of the income year. A substitute parent is required to file a CbC report when the final parent does not report, or there is no report exchange agreement between countries. On the other hand, if another surrogate parent entity submits the report and conforms to the following conditions, the Danish group company needn’t file them.

Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)

Denmark uses both APA and MAP to manage and resolve international tax disputes, in compliance with OECD guidelines.

APAs are agreements made between the taxpayer and the tax authorities, in advance, to avoid tax disputes regarding transfer pricing methodology. The authority regulating the agreements is the Danish Tax Agency- Danish Customs and Tax Administration (SKAT), which determines how Denmark tax law will be applied to a specific situation or transaction that has not yet occurred from a tax perspective.

The Danish law provides two types of APAs: Bilateral and Multilateral.

The request for a bilateral or multilateral APA must be submitted in writing (email requests are accepted) and must as a minimum contain: A description of the company, the group, and the market, a description of the controlled transactions including an analysis of functions, assets, and risks of each party to the transactions, a comparability study, a choice of transfer pricing method and how it will be implemented including critical assumptions and annual APA compliance reports.

In addition, the Mutual Agreement Procedure (MAP) helps resolve tax disputes, such as double taxation, under Article 25 of the OECD Model Tax Convention. Most Danish tax treaties incorporate this provision, enabling Danish taxpayers to request assistance from the Danish Tax Agency (DTA) if a foreign tax authority’s transfer pricing assessment is incorrect. The DTA may initiate a MAP if it finds the claim valid, negotiating with the other state’s tax authority. However, tax authorities are not obligated to reach an agreement under this procedure.

Approach to Transfer Pricing Audits

Denmark lacks specific audit procedures for controlled transactions between group companies, though the Danish Legal Tax Guide covers transfer pricing issues. The Danish tax authority may initiate audits based on taxpayer reports and must do so within six years of the transaction. A 2012 tax law requires companies to obtain an auditor’s report if they transact with related parties in non-EU, non-tax treaty countries or report consecutive operating deficits. Non-compliance may lead to penalties, and Denmark aligns its income allocation rules with OECD principles.

Penalties

Non-compliance with Denmark’s transfer pricing provisions can be a criminal offense under the Danish Penal Code or the Tax Control Act if a taxpayer intentionally or negligently files incorrect tax returns. Violations exceeding DKK 250,000 are penalized under specific tax laws, while intentional violations above DKK 500,000 fall under the Penal Code. Fines are twice the tax amount for willful violations and 50% for gross negligence, with reductions for amounts under DKK 60,000. Voluntary disclosure before an audit can eliminate or reduce fines by 50%. Transfer pricing documentation failures incur fines of DKK 250,000 plus a 10% increase if income is corrected, reduced to DKK 125,000 if submitted later, and are non-deductible for corporate tax purposes.

Taxation at a Glance

The Danish tax system is composed of two main categories: direct taxes and indirect taxes. Furthermore, the country has signed double tax agreements with several countries. The official name of the Danish tax authority is the Skattestyrelsen.

The table below provides a summary of the main taxation rates related to businesses:

Tax Type

Tax Rate

Corporate Tax

22%

VAT

25%

Withholding tax on dividends to non-residents

27%

Withholding tax on interest to non-residents

22%

Withholding tax on royalties to non-residents

22%

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