When affiliated companies, shareholders or individuals trade with each other, they must do so at arm's length prices. This price fixing is called transfer pricing. The area is regulated by the tax authorities, who ensure that the pricing and thus the calculation of taxable income is correct.
Transfer pricing ensures that the purchase and sale of goods, services and rights between group companies is carried out at arm's length. This means that prices and terms are set on equal market terms and correspond to what could have been achieved between independent parties.
Among other things, companies must draw up internal rules for settlement within the group, and this pricing is called transfer pricing.
Interactions between group companies are also called controlled transactions or intra-group transactions.
The transfer pricing rules and the arm's length principle aim to prevent artificial prices that can be used to reduce a company's taxable income.
When independent companies, shareholders or individuals trade with each other, prices are usually regulated by supply and demand, but when the parties are connected, they may have common interests that override free market forces. The rules on transfer pricing and the arm's length principle are designed to prevent this.
The rules on transfer pricing and the arm's length principle apply to group companies covered by section 2 of the Tax Assessment Act. These are, among others:
For groups of a certain size, it is mandatory to submit written documentation to the Tax Agency for the transactions that take place internally between the companies in the group.
The requirement applies to groups that have more than 250 employees or a balance sheet total of more than DKK 125 million and that also have a turnover of more than DKK 250 million.
With effect for income years starting on January 1, 2021, new rules have been introduced that relax the documentation requirement for purely Danish controlled transactions. The change means that transactions that take place between Danish companies do not need to be included in the transfer pricing documentation. However, the exemption from preparing transfer pricing documentation does not apply if the transaction takes place between Danish companies that are taxed under different sets of rules.
The arm's length principle still applies to these transactions even though they are exempt from the documentation requirement.
If the transfer pricing documentation is not prepared, is not sufficient or is not submitted on time, the Tax Agency has the right to increase the company's income at its discretion.
Smaller companies are not required to submit written documentation for intra-group transactions, but a company's size is calculated at group level and also includes foreign companies. If a small Danish company is owned by a large international group, it may well be subject to the requirement to document the group's transfer pricing in writing.
Regardless of the size of the group, intra-group transactions with companies etc. in countries outside the EU/EEA with which Denmark does not have a double taxation agreement must always be documented in writing.
Even if a group is below the thresholds for when documentation must be prepared and submitted, it has an obligation to comply with the arm's length principle.
Read more about transfer pricing on Skats website.
If you need advice or practical assistance in connection with transfer pricing or international tax, you are welcome to contact your accountant or inforevision's tax department. You can read more about our advice and assistance to companies here.
Contact Flemming Saabye
Flemming Saabye
Head of the tax department
T 39 53 50 38
fsa@inforevision.dk
Jannik Petersen
Tax Advisor
T 39 53 50 47
JPE@inforevision.dk