The Transfer Pricing Law Review: Denmark


Danish tax legislation contains two sets of primary provisions governing transfer pricing.

First and foremost, Article 2 of the Danish Tax Assessment Act contains the Danish arm's-length provision according to which related parties are obliged to act as if the parties were independent. Corporate bodies are generally considered related for transfer pricing purposes if they are controlled, directly or indirectly, by the same group of shareholders. In this context, control usually implies control over more than 50 per cent of the votes. Shares owned by non-related parties are included in the 50 per cent assessment if there is an agreement establishing joint control over the corporate bodies in question.

In the legislative preparatory work, it was specifically stated that Article 2 shall be interpreted in accordance with the Organisation for Economic Co-operation and Development Transfer Pricing Guidelines (the OECD Guidelines), and the Danish tax authorities generally recognise the link to the OECD Guidelines and as such also acknowledge the principles set out in them.

If Article 2 of the Danish Tax Assessment Act is applicable, all actions between the related parties are covered.

Articles 37–52 of the Danish Tax Control Act govern provision of information to the Danish tax authorities about controlled transactions and the preparation of transfer pricing documentation, including country-by-country reporting. See below for a more detailed description of the reporting and documentation requirements.

Filing requirements

Pursuant to the Danish Tax Control Act, corporate bodies subject to Danish tax must report the nature of controlled transactions (e.g., interest and royalties) and the aggregate volume of such transactions when submitting their Danish tax return.2 Reporting is done electronically and the deadline for reporting is linked to the deadline for submitting the tax return.

Furthermore, pursuant to the Tax Control Act, corporate bodies covered by the Danish transfer pricing legislation must prepare and maintain written documentation (transfer pricing documentation) describing how prices and conditions between the related parties have been decided upon.3 The transfer pricing documentation must be of a quality that allows the tax authorities to assess whether the prices and conditions applied to controlled transactions are of an arm's-length nature.

It is further specified in the accompanying administrative act that the transfer pricing documentation must contain both a master file containing, for example, a general description of the group, corporate bodies, nature of transactions and global presence, and a local file containing country-specific information about the local specific corporate bodies.4 In general, the Danish master file and local file requirements are identical to the recommendations set out in the OECD Guidelines.

The transfer pricing documentation can be prepared in Danish, Norwegian, Swedish or English. The transfer pricing documentation must be prepared on an ongoing basis and written documentation must be in place when the tax return is filed. The transfer pricing documentation must be delivered to the Danish tax authorities within 60 days of receipt of its request.

In addition to the transfer pricing documentation, a Danish ultimate parent company must prepare and file country-by-country documentation if the consolidated annual group turnover exceeds 5.6 billion kroner. The Danish requirements for the country-by-country documentation are identical to the OECD standards.

The country-by-country documentation is prepared in an XML format and must be submitted within 12 months of the end of the income year concerned. It is recommended that the country-by-country documentation is prepared in English because the report is exchanged between tax authorities.

Presenting the case

i Pricing methods

According to administrative guidelines issued by the Danish tax authorities, the transfer pricing methods generally recommended by the OECD Guidelines are also acknowledged under Danish transfer pricing regulations.5 As such, the traditional transfer pricing methods (comparable uncontrolled price, resale price and cost-plus methods) as well as the transactional transfer pricing methods (transactional net margin and profit split methods) are all accepted by the Danish tax authorities. Furthermore, transfer pricing methods that are not mentioned by the OECD Guidelines can be applied if they provide a reliable result. In practice, however, the OECD recommended methods are applied.

In principle, all methods can be applied equally. However, where traditional transfer pricing and transactional transfer pricing methods are considered equally applicable, traditional transfer pricing methods are recommended over transactional methods. Similarly, where the comparable uncontrolled price method is considered applicable given the reliable data available, it is recommended over the cost-plus and resale price methods.

Regardless of which transfer pricing method is considered most reliable, the backbone of the application of the transfer pricing method is the comparability analysis.6 The Danish tax authorities generally apply the comparability factors described by the OECD:

  1. the characteristics of the property or services transferred;
  2. the functions performed by the parties (taking into account assets used and risks assumed), in relation to the controlled transaction, an examination of which is often referred to as a 'functional analysis';
  3. the contractual terms of the controlled transaction;
  4. the economic circumstances of the parties; and
  5. the business strategies pursued by the parties in relation to the controlled transaction.

The local file must contain a detailed description of the comparability analysis for each category of controlled transaction.

ii Authority scrutiny and evidence gathering

Despite the significant focus on transfer pricing by the Danish tax authorities, and the number of transfer pricing audits conducted over the past years, surprisingly few cases have been brought before the courts.

During the transfer pricing audit, the Danish tax authorities may pay attention to the country-by-county report but the basis for the transfer pricing audit is the transfer pricing documentation prepared by the taxpayer. The tax authorities will scrutinise the transfer pricing documentation, including scrutinising the selected comparable entities and transactions.

In general, the transfer pricing audit is handled between the tax authorities and the taxpayer. The tax authorities will generally not engage in discussions with third-party witnesses nor will they expect the taxpayer to do so. The transfer pricing audit process is always initiated by the tax authorities requesting the transfer pricing documentation from the taxpayer. The tax authorities do not engage in down raids or similar confrontational initiatives.

As already mentioned, the basis for the transfer pricing audit is the transfer pricing documentation prepared by the taxpayer. The transfer pricing documentation must be of a quality that allows the tax authorities to assess the arm's-length nature of the transactions covered. In general, when making a transfer pricing adjustment, the tax authorities must prove that the transactions concerned are not on arm's-length terms. However, if the transfer pricing documentation is not prepared, or is prepared inadequately, the tax authorities can make a discretionary adjustment to the taxpayer's income.

A decision to adjust the taxable income must be issued no later than 1 August in the sixth year following the end of the income year under consideration.

Transfer pricing audits do not follow a set cycle, and selection of corporate bodies for audits is random. However, in the current environment, corporate bodies exceeding a certain size should probably expect a transfer pricing audit every three to five years.

Intangible assets

The administrative guidelines issued by the Danish tax authorities concerning intangible assets specifically refer to Chapter VI of the OECD Guidelines.7

When defining intangible assets, the administrative guidelines refer to Section 6.6 of the OECD Guidelines. Hence, an intangible asset is defined as something that is not a physical asset or a financial asset, that is capable of being owned or controlled for use in commercial activities, and whose use or transfer would be compensated had it occurred in a transaction between independent parties in comparable circumstances.

It is recognised that the circumstances concerning transfer pricing related to intangible assets give rise to difficulties in the sense that it is often impossible to identify comparable transactions between unrelated parties. That said, regardless of the difficulties concerning identification of uncontrolled comparables, transactions concerning transfers or use of intangible assets must be handled under the principles set out in Chapters I–III of the OECD Guidelines.

According to the administrative guidelines, attention should be paid to the economic ownership as opposed to the legal ownership. Economic ownership is assessed by identifying the intangibles used or transferred in the transaction with specificity and the specific, economically significant risks associated with the development, enhancement, maintenance, protection and exploitation of the intangibles (known as the DEMPE principles).

With regard to selection of the most appropriate transfer pricing method to analyse the arm's-length nature of transactions involving intangible assets, it is specified in the administrative guidelines that the residual profit cannot per se be allocated to the owner of the intangible asset. Selection of the most appropriate transfer pricing method must be based on a thorough analysis of the corporate bodies in the group entitled to receive profits from the intangible asset. In practice, the comparable uncontrolled price method and the profit split method are generally recognised as the most appropriate transfer pricing methods in relation to transactions involving intangible assets, whereas the resale price method and the transactional net margin method are generally not considered appropriate.


In Denmark, the taxpayer has a variety of options to settle transfer pricing matters with the tax authorities. First of all, the taxpayer has the option to apply for a binding ruling from the tax authorities. When applying for the binding ruling, the taxpayer must disclose all relevant information to the tax administration. When issued by the tax authorities, the ruling is binding to the tax authorities. Normally the binding rulings are published (anonymously).

In addition to the domestic binding ruling, the taxpayer may ask the tax authorities to enter into negotiations to obtain an advance pricing agreement on a bilateral or multilateral basis. It is a precondition for obtaining an advanced pricing agreement that the negotiations are supported by the relevant double-tax conventions in place. Obtaining an advance pricing agreement may be time-consuming and burdensome but provides great comfort for the taxpayer, and the Danish tax authorities are generally proactive in this regard.


The assessment of transfer pricing compliance is done randomly. Initially the tax authorities will request the taxpayer's transfer pricing documentation for the relevant income years. A transfer pricing audit typically covers two to four income years but can also relate to one single transaction (e.g., a transfer of intellectual property). Upon receipt of request for the documentation, the taxpayer has 60 days to deliver the transfer pricing documentation to the tax authorities.

Upon receipt of the transfer pricing documentation, the tax authorities will issue a letter of intent if they intend to adjust the taxable income of the corporate bodies under scrutiny. The corporate bodies will be able to comment on the letter of intent but, needless to say, the tax authorities are not bound by such comments. Ultimately the tax authorities will have to issue a final decision before 1 August in the sixth income year following the year under scrutiny.

The taxpayer may appeal the decision to Tax Appeals Agency.8


i Procedure

If the taxpayer has received an assessment adjusting its taxable income and the taxpayer disagrees with the assessment it may lodge an appeal to the Tax Appeals Agency. The Tax Appeals Agency is an independent authority that handles appeals against decisions made by the Danish tax authorities.

The appeal must be filed within three months of the tax authorities' decision to adjust the income.

Once the Tax Appeals Agency receives the appeal from the taxpayer, it will collect the relevant information, including supplementary information from the taxpayer and the Danish tax authorities. The taxpayer may discuss the case and documentation provided with the person handling the appeal.

When the Tax Appeals Agency has all necessary documentation, it will prepare the case and pass it on to a regional appeals board or the National Tax Tribunal for decision. Only in rare circumstances will the Tax Appeals Agency decide the case on its own. Upon the taxpayer's request, the taxpayer and his representatives may present the case in person before the decision-making agency.

The decision made by the National Tax Tribunal or other decision-making agency may be appealed to the Danish court.

ii Recent cases

Only a few cases have been decided by Danish courts. In practice, many transfer pricing cases are settled in agreements between the taxpayer and the tax authorities, ultimately through initiating a mutual agreement procedure to avoid double taxation.

However, the Danish Supreme Court recently published its decision in the Microsoft case,9 in which the tax authorities had disregarded the transfer pricing documentation prepared by Microsoft and adjusted the taxable income on a discretionary basis. The Supreme Court found that for the tax authorities to disregard the transfer pricing documentation it must be of a quality similar to what would be available had documentation not been prepared at all.

The case lasted a total of 10 years, across three different courts. During the handling of the case, the transfer pricing legislation has been amended several times and the implications of the judgment can therefore be debated. However, the case will have a definitive impact on transfer pricing adjustments made under the old rules. Furthermore, the case does provide some guidance as to the quality of the transfer pricing documentation, and it is expected that the tax authorities will be more reluctant to adjust the taxable income of Danish entities on a discretionary basis in future.

Secondary adjustment and penalties

Provided that the tax authorities find that the Danish entity has not acted on arm's-length terms and conditions when dealing with related parties, the tax authorities will adjust the income of the Danish entity to reflect arm's-length terms and conditions (primary adjustment).

If a foreign related party is subject to a primary adjustment, the Danish tax authority will follow up with a corresponding adjustment at the level of the Danish corporate body if the Danish tax authorities agree to the primary adjustment. Hence, the primary adjustment and the corresponding adjustment are a zero-sum adjustment at consolidated level.

The primary and corresponding adjustments equalise the tax treatment of the controlled transaction under review as if the transaction was conducted on arm's-length terms and conditions. However, as a supplement to the primary and corresponding adjustments, the tax authorities may subject the transaction parties to a secondary adjustment.

The tax treatment of the secondary adjustment will be derived from the ordinary tax legislation and principles. In general, a secondary adjustment will be characterised as a dividend distribution or a contribution to the subsidiary.

A secondary adjustment can be avoided – subject to certain conditions being met – if the corporate body that benefitted from the non-arm's-length prices agrees to pay to the other party an amount equal to the transfer pricing adjustment.

Pursuant to Danish legislation, the basic fine for not providing information about controlled transactions in a tax return is 250,000 kroner if the Danish corporate body has a maximum of 50 employees. The fine is increased by 250,000 kroner for each 50 employees to a maximum of 2 million kroner if the Danish corporate body has 400 employees or more.10

The fine for not preparing transfer pricing documentation is 250,000 kroner plus 10 per cent of the transfer pricing adjustment (if any). The transfer pricing documentation fine is reduced to 125,000 kroner plus 10 per cent of the transfer pricing adjustment (if any) if the taxpayer subsequently delivers transfer pricing documentation that meets the requirements.11

Broader taxation issues

i Diverted profits tax and other supplementary measures

Danish tax legislation currently has no provisions on diverted profits tax, or other supplemental measures targeted at digital enterprises.

ii Double taxation

If tax authorities outside Denmark initiate a primary adjustment because of non-arm's-length transactions with a Danish corporate body, the latter may ask the Danish tax authorities to issue a corresponding adjustment at the level of the Danish corporate body.

If the Danish tax authorities agree with the assessment issued by the foreign tax authorities, they will adjust the taxable income of the Danish corporate body. However, this simplified approach requires the Danish tax authorities to agree with the assessment made by the foreign tax authorities.

If the Danish tax authorities disagree with the primary adjustment issued by the foreign tax authorities, they will not issue a corresponding adjustment at the level of the Danish corporate body. For the Danish corporate body to eliminate double taxation, two remedies are available.

First and foremost, Denmark has entered into a significant number of double-tax treaties with foreign countries. Most of these double-tax treaties include an article governing taxation of associated enterprises (similar to Article 9 of the OECD Double Tax Convention) pursuant to which transfer pricing adjustments can be initiated. Additionally, most double-tax treaties entered into by Denmark contain an article providing for a mutual agreement procedure (similar to Article 25 of the OECD Double Tax Convention), which can be invoked to have the respective tax authorities agree on the taxation of the corporate bodies concerned. The Danish tax authorities generally have a good track record in reaching agreements.

If double taxation arises because of a primary adjustment within the EU, double taxation may be avoided by invoking the EU Arbitration Convention.

Although double taxation has been eliminated through negotiations between the states involved, the result of these negotiations cannot per se be relied upon to be considered arm's-length terms and conditions at a future date.

iii Consequential impact for other taxes

Transfer pricing is first and foremost a discipline concerning direct corporate tax. The pricing mechanisms applied in transfer pricing cannot per se be applied to indirect taxes. Hence, a transfer pricing adjustment does not automatically lead to an adjustment of VAT. Whether VAT should be adjusted must be assessed individually in accordance with the rules governing VAT.

Outlook and conclusions

In line with the general trend in international tax, Denmark is in the process of implementing the OECD Base Erosion and Profit Shifting (BEPS) initiatives. Most notably, Denmark has signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). The overall purpose of the MLI is to effectuate the BEPS Actions 2, 6, 7 and 14.

Along with legislative developments in relation to the BEPS project, a number of transfer pricing cases are pending before the courts and the outcomes of these cases have been long awaited and are expected to shed light on the interpretation of existing transfer pricing legislation.


1 Martin Bay is a lawyer and Henrik Stig Lauritsen is a partner at Horten Law Firm.

2 Skattekontrolloven § 38.

3 Skattekontrolloven § 40.

4 Bekendtgørelse om dokumentation af prisfastsættelsen af kontrollerede transaktioner, BEK nr 1297 af 31/10/2018.

5 SKATs Juridiske Vejledning C.D.11.4.

6 SKATs Juridiske Vejledning C.D.11.5.

7 SKATs Juridiske Vejledning C.D.11.6.

8 Landsskatteretten.

9 SKM2019.136.HR.

10 Skattekontrolloven § 84.

11 SKATs Juridiske Vejledning C.D.

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