Denmark vs Pharma Distributor A A/S, March 2020, National Court, Case No SKM2020.105.OLR

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The case concerned a Danish group engaged in distribution of pharmaceuticals. The TP documentation showed, using the TNM method, that the company’s earnings (EBIT margin) were, on average, significantly below an arm’s length range of net profit (benchmark), but by disregarding, among other things, the annual goodwill amortization of DKK 57.1 million, the average EBIT margin was within the benchmark.

The goodwill that was being amortized in Pharma Distributor A A/S had been determined under a prior acquisition of the company and later, due to a merger with the acquiring danish company, booked in Pharma Distributor A A/S.

The main question in the case was whether Pharma Distributor A A/S were entitled to disregard the goodwill amortization in the comparability analysis. The national tax court had ruled in favor of the company, but the national court reached the opposite result. Thus, the National Court found that the goodwill in question had to be regarded as an operating asset, and therefore the depreciation had to be regarded as operating expenses when calculating the net profit (EBIT margin).

In 2017 the Danish tax tribunal found in favor of Pharma Distributor A A/S

However, The Danish National Court found that the controlled transactions had not been priced in accordance with the arm’s length principle in section 2 (2) of the Tax Assessment Act. 1, and that the tax authorities was therefore basically justified in assessing the income of Pharma Distributor A A/S. But there was no basis for adjustment for the income year 2010, where the EBIT margin of the company (including goodwill amortization) was within the interquartile range of the benchmark.

The National Court further found that Pharma Distributor A A/S had not demonstrated that the companies whose results were included in the benchmark possessed goodwill that was simply not capitalized and which corresponded approximately to the value of the goodwill in Pharma Distributor A A/S. Therefore, the National Court did not find that adjusting for goodwill amortization in the comparability analysis, would make the comparison more correct.

Pharma Distributor A A/S also claimed that special commercial conditions (increased price competition, restructuring , etc.) and not incorrect pricing had led to lower earnings. The Court found that such conditions had not been demonstrated by the company.

On this basis, the National Court found that the tax authorities was entitled to make the assessment of additional income in FY 2006-2009, but not for FY 2010.

The court found that, when adjusting the taxable income, an individual estimate must be made for each year, based on what income the defendants could be assumed to have obtained if they had acted in in accordance with the arm’s length principle. The court referred the case for re-assessment of the taxable income for FY 2006-2009.

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SKM2020-105-olrn