Policy, trends and developments
Describe the general government/regulatory policy for transfer pricing in your jurisdiction. To what extent is the arm’s-length principle followed?
The arm's-length principle was incorporated into Danish law through Section 2 of the Tax Assessment Act and must be interpreted in accordance with Article 9 of the Model Tax Convention on Income and on Capital of the Organisation for Economic Cooperation and Development (OECD). Although not directly incorporated into Danish law, the OECD Transfer Pricing Guidelines play a significant role in interpreting the Danish transfer pricing legislation.
Trends and developments
Have there been any notable recent trends or developments concerning transfer pricing in your jurisdiction, including any regulatory changes or case law?
With effect from the tax year 2016, the obligation for multinational enterprises to provide country-by-country reporting, as set out in Action 13 of the OECD Base Erosion and Profit Shifting (BEPS) project, is incorporated into Danish domestic law in Section 3B of the Tax Control Act.
Further, the revisions to the OECD Transfer Pricing Guidelines that were made as a result of BEPS Actions 8 to 10 have also been incorporated into Danish domestic law.
With effect from 2017, the Danish tax authorities have adopted an alternative dispute resolution (ADR) strategy to resolve transfer pricing cases. Approximately 12 officers from within the tax authorities have been educated in the use of mediation between the tax authorities and the companies involved. The strategy aims to prevent long procedures in transfer pricing cases. As the strategy is still new, the tax authorities plan to report on the experience with the use of the internal mediation model later in 2018.
Once a year, the Danish tax authorities publish a transfer pricing review covering the authorities' transfer pricing focus points and the number of adjustments (downwards and upwards) carried out by the authorities for the previous year. The latest review covers 2016 and includes the following noteworthy points:
- upwards adjustments were made in 188 transfer pricing audits at a total value of Dkr7.3 billion;
- downwards adjustments were made in 20 cases at a total value of Dkr11.5 billion;
- 143 mutual agreement procedures (MAP) were pending, while 22 MAPs were concluded in 2016; and
- 21 advance pricing agreements (APAs) were pending and seven APAs were concluded in 2016.
The Tax Control Act – covering the transfer pricing documentation requirements, among other things – has recently been rewritten to simplify and clarify its provisions. The rules on transfer pricing documentation in the new Tax Control Act are largely the same as before, but one noteworthy change is that the documentation must be made on a contemporaneous basis and finalised by the due date of the tax return. This had previously been the position of the Danish tax authorities, but is now explicitly set out in the amended act. The amended act as a whole enters into force on January 1 2019. The transfer pricing documentation rules in the amended act are effective in respect of taxpayers with tax years beginning after January 1 2018 that have a tax return filing date in June 2019 or later. The other sections of this questionnaire refer to the existing provisions of the Tax Control Act.
Domestic legislation and applicability
What primary and secondary legislation governs transfer pricing in your jurisdiction?
The Danish statutory rules on transfer pricing primarily consist of the following:
- Section 2 of the Tax Assessment Act stipulates that the prices and terms in commercial and economic transactions between associated parties must be in accordance with what could have been achieved if the transactions were concluded between unrelated parties (the arm's-length principle); and
- Section 3B of the Tax Control Act sets out the documentation and disclosure requirements. The act also contains provisions on penalties for failing to comply with the documentation and disclosure requirements.
The statutory rules are supplemented by the Transfer Pricing Guidelines of the Organisation for Economic Cooperation and Development (OECD), which the Danish tax authorities in general will apply when interpreting the Danish domestic transfer pricing rules. The Danish tax authorities also rely on the commentaries on the articles in the OECD Model Tax Convention on Income and on Capital – for instance, as provided in the November 2017 condensed version of the model convention text.
Executive Order 401/2016 on Documentation of the Determination of Prices in Controlled Transactions further outlines the documentation requirements in transfer pricing transactions. The specific content of Danish country-by-country reporting is outlined in Statutory Order 1133/2016.
Further, the Danish Customs and Tax Administration issues guidelines on the transfer pricing rules and the methods for valuating transactions.
Are there any industry-specific transfer pricing regulations?
The Hydrocarbon Tax Act stipulates that the arm's-length principle also applies to transactions between related parties in the oil and gas sector – for instance, if a participant in a consortium carries out economic transactions with a company owned by one of the other participants in the consortium. The arm's-length principle must also be followed in the shipping business according to the Tonnage Tax Act.
What transactions are subject to transfer pricing rules?
In theory, the arm's-length principle set out in Section 2 of the Tax Assessment Act covers any commercial or economic relationship between associated parties (controlled transactions). Any economic elements and other relevant conditions for taxation purposes are covered by the provision – such as the delivery of goods and services, loan arrangements, lease of tangible assets, use of intangibles assets and the transfer of tangible and intangible assets. The arm's-length principle must be interpreted in accordance with the OECD Transfer Pricing Guidelines.
The Danish transfer pricing rules apply to all national or cross-border transactions between associated parties.
Parties covered by the transfer pricing rules are subject to certain documentation and disclosure requirements under Section 3B of the Tax Control Act. Certain small enterprises are exempt from the transfer pricing documentation obligations. Please see the description under the heading "Documentation and reporting".
How are ‘related/associated parties’ legally defined for transfer pricing purposes?
For transfer pricing purposes, the ‘associated’ or ‘related persons’ covered by Section 2 of the Tax Assessment Act are taxable persons that:
- are controlled by natural or legal persons;
- control legal persons;
- are group-related with a legal person;
- have a permanent establishment abroad; or
- are non-resident natural or legal persons with a permanent establishment in Denmark.
‘Control’ exists when more than 50% of the shares or voting rights are owned or controlled, directly or indirectly. Votes and shares held by group-related entities are also taken into account. Votes and shares held by non-related shareholders are also taken into account, provided that an agreement has been made between the taxable person and the non-related shareholders for the purpose of “exercising a common controlling influence” over a jointly held legal entity.
Two or more legal persons are ‘group-related’ when they are directly or indirectly controlled by the same group of shareholders or are under a common management.
Regarding the definitions of ‘control’ and ‘group-related’, transparent entities (ie, partnerships) may be treated as non-transparent entities if they are “governed by rules of corporate law, a corporate law agreement or articles of association”.
Are any safe harbours available?
There are no statutory safe harbours as regards the arm's-length principle as such. However, only certain minimum transfer pricing documentation requirements apply when certain turnover, profit or employee thresholds are not passed (see below).
Which government bodies regulate transfer pricing and what is the extent of their powers?
The Customs and Tax Administration regulates the transfer pricing rules. The administration:
- is empowered to undertake audits;
- may require that the taxpayer produces database benchmark studies substantiating the transfer prices; and
- can estimate the taxpayer's income if the documentation requirements are not complied with.
The administration is also the authority responsible for the exchange of information with foreign tax authorities under tax treaties and international agreements and conventions, as well as the competent authority to decide on transfer pricing matters relating to mutual agreement procedures or bilateral advance pricing agreements.
Which international transfer pricing agreements has your jurisdiction signed?
Denmark has entered into tax treaties with approximately 80 countries. As the agreements are widely based on the OECD Model Tax Convention on Income and on Capital, a provision similar to Article 9 of the convention is included in the majority of the tax treaties.
Denmark has also entered into tax information exchange agreements with a number of countries, providing for the exchange of information relating to specific tax matters under investigation.
Further, Denmark has signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). Where applicable, the MLI will change the effect of the tax agreements with countries that have also signed the MLI subject to the reservations and choices made by the contracting states.
Denmark has also signed a number of international agreements of relevance for transfer pricing transactions, such as the EU Arbitration Convention and the Convention on Mutual Administrative Assistance in Tax Matters; Denmark must also implement the EU Tax Dispute Resolution Mechanism Directive (2017/1852/EC).
To what extent does your jurisdiction follow the Organisation for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines?
In general, Denmark follows the OECD Transfer Pricing Guidelines closely. The explanatory notes to Article 2 of the Tax Assessment Act (ie, the provision incorporating the arm's-length principle into Danish domestic law) state that the Danish domestic transfer pricing rules must be interpreted in accordance with the OECD Transfer Pricing Guidelines.
Transfer pricing methods
Which transfer pricing methods are used in your jurisdiction and what are the pros and cons of each method?
There are no statutory rules on the applicable methods for making transfer pricing adjustments in Denmark, but the applicable methods are consistent with the methods covered by the Organisation for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines, which are:
- the comparable uncontrolled price method (CUP method);
- the resale price method;
- the cost-plus method;
- the transactional net margin method; and
- the profit split method.
According to the guidelines, other transfer pricing methods may be used if they are in accordance with the arm's-length principle in the specific case.
Preferred methods and restrictions
Is there a hierarchy of preferred methods? Are there explicit limits or restrictions on certain methods?
While the CUP method is the most commonly used model, there is no statutory hierarchy of the applicable methods as the aim of the Danish transfer pricing rules – in accordance with the OECD Transfer Pricing Guidelines – is to find the most appropriate method of determining the value of the transactions under the arm's-length principle.
What rules, standards and best practices should be considered when undertaking a comparability analysis?
The guidance on the comparability analysis under Danish domestic law is fully aligned with the guidance outlined in the OECD Transfer Pricing Guidelines.
Are there any special considerations or issues specific to your jurisdiction that associated parties should bear in mind when selecting transfer pricing methods?
Documentation and reporting
Rules and procedures
What rules and procedures govern the preparation and filing of transfer pricing documentation (including submission deadlines or timeframes)?
Section 3B of the Tax Control Act imposes obligations for natural and legal persons to disclose and document various information about their transfer pricing transactions. The specific content of transfer pricing documentation is outlined in Statutory Order 401/2016. The specific content of Danish country-by-country reporting is outlined in Statutory Order 1133/2016.
The parties subject to the disclosure and documentation requirements are the same parties covered by the obligation to carry out controlled transactions at arm's-length terms.
According to Section 3B(1), taxpayers must include information on the type and extent of their commercial and economic transactions with related parties (controlled transactions) for a tax year in their tax return for that year. Further, a specific transfer pricing return must be annexed to the tax return containing information about types of controlled transaction and amounts related to each type of transaction.
The position of the Danish tax authorities is that the transfer pricing documentation must be made on a contemporaneous basis and finalised by or on the date that the tax return must be submitted to the Danish tax authorities for the relevant tax year. Some cases on this matter are pending decision in the administrative tax appeal system. With the amended Tax Control Act, the ‘contemporaneous basis’ when preparing the documentation and the finalising date are now explicitly part of statutory law, as mentioned under the heading "Trends and developments".
In general, companies must file the tax return (including the transfer pricing documentation) for a tax year no later than six months following the end of that year.
Taxpayers with controlled transactions under Dkr5 million during a tax year are only obligated to state in the tax return that the threshold is not exceeded.
What content requirements apply to transfer pricing documentation? Are master-file/local-file and country-by-country reporting required?
In general, the Danish documentation requirements are fully aligned with the Organisation for Economic Cooperation and Development (OECD) standards and therefore include the filing of:
- a master file containing basic information relevant for all group entities;
- a local file containing specific information on the Danish entities (if applicable, see below); and
- a country-by-country report containing information on the global allocation of the group's income and taxes (in some cases).
The files should include the information specified in Annexes I to III of the OECD report "Transfer Pricing Documentation and Country-by-Country Reporting". The annual country-by-country report must, under certain circumstances, be submitted to the Danish tax authorities each year if the annual worldwide turnover of the group exceeds Dkr5.6 billion. Documentation can be prepared in one of the Scandinavian languages or in English.
According to Section 3B(5) of the Tax Control Act, taxpayers must prepare and keep for five years documentation in writing on how prices and terms for controlled transactions are determined.
Further, according to Section 3B(5) the tax authorities may require, by giving a 60-day notice, that the taxpayer produce database benchmark studies substantiating the transfer prices.
However, under Section 3B(6), certain small enterprises, while subject to the transfer pricing principles, are not obliged to produce written documentation relating to intragroup transactions. ‘Small enterprises’ are enterprises with fewer than 250 employees and a balance sheet total of under Dkr125 million, or an annual turnover of under Dkr250 million measured at a group level. However, documentation is always required in respect of intragroup transactions with natural and legal persons and permanent establishments resident in countries outside the European Union and European Economic Area with which Denmark has not concluded a tax agreement.
No written documentation is needed in respect of controlled transactions of an insignificant extent or frequency.
What are the penalties for non-compliance with documentation and reporting requirements?
A company may incur a fine if it fails to state in its income tax return that it is subject to the transfer pricing documentation requirements. This fine may be calculated on the basis of either the company’s annual turnover or the number of employees. The fine will never be set below Dkr250,000. If the failure to report correctly is deemed to be part of a systematic violation of the tax legislation, the fine may be increased by up to 50%.
Fines calculated on the basis of annual turnover may be set at:
- 0.5% of the turnover for a turnover up to Dkr500 million;
- 0.1% of the turnover if the turnover is between Dkr500 million and Dkr1 billion; and
- 0.05% of the turnover if the turnover exceeds Dkr1 billion.
Fines calculated on the basis of the number of employees may be set at Dkr250,000 per group of 50 employees. If the number of employees exceeds 500, the fine may be set at Dkr2 million.
Further, fines may apply for failure to prepare transfer pricing documentation when the company is required to do so by the tax authorities. The minimum fine for failure to prepare transfer pricing documentation is set at Dkr250,000.
Moreover, a 10% fine may be applied on any increase in the taxable income resulting from transfer pricing adjustments.
The tax authorities are entitled to disregard the price and transfer pricing method applied by the taxpayers and, instead, apply their own method and correct pricing if the taxpayer fails to comply with the documentation requirements.
What best practices should be considered when compiling and maintaining transfer pricing documentation (eg, in terms of risk assessment and audits)?
Transfer pricing documentation should be prepared according to the methods outlined in the OECD Transfer Pricing Guidelines – the Danish tax authorities will rely on these methods for calculating the arm's-length price. The reasons for selecting a certain method should also be stated clearly. Transfer pricing documentation sometimes primarily provides for an account of the transfer pricing methods, while little or no attention is given to why a specific pricing method is used. Further, as described under “Content requirements”, taxpayers are obligated to keep documentation on how prices and terms for controlled transactions are determined for five years.
Advance pricing agreements
Availability and eligibility
Are advance pricing agreements with the tax authorities in your jurisdiction possible? If so, what form do they typically take (eg, unilateral, bilateral or multilateral) and what enterprises and transactions can they cover?
Unilateral (ie, binding rulings issued by the tax authorities), bilateral and multilateral advance pricing agreements (APAs) are possible.
In principle, an APA may cover all types of future controlled transaction between related parties.
Rules and procedures
What rules and procedures apply to advance pricing agreements?
As the Danish tax authorities have no specific application procedure for obtaining an APA, the process is relatively flexible. That said, an application will likely include the following steps:
- informal contact with the Danish tax authorities;
- pre-filing meeting;
- formal application;
- tax authorities' assessment;
- negotiations with foreign tax authorities; and
- formal agreement between the Danish and foreign tax authorities.
How long does it typically take to conclude an advance pricing agreement?
Two to three years. Additions to an existing APA can be made much sooner.
What is the typical duration of an advance pricing agreement?
An APA is usually valid for five years and, in certain cases, may have retrospective effect for previous tax years (roll-back).
What fees apply to requests for advance pricing agreements?
No fees apply when filing for an APA with the Danish tax authorities.
Are there any special considerations or issues specific to your jurisdiction that parties should bear in mind when seeking to conclude an advance pricing agreement (including any particular advantages and disadvantages)?
Review and adjustments
Review and audit
What rules, standards and procedures govern the tax authorities’ review of companies’ compliance with transfer pricing rules? Where does the burden of proof lie in terms of compliance?
The Danish tax authorities' administration of the tax rules are set out in the Tax Administration Act and the Public Administration Act. The Danish tax authorities may undertake transfer pricing audits on the basis of Section 3B of the Tax Control Act and transfer pricing aspects may also be reviewed in connection with general tax audits of the taxpayers.
Generally, it is the taxpayer that must inform the Danish tax authorities sufficiently about the extent and content of its controlled transactions as set out in the statutory documentation and disclosure requirements. The tax authorities must then prove that the prices and terms used in a transaction deviate from the arm's-length prices and terms. The burden of proof may shift from the tax authorities to the taxpayer if sufficient documentation is not submitted to the tax authorities in due time.
Do any rules or procedures govern the conduct of transfer pricing audits by the tax authorities?
See previous response.
What penalties may be imposed for non-compliance with transfer pricing rules?
Penalties for not complying with the documentation requirements include fines and an assessment of the taxpayers' transfer pricing transactions, as mentioned above.
What rules and restrictions govern transfer pricing adjustments by the tax authorities?
The Danish tax authorities may make transfer pricing adjustments at the latest in the sixth year following the tax year concerned (ordinary adjustments).
Further, the Danish tax authorities or the taxpayer may make or request that an extraordinary adjustment be made, even when the deadline for making an ordinary adjustment is exceeded, such as in cases of double non-taxation or double taxation, when a foreign tax authority has made a decision of relevance for the taxpayer or if the Danish tax authorities have assessed the taxpayer on an incorrect or incomplete basis.
How can parties challenge adjustment decisions by the tax authorities?
Decisions made by the Danish tax authorities may be appealed to the Administrative Tax Court. The appeal must be received within three months of the taxpayer receipt of the assessment notice. A decision of the Administrative Tax Court may be brought before the city courts, then the high courts and ultimately the Supreme Court (if third-instance permission is granted).
With effect from 2017, the Danish tax authorities are educating internal mediators to help resolve transfer pricing cases as an alternative dispute resolution mechanism.
It is also possible to challenge through the mutual agreement procedure (MAP). Please see below.
What MAPs are available to avoid double taxation arising from transfer pricing adjustments? What rules and restrictions apply?
Most tax treaties concluded by Denmark contain provisions regarding termination of double taxation in transfer pricing cases based on the Model Tax Convention on Income and on Capital of the Organisation for Economic Cooperation and Development and the MAP described therein (Article 25 of the convention).
The only condition for requesting a MAP is that an action giving rise to double taxation has occurred in either of the treaty countries. While the tax authorities are not obliged to reach a solution on a double taxation issue, they are required to attempt to do so.
Taxpayers should generally ensure that the national rules on appeals can be used simultaneously with the MAP since invoking the MAP does not suspend the national appeal deadlines.
As an alternative to terminating double taxation via the tax treaties, or where no tax treaty with the relevant country exists, double taxation pursuant to a transfer pricing adjustment may be terminated under the EU Arbitration Convention if the relevant companies or entities are residents of EU member states.
The EU Tax Dispute Resolution Mechanism Directive (2017/1852/EC) also provides measures aiming to ensure that all disputes between EU member states relating to the interpretation and application of tax treaties are resolved.
What legislative and regulatory initiatives has the government taken to combat tax avoidance in your jurisdiction?
Combating tax abuse and avoidance has always been (and remains) a major focus for the Danish government and numerous measures have been implemented over time. Accordingly, Denmark had many anti-avoidance rules in place when the Organisation for Economic Cooperation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Action Plan was completed in 2015.
The following noteworthy anti-avoidance rules are largely covered by the BEPS Action Plan:
- The adoption of a general anti-abuse rule in Section 3 of the Tax Assessment Act that applies from May 1 2015, denying tax treaty and EU directive benefits in certain cases.
- Taxation of hybrid entities, taxation of hybrid financing instruments and re-classification of certain transparent entities for Danish tax purposes as set out in Sections 2A to 2C of the Corporate Income Tax Act (BEPS Action 2).
- Controlled foreign company taxation rules as set out in Section 32 of the Corporate Income Tax Act and Sections 16H to 16J of the Assessment Act (BEPS Action 3).
- Rules on thin capitalisation and interest reductions as set out in Sections 11, 11B and 11C of the Corporate Income Tax Act (BEPS Action 4).
- Certain anti-avoidance rules countering avoidance of dividend tax – for instance, Section 2D of the Corporate Income Tax Act and Section 2 of the Tax at Source Act (BEPS Action 5).
- Danish dividend withholding tax on dividend distributions running through conduit companies as set out in Section 2(1)(c) of the Corporate Income Tax Act (BEPS Action 6).
- Country-by-country reporting (BEPS Action 13).
To what extent does your jurisdiction follow the OECD Action Plan on Base Erosion and Profit Shifting?
In general, Denmark follows the BEPS project closely and is expected to uphold measures covered by the BEPS actions. As mentioned above, Denmark has adopted legislation on many areas covered by the BEPS Action Plan.
Is there a legal distinction between aggressive tax planning and tax avoidance?
The term ‘aggressive tax planning’ has no legal status in Denmark; consequently, aggressive tax planning has no specific legal effects. The Danish domestic rules cover tax avoidance only when specifically covered by the anti-avoidance rules.
What penalties are imposed for non-compliance with anti-avoidance provisions?
There are no specific penalties for not complying with the Danish anti-avoidance rules. However, general penalties and interest apply with respect to taxes assessed and reported that deviate from the tax return submitted by the taxpayer. Increased fines and penalties generally apply in case of tax evasion.