Denmark

Concept and Regulation in Denmark

In 2012, the Danish parliament passed a Transfer Pricing bill to strengthen measures against zero-tax companies. The bill introduced new and stricter regulations for companies performing controlled transactions.

The changes introduced by this bill are the tightening of specific penalties for transfer pricing non-compliance and the introduction of the possibility for the Danish Tax Authority (Skattestyrelsen) to request opinions from independent auditors.

Upon passage of Bill L28/2020, on December 3, 2020, Danish companies must file the Master File and the Local Report to the Danish Tax Authority within 60 days after the deadline for filing the corporate income tax return.

In November 2021, The Danish Ministry of Finance issued updated guidance regarding amendments to the transfer pricing rules requiring the filing of transfer pricing documentation.

Arm’s Length Principle: Concept

The Tax Assessment Act, Section 2, contains the Arm’s Length Principle provision with direct reference to that described in the OECD Transfer Pricing Guidelines.

The application of the Arm’s Length Principle implies that the prices and terms of the related transaction are compared and possibly replaced by the Arm’s Length prices and terms that would be agreed upon if the same transaction had occurred between independent parties.

Definition of Related Parties in Denmark

According to the Tax Assessment Act, Section 2, and the Tax Control Act, Section 37, a company or an individual must (directly or indirectly) own more than 50% of the share capital or control more than 50% of the votes or have an agreement regarding controlling equity stake in another company to be considered a related party.

Transfer Pricing Methodology in Denmark

According to Section 2 of the Tax Assessment Act, the transfer pricing methods applicable in Denmark are as follows:

Comparable Uncontrolled Price Method.
Cost Plus Method.
Resale Price Method.
Profit Split Method.
Transactional Net Margin Method.

The taxpayer will be able to apply the most appropriate method.

Transfer Pricing Documentation in Denmark

A company must prepare transfer pricing documentation in Denmark if:

The company is part of a group employing 250 or more employees.
The company has revenues exceeding DKK 250 million and a balance sheet total exceeding DKK 125 million.
The company has transactions between companies located outside the European Union or in countries with which Denmark does not have a double taxation agreement, regardless of the size of the group.

The Danish Transfer Pricing documentation structure can be filed in Danish, Norwegian, Swedish, or English, consisting of the following:

Local Report

The Local Report must provide information concerning the specific entity and its controlled transactions with affiliated companies on the following aspects:

Management structure and reporting lines of the local entity.
Intercompany transactions during the year under analysis.
Relevant intercompany agreements.
Description of the transfer pricing method used and its application.
Financial information of local entities.

Master File

The master file must provide an overview of the group’s activities and include information on the following aspects:

The organizational structure.
Geographical locations of the transactions.
The main value chain and drivers of business profits.
The group’s business activities.
Intangible assets.
Information on the group’s financing.

Country by Country Report

The multinational groups with a consolidated turnover of at least DKK 5.600 million must file the Country-by-Country Report. The ultimate parent company resident in Denmark must file the Country-by-Country Report.

The Country-by-Country Report must be filed to the Danish Tax Agency within 12 months of the closing date of the group’s reported consolidated financial statements.

Transfer Pricing Penalties in Denmark

Missing or insufficient transfer pricing documentation exposes the taxpayer to possible penalties for non-compliance with the transfer pricing requirements. In order to sanction insufficient Transfer Pricing documentation, the tax authorities have the burden of proof that the insufficient documentation is due to gross negligence or willful misconduct of the taxpayer.

As a starting point, the penalty is DKK 250,000 (approx. €33,500) per legal entity per year. If sufficient Transfer Pricing documentation is subsequently prepared and filed, the penalty will often be reduced to DKK 125,000. In addition, a 10% penalty may be imposed on a possible income adjustment.

Therefore, the preparation and filing of the Master File and the Local Report are essential to avoid significant penalties.

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