These cases concerned whether the tax authorities had been entitled to exercise an assessment of two types of intra-group transactions made between H1 A/S and a number of group companies. The cases also concerned whether, if so, the tax authorities’ estimated assessment could be set aside. The two types of controlled transactions were employee loans (IAA) and royalty payments for access to and use of intangible assets.
The employee loans (IAA) were temporary intra-group loans of “idle” employees who were not in the process of or were about to perform specific tasks for the operating company in which they were employed. To a large extent, these were cross-border employee loans. In the employee loans, the borrowing operating company provided a consultancy service to a customer, and it was also the borrowing operating company that bore the business risk.
The TP documentation stated that the lending operating company did not provide a consultancy service and that the earnings on a consultancy service were therefore too high in relation to the functions and risks assumed by the lending company in the internal lending of employees. Regardless of this, H1 A/S had, when valuing the employee loans, compared the lending service with services from other consultancy companies. It was also stated in the TP documentation that the valuation was based on accounting data from the 16 operating companies in the H1 group, which accounted for the majority of the income regarding intra-group employee loans. As it was reportedly not possible to isolate the specific costs and income associated with the employee loans, the valuation was based on the companies’ combined income statements.
The royalty payments related to H1 A/S’ use of the Group’s intangible assets, which were reportedly owned by a Y1 country operating company, G1 company. In the case, it was stated that the H1 Group’s operating companies’ intangible assets and future development and improvements of the same had been transferred to the G1 company, and the other operating companies’ access to the use of the Group’s intangible assets was regulated in licence agreements entered into between the G1 company and the operating companies.
The Y1-country company G1 company had 9-11 employees who primarily had administrative and coordinating functions, and they did not make unique contributions to the development of the intangible assets. The parties agreed that the development of the intangible assets took place in the group’s operating companies, and it was also agreed that H1 A/S, like the other operating companies in the group, possessed local intangible assets, e.g. in the form of customer relations, a highly specialised workforce and goodwill, which had an impact on the company’s results.
Regarding the royalty payments, it appeared from the TP documentation that the valuation was based on a residual profit split method, and that it was G1 companies – as the owner of all economic rights to the group’s intangible rights – should receive the entire residual profit, while H1 A/S should only receive a routine remuneration.
Judgment of the Court of Appeal
The Court of Appeal found that the TP documentation for the employee loans (IAA) was deficient, including, among other things, that it did not contain a comparability analysis explaining how the adjusted accounting figures for the selected comparable consultancy companies should show the market price for the internal employee loans. The Court of Appeal found that the TP documentation was deficient to such an extent that it had to be equated with a lack of documentation. The tax authorities had therefore been entitled to assess H1 A/S’ taxable income on a discretionary basis in the income years in question.
As regards the royalty payments, the Court of Appeal found it established that H1 A/S had not acted in accordance with what independent parties would have accepted (the arm’s length principle) when making the intra-group royalty payments. In its assessment, the Court of Appeal emphasised, among other things, that it had not been established that the 9-11 employees in the G1 company had the necessary functional and competence capacity to make significant decisions regarding the development work in the group, which is why it was not in accordance with the arm’s length principle that the G1 company should receive the entire residual profit according to the residual profit split method. The tax authorities were therefore entitled to assess H1 A/S’ deduction for royalty payments on a discretionary basis.
The Court of Appeal found no basis to set aside the tax authorities’ estimate (neither for the employee loan nor for the royalty payments), as H1 A/S had not demonstrated that the estimate had been exercised on an incorrect or deficient basis or that the estimate had led to a manifestly unreasonable result.
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