Denmark vs “Soy A/S”, June 2023, Eastern High Court, SKM2023.316.ØLR

Category: Benchmark, Range and Median, Comparability Analysis, Limited Risk Distributor, Transfer Pricing Documentation, Withholding Tax (WHT) | Tag: , , , , , , , , , , , , , , ,
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Two issues were adressed in this case – transfer pricing and withholding taxes.

The transfer pricing issue concerned whether the Danish tax authorities (SKAT) had been entitled to issue an assessment on controlled transactions made between “Soy A/S” and a flow-through company in the group located in a low tax jurisdiction.

The withholding tax issue concerned whether the 13 transfers actually constituted taxable dividends under section 31, D of the Danish Corporation Tax Act, which “Soy A/S” was subsequently liable for not having withheld tax at source, cf. section 69(1) of the Danish Withholding Tax Act.

Judgement of the High Court

In regards of the transfer pricing issue, the High Court found that the company’s TP documentation was subject to a number of deficiencies which meant that the documentation did not provide the tax authorities with a sufficient basis for assessing whether the transactions were made in accordance with the arm’s length principle. The High Court emphasised, among other things, that the documentation did not sufficiently describe how prices and terms had actually been determined. The High Court also emphasised that there had only been a very general description and very sparse information about the sister company’s business activities, contractual terms and financial circumstances, including no information about to whom and at what prices the goods from the sister company were resold.

SKAT was therefore entitled to make a discretionary assessment of the company’s taxable income.

The High Court found no basis to set aside SKAT’s estimate, as the company had neither demonstrated that the estimate was exercised on an erroneous basis nor led to a manifestly unreasonable result.

The High Court emphasised, among other things, the extent and nature of the deficiencies in the information basis and the fact that SKAT had unsuccessfully attempted to obtain additional information for use in the tax assessment.

As regards the arm’s length interval used by SKAT, the High Court found, after an overall assessment, that SKAT had been entitled to use the interquartile range and adjusted the price to the third quartile. The High Court stated that the company had a central and value-creating function in the group, and that the comparability analysis was based on “limited risk distributors”, which were not directly comparable with the company.

The High Court also found that the foreign sister company had to be considered a pure flow-through company that had no independent business justification in the group. In this connection, the High Court stated that there had been changing information about the sister company’s employees and that there was no documentation that there had been employees to carry out the alleged activities in the company.

The analyses prepared after the tax assessment, including the capital adjustment test and the berry ratio analysis, as well as the other factors invoked by the company could not lead to a different assessment.

In regards of the withholding tax issue the High Court found that the foreign sister company could only be considered to have acted as a flow-through company that did not bear any risk with the commodity trade. The High Court emphasised, among other things, that no hedging contracts had been presented.

In light of the other circumstances of the case, the High Court found that the 13 transfers, which did not take place until 2010, could not be considered to have been made pursuant to the aforementioned agency agreement.

The High Court stated that in the situation at hand, the company had a heightened burden of proof that there was no basis for considering the payments as subsidies/dividends with derived liability for withholding tax. The High Court found that the Danish company had not met this burden of proof through the testimony of the company’s former CEO and auditor.

Finally, the High Court found that the Danish company was aware of all the circumstances surrounding the transfers to the foreign sister company in Y1 country, and that the transfers were very significant without documentation. On this basis, the High Court found that the Danish company had acted negligently and was therefore liable for the missing withholding tax, cf. section 69(1) of the current Withholding Tax Act, cf. section 65(1).

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Denmark vs Soy-Oil AS June 2023





Related Guidelines

  1. TPG2022 Chapter V paragraph 5.13A third objective for transfer pricing documentation is to provide tax administrations with useful information to employ in conducting a thorough transfer pricing audit. Transfer pricing audit cases tend to be fact-intensive. They often involve difficult evaluations of the comparability of several transactions...
  2. TPG2022 Chapter V paragraph 5.15It may often be the case that the documents and other information required for a transfer pricing audit will be in the possession of members of the MNE group other than the local affiliate under examination. Often the necessary documents will be located...
  3. TPG2022 Chapter V paragraph 5.6Each of these objectives should be considered in designing appropriate domestic transfer pricing documentation requirements. It is important that taxpayers be required to carefully evaluate, at or before the time of filing a tax return, their own compliance with the applicable transfer pricing...
  4. TPG2022 Chapter V paragraph 5.34For purposes of Annex III to Chapter V of these Guidelines, the Country-by-Country Report should include all tax jurisdictions in which the MNE group has an entity resident for tax purposes, regardless of the size of business operations in that tax jurisdiction....
  5. TPG2022 Chapter V paragraph 5.12There is a variety of tools and sources of information used for identifying and evaluating transfer pricing risks of taxpayers and transactions, including transfer pricing forms (to be filed with the annual tax return), transfer pricing mandatory questionnaires focusing on particular areas of...
  6. TPG2022 Chapter VIII paragraph 8.52The following information would be relevant and useful concerning the initial terms of the CCA: a) a list of participants b) a list of any other associated enterprises that will be involved with the CCA activity or that are expected to exploit or...
  7. TPG2022 Chapter V paragraph 5.9While ideally taxpayers will use transfer pricing documentation as an opportunity to articulate a well thought-out basis for their transfer pricing policies, thereby meeting an important objective of such requirements, issues such as costs, time constraints, and competing demands for the attention of...
  8. TPG2022 Chapter V paragraph 5.7By requiring taxpayers to articulate convincing, consistent and cogent transfer pricing positions, transfer pricing documentation can help to ensure that a culture of compliance is created. Well-prepared documentation will give tax administrations some assurance that the taxpayer has analysed the positions it reports...
  1. OECD: Report on harmful tax practices, 16 October 2017The OECD report on harmful tax incentives provides details on reviews of 164 preferential tax regimes. Some preferential tax regimes are considered harmful – where these encourage the erosion of other jurisdictions’ tax bases. All 102 members of the BEPS Inclusive Framework have...
  2. German Guidance on Business Restructuring and Valuation issued in October 2010In 2008 German legislation on business restructurings was updated to align with the new chapter XI in the OECD Transfer Pricing Guidelines. § 1 para. 3 AStG and the “Regulation on the application of the arm’s length principle according to §1 para. 1...

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