By Michael Vorndran, Nord Advisory AS, Oslo, Norway
Denmark’s National Tax Tribunal on 8 October rejected the Danish tax authority’s assessment of additional taxes in a transfer pricing case involving the liquidation of a Danish subsidiary associated with a group-wide restructuring.
The court rejected the tax authority’s assessment of a deemed intercompany compensation charge. The decision is important because it may set the stage for evaluating deemed transactions going forward.
Deemed intercompany compensation charge
In the case, (SKM2018.510LSR), the Danish tax authority made a discretionary adjustment assessment against a taxpayer undergoing a restructuring of a deemed intercompany compensation charge.
The tax authority argued that the company’s transfer pricing documentation was incomplete as it did not include information relating to the restructuring and did not include a compensation charge as a controlled transaction.
The Danish tax authority argued that the compensation charge, which would increase the Danish subsidiary’s taxable income by the amount of the costs of the closure, reflected the benefit of the closure for the group following restructuring. The tax authority further argued that the compensation charge would have been agreed between unrelated parties since the remaining group would have had to pay for the subsidiary’s closure costs.
Adjustment rejected
The National Tax Tribunal rejected the legal basis for the discretionary adjustment as the taxpayer’s transfer pricing documentation in question predated the introduction of formal documentation content requirements in Denmark.
The Tribunal concluded that the tax administration failed to prove that a transfer of assets between related parties had occurred and noted that no contractual relationships existed to provide a basis for a compensation charge.
The National Tax Tribunal’s rejection of the compensation charge with respect to arm’s length conditions should assist in assessing deemed transactions going forward.
The case also demonstrates the importance of compliant transfer pricing documentation for taxpayers to avoid discretionary adjustments under audit.
–-Michael Vorndran is a principal with Nord Advisory AS, Oslo, Norway, and can be reached at [email protected] or +47 902 53 142
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