Denmark vs. “H Borrower and Lender A/S”, January 2021, Tax Tribunal, Case no SKM2021.33.LSR

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“H Borrower and Lender A/S”, a Danish subsidiary in the H Group, had placed deposits at and received loans from a group treasury company, H4, where the interest rate paid on the loans was substantially higher than the interest rate received on the deposits.

Due to insufficient transfer pricing documentation, the tax authorities (SKAT) issued a discretionary assessment of taxable income where the interest rate on the loans had been adjusted based on the rate received on the deposits.

Decision of the Tax Tribunal

The National Tax Tribunal stated that the documentation was deficient to such an extent that it could be equated with a lack of documentation. The tax authorities had therefore been entitled to make a discretionary assessment. The National Tax Tribunal referred, among other things, to the fact that the company’s transfer pricing documentation lacked a basic functional analysis of the group treasury company with which the company had controlled transactions.

The National Tax Tribunal finds that the company has not proved that SKAT’s estimates are not in accordance with the arm’s length principle. It is hereby emphasized that the company has received a loan from H4, where the interest rate is based on a base interest rate plus a risk margin of 130 bps. Thus, the interest paid on these loans has been higher than the interest received by placing liquidity with H4. The National Tax Tribunal does not find it proved by the company that these two cash flows should constitute different financing instruments with different risks, and that the interest rates must therefore be different. The lack of functional analysis for H4 in the TP documentation means, in the opinion of the National Tax Tribunal, that it cannot be considered to be in accordance with the arm’s length principle, that H4 must receive a proportionately higher interest payment from the company than what is paid to the company. In this connection, it is taken into account that H4 has no employees and thus cannot be considered to have control over the risks associated with the various controlled transactions. The fact that the company has entered into different contractual obligations for the two cash flows is given less weight due to the lack of a functional analysis for H4.

The company’s argument, that the interest rate for deposits with H4 according to the National Tax Tribunal’s previous decision, published by SKM2014.53.LSR, must be determined without a risk margin as there is a full set-off against the company’s loan from H4, can not be taken into account, as the interest rates for the two cash flows in this way would be different.

The National Tax Tribunal finds that the decision in SKM2014.53.LSR must be interpreted as meaning that the interest rates for comparable cash flows, that are fully hedged between two related parties, must carry the same interest rate, as the cash flows in this way will cancel out each other.”


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