The issue in the case was whether the applicable rates under the cash pool arrangement were on arm’s length, i.e. in accordance with the transfer pricing requirements.
The Administrative Tax Court upheld most of the conclusions of the tax authorities. First, the Court found that the tax authorities were allowed to assess an arm’s length rate due to the lack of transfer pricing documentation. Second, the financial service fee of 0.25% was upheld. Third, the Court concluded that the rate on the short-term deposits and the corresponding loans (borrowed due to insufficient liquidity management) should be the same.
The Administrative Tax Court observed that there was very little or no creditor risk on these gross corresponding loans/deposits because of the possibility of offsetting the balance. Hence, according to the Court, there was no basis for a spread on the gross balance.
However, the rate spread on the net balance of the deposits was lowered from +1.18% to + 1.15%, equal to the borrowing rate spread. The Administrative Tax Court reasoned that the tax authorities had accepted the 1.15% rate spread as the market rate on loans made by the Danish subsidiary and that there were no facts indicating that the deposit rate should be different.
The Administrative Tax Court also remarked that the adjustment made by the tax authorities was not a recharacterization, but rather a price adjustment.