The case concerned the valuation of certain intangible assets in connection with a company’s transfer of these assets to a newly established group company. After the transfer, the company was to continue to provide sales and service activities and routine functions relating to the intangible assets to the newly established group company. The company had two transfer pricing valuation reports prepared, both of which used the DCF method to calculate the value of the transferred intangible assets. The reports calculated the value of the entire business, after which the value of the transferred intangible assets was calculated by deducting the value of the routine functions. The required rate of return for the entire business was set at 20%, while the required rate of return for the routine functions was set at 8%. The Danish tax authorities found that the company had submitted proper TP documentation, which meant that it was not possible to make an discresionary assessment. It was then incumbent on the Danish Tax Agency to prove that the agreed transfer price was not in accordance with the arm’s length principle, cf. section 2 of the Danish Tax Assessment Act. The tax authorities assessed the value of the transferred intangible assets on the basis of the share price at the time of the purchase of a company in the year prior to the transfer. Judgment The National Tax Tribunal found that by applying different return requirements to the routine functions and the business as a whole, the company had overestimated the value of the routine functions, which meant that the valuation of the intangible assets was not at arm’s length. During the transfer pricing audit, the tax authorities had prepared a DCF calculation based on the company’s valuation report dated two months prior to the transfer, with the difference that the calculation applied a return requirement of 20% for both routine functions and the entire business. The National Tax Tribunal found that the tax authorities’ DCF calculation based on the company’s valuation report, which, however, used the same return requirement for routine functions as for the entire business, was in accordance with the arm’s length principle. Since the tax authorities’ assessment had been made in a timely manner, the National Tax Tribunal upheld the assessment in part but reduced the amount by DKK 60,285,283. Excerpt “The company was founded in 20XX. Until the transfer of the intangible rights to H7 on […] 20XX, the company owned and operated, also through subsidiaries, the business of developing and selling […]. It must be assumed that the routine functions, including the associated know-how, associated with such operations in the form of sales and marketing services were built up by the company and its subsidiaries over a number of years and, given their nature, could not simply be replaced by H7 after the transfer of the intellectual property rights. In these circumstances, the National Tax Tribunal finds that the routine functions in question had a value. In the ÅrY report, R1 used a return requirement of 8% when calculating the value of the routine function, which differs from the return requirement of 20% used for the group as a whole. The value of the routine functions calculated by R1 is based on the expected future remuneration that the routine companies will receive for providing services to H7. The National Tax Tribunal finds that the Company’s valuation of the routine functions is overestimated and that the valuation of the transferred intangible assets has therefore not been at arm’s length. The risk associated with the company’s sub-activities was thus closely linked to the overall business concept and the risks involved. It appears from TPG 2022, section 6.171, that it is the specific circumstances and risks in a case and the specific cash flow that should be assessed when determining an appropriate discount rate. The National Tax Tribunal finds that the risk associated with the budgeted cash flow for routine functions cannot be considered less than the risk associated with the budgeted cash flow for the business as a whole. This also takes into account that H7 could terminate the contracts with the routine companies at short notice and that the Company did not contract with third parties, cf. the valuation report. The National Tax Tribunal therefore finds that the value of the routine functions must be assessed using the same return requirement as that used for the business as a whole. During the transfer pricing audit, the Tax Agency performed DCF calculations, which it sent to the Company’s representative. These calculations are based on the Company’s approach to the valuation of routine functions, with the difference that a return requirement of 20% is applied to routine functions, which resulted in a calculated value of EUR […] million for the transferred intangible assets. The Tax Authority’s DCF calculation is based on R1’s valuation report of […] March 20XX, which applies a return requirement of 20% for routine functions. The Tax Authority’s DCF calculation based on R1’s valuation report of […] March 20XX, which applies a return requirement of 20% for routine functions and the business as a whole, is accepted as being in accordance with the arm’s length principle. The value of the transferred intangible assets is thus assessed at EUR […], corresponding to a reduction of EUR 8,087,208 according to the Danish Tax Agency’s valuation of the intangible assets ( ). The reduction is converted into Danish kroner at the same exchange rate used in the Danish Tax Agency’s decision.” The decision has subsequently been brought before the courts. Click here for English translation Click here for other translation ...