A was the sole owner of “C-Advisory Business ApS” established in Denmark in 2003. The company advised and represented taxpayers in cases related to tax deductions for land improvements to immovable property. A was also the sole owner of a company established in Dubai in 2006. The Dubai company provided services for “C-Advisory Business ApS” in Denmark and a total of DKK 78,785,549 was expensed in FY 2006-2010 relating to the purchase of these services. The Danish tax authorities considered that the payments had not been at arm’s length and reduced the service fees to the Dubai company to DKK 20 million for the income years in question. This resulted in additional taxable income of “C-Advisory Business ApS” in a total amount of DKK 58,5 million. Following an unsuccessful complaint to the Tax Tribunal, “C-Advisory Business ApS” filed an appeal with the regional court where a judgement was issued in June 2021. The Regional Court found, that the tax authorities had been entitled to exercise discretion over the pricing of the controlled transactions as the transactions had not been priced at arm’s length and the transfer pricing documentation did not provide the tax authorities with a sufficient basis for assessing whether the arm’s length principle had been complied with. An appeal was then filed by “C-Advisory Business ApS” with the Supreme Court. Judgement of the Supreme Court The Supreme Court upheld the decision of the Regional Court and found in favour of the tax authorities. The Court considered that the tax authorities had been entitled to exercise discretion in relation to pricing of the controlled transactions at issue and that there were no grounds for setting aside the tax assessment “(…) Whether the tax authorities were entitled to exercise a discretion in respect of the controlled transactions It is accepted, for the reasons given by the Court, that the tax authorities have established that the transfer pricing documentation is so deficient that it did not provide the tax authorities with a sufficient basis for assessing whether the arm’s length principle was complied with. As stated by the Regional Court, in assessing whether the pricing between C and the Dubai company was at arm’s length, it must be borne in mind, inter alia, that it followed from the Service Agreement concluded and the allonge thereto that in 2006-07 the Dubai company received a management fee consisting of a fixed base fee of DKK 800,000 and a profit-based fee of 50-70% of C’s profits, and that in 2008-10 the Dubai company received a base fee with full cost recovery plus the same profit-based fee. The Supreme Court finds, as did the Regional Court, that it has been established that C would not have entered into an agreement on those terms with an independent company. The Supreme Court therefore holds that the tax authorities were entitled to set aside C’s pricing and instead exercise discretion in relation to the controlled transactions in order to determine what C would have paid to the Dubai company for the purchase of the services if they had been independent contracting parties. Whether there is a basis to set aside the estimate SKAT’s estimate of C’s payments for the services provided by the Dubai company is based on the TNM method as a pricing method. In applying the TNM method, SKAT calculated the Dubai company’s transfer prices for the provision of services to C by carrying out a benchmark analysis of 25 law firms and audit firms, using return on total cost (RoTC) as a profit level indicator. RoTC is calculated by dividing the firms’ profits (earnings before interest and tax) by their costs (total costs). The benchmark analysis showed a market RoTC with a median of 6.72% and on this basis the tax authorities have estimated that the Dubai company is entitled to a profit of 6.72% of the Dubai company’s expenses. C’s expenditure on the Dubai company was then estimated for tax purposes to be approximately DKK 20 million for the period 2006-10. For the reasons stated by the Regional Court, the Supreme Court finds that C and B have not demonstrated that the TNM method was not applicable as a pricing method. C and B submit that SKAT’s calculation does not take account of the fact that a partner in a law firm – as described, inter alia, in the Competition Council’s analysis report of 14 January 2021 on ‘Competition in the legal profession’ – receives both payment for his work and remuneration for ownership in the form of a share of the law firm’s profits. The Ministry of Taxation has submitted to the Supreme Court a calculation which, according to the Ministry, shows that a discretionary tax assessment based on the conclusions of the said report would not have resulted in a lower tax assessment than the tax assessment calculated by SKAT based on the application of the TNM method and RoTC as described above. The Supreme Court considers that, with regard to this calculation, C and B have not provided any evidence that the tax authorities’ estimate rests on an incorrect or inadequate basis or is manifestly unreasonable. There are therefore no grounds for setting aside the tax authorities’ assessment and referring the case back to the Court.” Click here for English translation Click here for other translation ...

The case concerned a Danish company that provided legal services regarding tax deductions for improvements to real estate, etc. In 2006, the owner of the Danish company moved to Y2 city and in the process established a company in Y2 city, which would then provide services to the Danish sister company, including legal advice. The tax authorities had increased the Danish company’s taxable income by an estimated total of approximately DKK 58.4 million, as the tax authorities considered that the company’s transfer pricing documentation was sufficiently deficient, in accordance with Section 3 B(8) of the Tax Control Act, cf. Section 5(3), and that the service agreements were not concluded at arm’s length in breach Danish arm’s length provisions. Judgement of the High Court The tax authorities were entitled to exercise discretion over pricing of the controlled transactions as the transactions had not been priced at arm’s length and the transfer pricing documentation was deficient. “The case shows that SKAT’s estimate of H2 ApS’s payment (management fee) for the services provided by G1 is based on the TNM method as a pricing method, which is justified in particular by the fact that G1 was a simple service/service provider. Furthermore, the case shows that in calculating G1’s transfer prices for the provision of services to H2 ApS, SKAT carried out a benchmark analysis of 25 comparable law firms and audit firms using Return on Total Cost (hereinafter RoTC) as a profit level indicator. It is stated that RoTC is calculated by dividing the companies’ profits (earnings before interest and tax) by their costs (total costs). The benchmark analysis showed a market RoTC median of 6,72 %, which implied that the tax authorities considered G1 eligible to earn a profit of 6,72 % in relation to G1’s expenses and that G1’s expenses with the said mark-up could be approved as the amount of H2 ApS’s expenses to G1 for tax purposes for the period 2006-2010 (approximately DKK 20 million). The High Court accepts, after an overall assessment, that the services provided by G1 to H2 ApS are comparable to the services provided by law firms and auditing companies and that the applicants have not demonstrated that the TNM method was not applicable as a pricing method, also referring to the above-mentioned reason why, in the High Court’s view, the profit-split method was not the appropriate pricing method to apply in relation to the controlled transactions. The High Court considers that, on the basis of the evidence submitted – in particular in the light of the calculation of the profit rate in the legal sector contained in the Competition Council’s analysis report of 14 December 2005 – the applicants have not established that the profit-split method was applied. In the light of the evidence, including the evidence of the profitability analysis carried out by the tax authorities, as set out in the Competition Authority’s report of 14 January 2021 on ‘Competition in the legal sector’, the applicant submits that the tax authorities’ estimate in the present case is based on an incorrect or inadequate basis capable of influencing the estimate, having regard also to the fact that the Y2 company mainly provided legal services and that approximately half of the companies included in the SKAT benchmark analysis are law firms. In this respect, the Court of Appeal has emphasised in particular that it follows from the above-mentioned analysis report that a partner in a law firm receives a salary for work performed as well as a remuneration for ownership in the form of a share of the law firm’s profits, that if the partners’ income is calculated on the basis of their personal income – which includes both a salary for work performed as well as a remuneration for ownership – the profit rate in the legal sector was between 30 and 35 %. in the years 2012 to 2018, and that the profit rate was around 20 per cent in those years if the remuneration for the partners’ work is adjusted. The High Court thus considers that the calculation method used by SKAT does not take proper account of the remuneration structure of law firms and that SKAT’s benchmark analysis thus arrived at a profit rate which is not accurate. In doing so, the High Court also took into account that it follows from TPG 2010, points 2.90-2.91, 2.92 and 2.97, that profit level indicator may be, inter alia, net profit in relation to turnover (sales), costs (costs) or assets (assets), see also section C.D.11.4.1.4 of the Legal Guide 2021-1. On the basis of the above, the High Court remands the tax assessment for Rafn & Søn ApS and, consequently, the determination of the joint taxable income for PB Holding ApS for the income years 2006-2010, as regards the amount of DKK 33,699,860, to be reviewed by the Tax Agency in order for the Tax Agency to take due account of the remuneration structure of the law firms in the discretionary assessment.” Click here for English translation Click here for other translation ...