In 2021, the Danish Tax Agency "Skattestyrelsen" announced a stricter approach to the country’s transfer pricing documentation, introducing mandatory filing and penalties. More than a year has passed since the changes came into effect and for groups with local presence, or operations, in Denmark it is time to review their annual reporting obligation, to avoid being subject to penalties for non-compliance. In this article, we share the latest news on the Danish transfer pricing rules and how the tax landscape has been affected since they were introduced.
In 2021, the Danish transfer pricing documentation requirements became more strict. The new rules entail mandatory filing of transfer pricing documentation, consisting of a Master File and one or several Local Files. The documentation should be filed together with the corporate income tax return. The filing deadline requires the transfer pricing documentation to be submitted no later than 60 days following the Group’s filing deadline for its income tax return.
In addition, intercompany agreements and comparability studies (benchmarks) supporting the transfer pricing methods applied by the Group, are now also requested to be submitted in connection with the filing of the corporate income tax return. The new requirements differ drastically from the previous requirements in Denmark, when it was only required to have completed the transfer pricing documentation at the time of the filing of the corporate income tax return.
The Danish Transfer Pricing Rules
The mandatory filing requirements of transfer pricing documentation applies to businesses with 250 or more employees, and businesses reporting a turnover exceeding DKK 250 million, and a balance sheet exceeding DKK 125 million (consolidated at group level).
For most Groups affected, this means that the documentation must be filed with the Danish Tax Agency within 60 days from June 30th 2023.
Penalties for late filing may amount to DKK 250 000 per company and financial year, and an additional 10 percent of the taxable income in the event of a potential income adjustment. In case of a dispute, there is a reversed burden of proof, which could potentially result in time-consuming and costly processes. To avoid this, we would like to stress the necessity of preparing a complete transfer pricing documentation (including a group Master File and one or several Local Files covering the Group entities subject to the reporting obligation) and necessary supporting documents, such as comparability analyses (benchmarks) and inter-company agreements.
It is important to note that the Danish documentation requirements apply to several types of entities, including Danish subsidiaries, branches, and permanent establishments.
Looking at the latest data regarding last year’s filings, currently the Danish Tax Agency has received approximately 5 000 transfer pricing documentation reports from the approximately 8 000 companies that were considered to be subject to the filing obligations covering financial year 2021. New data is expected shortly as many companies submitted their documentation in December 2022, either due to their financial year, or due to having received an extended submission deadline.
Approximately 300 of the companies subject to the regulations and the stricter reporting requirements covering financial year 2021 are expected to be subject to random review and a potential audit from the Danish Tax Agency. Excluded from the above-mentioned companies are larger Danish Groups that the Danish Tax Agency already audits on an ongoing basis, as well as companies already subject to systematic review for e.g., the acquisition or disposal of intangible assets at a value above DKK 200 million.
In addition to random reviews and potential audits, the Danish Tax Agency could potentially carry out further audits of the reported documentation regarding the financial year 2021.
With regard to penalties, the Danish Tax Agency has started investigating the companies that have reported cross-border transactions in its corporate tax return but have not submitted any transfer pricing documentation, with the aim of issuing potential penalties for non-compliance. Some of these companies have actually already received information on the fact that they will be fined.
The Danish Tax Agency may also follow up with companies that have not identified themselves under the reporting obligations and thus have not reported transfer pricing documentation, but exceed the transfer pricing documentation reporting thresholds.
The filing deadline for this year’s transfer pricing documentation is confirmed to August 29th, 2023 (for companies with corporate income tax return deadline at the end of June) and the possibility of getting a deadline extension approved this year is expected to be significantly lower.
In light of the new rules, it is important that businesses present in Denmark annually review their routines and fiscal management in order to ensure timely and correct compliance.
As a first step, companies should look into the threshold values for transfer pricing documentation requirements in order to gain a further understanding of whether the Group, through its Danish presence, is obligated to file under the mandatory submission requirements.
In the event that the threshold values for the reporting obligation are not exceeded, Groups operating in Denmark should in any case ensure having relevant documents prepared, in addition to having a functional and risk analysis in place as these can provide protection in the event of a potential tax audit. A complete transfer pricing documentation that leaves little room for interpretation can also act as protection in an audit performed by the Danish Tax Agency.