Transfer pricing: New Danish Supreme Court ruling in favour of company


The Danish Supreme Court ruled on 25 June 2020 in favour of the claimant company in a transfer pricing case regarding trademark royalties, setting aside the Danish Revenue's contention that the royalties were not deductible business expenses and were not on arm's length terms.

The case regarded royalty payments from a Danish resident company to its Swiss parent company as consideration for the Danish company's use of trademarks, access to knowhow, and customer referrals from the group’s international network, etc. under a licence agreement with the parent. The Danish company had been loss-making for consecutive years.


The Danish Revenue contended that (i) the royalties did not constitute deductible business expenses, (ii) if they did, they were not on arm's length terms, and (iii) in any event they should be reduced to zero by offsetting a deemed remuneration from the parent to the Danish subsidiary, since the subsidiary was only kept in operation due the group's general interest in maintaining an entity in Denmark. 


The Supreme Court held that the payments of royalty for the right to use a trademark, access to knowhow, and customer referrals were sufficiently connected to the subsidiary's acquisition of income, notwithstanding that the company, on the whole, had been operating at a loss during the relevant period. Based on the evidence, the Supreme Court was satisfied that the payments were made in return for genuine services to the subsidiary. 

Quality of transfer pricing documentation

First, on the actual transfer pricing question, the Supreme Court held that the company's transfer pricing documentation for the relevant accounting periods was not so insufficient that it was comparable to lack of documentation. For this purpose, the Supreme Court noted that the fact that the Danish Tax Agency disagreed with, or raised legitimate doubt about, the company's comparability analysis did not per se make the documentation highly insufficient. Therefore, the company's income could not be assessed on a discretionary basis. 

Arm's length analysis

Second, the Court then investigated whether the royalty rate (2% of revenue) in the licence agreement was at arm’s length. The Court noted that the subsidiary had presented licence agreements between the parent and unrelated benchmark companies showing that a royalty rate of 2% was being paid for the right to use the trademark and with no access to knowhow or customer referrals. The Supreme Court went on to state:


"We are not satisfied that a 2% royalty rate is not an arm’s length payment or that the financial and commercial circumstances of the benchmark companies differ so much from the Danish company’s circumstances as to render them unsuitable for comparability analysis purposes. The Revenue has not stated what relevant differences exist between the Danish market and the markets in the countries covered by the licence agreements. Thus, the Revenue has not demonstrated that any such differences matter to the rate of royalty an independent party would be willing to pay to [the parent] in those countries.

The fact that [the subsidiary] has been operating at a loss for a number of years cannot, in our opinion, change this, since this is not enough per se to prove, even on a balance of probabilities, that the company was kept going only or primarily in the interests of the group, i.e. in order to preserve a local operating company in Denmark.

Also, the Revenue has, in our view, not proved, even on a balance of probabilities – including through comparability analyses – that [the subsidiary's] marketing in Denmark of [the subsidiary] justifies a deduction from the royalty payment which reflects non-payment of remuneration or compensation for marketing of the global trademark. 

Thus – and since none of the Revenue’s other submissions can lead to any other finding – we believe that a royalty rate of 2% of the revenue would not have been inconceivable between independent parties …


The new judgment follows other defeats to the Revenue in the first transfer pricing cases to reach the Supreme Court since the present Danish transfer pricing regime was introduced in 1998, see our briefings on the Microsoft and Danva judgments.


All cases were handled by Kromann Reumert's tax team led by partner Arne Møllin Ottosen, who argued the cases before the Supreme Court.


The Danish Tax Agency is already taking an aggressive approach to transfer pricing, but further measures were recently announced, including additional resources to target transfer pricing and multinational companies' alleged tax evasion, and a new centre for international corporate tax.