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.”
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