Taxpayers with controlled transactions must attach a transfer pricing annex to their income tax return, consisting of a so-called Controlled Transactions Form reporting high-level information on the taxpayer and its controlled transactions. The information to be reported on the Form includes a description of the business activity and the number and location of controlled/related parties. Additional more detailed information is required to be submitted where the value of controlled/related party transactions exceeds DKK 5 million. The Form is available in two versions: 05.021 (Danish version) and 05.022 (English version).
The transfer pricing documentation should be prepared contemporaneously. Effective 1 January 2021, the transfer pricing documentation must be submitted to the Tax Agency (SKAT) within 60 days from the due date for filing the annual corporate income tax return (previously, it was required to be submitted within 60 days from a request by SKAT). However, an extension may be granted by SKAT in extraordinary circumstances. The tax authorities are empowered to make adjustments based on estimated assessment when transfer pricing documentation is not available.
Effective for tax years beginning on or after 1 January 2021, transfer pricing documentation is required to be prepared for controlled transactions where:
- One party is a foreign natural or legal person, or constitutes a permanent establishment located in the Faroe Islands, in Greenland, or in a foreign state; or
- One party is subject to special tax rules in Denmark including the Tonnage Tax Act or the Hydrocarbon Tax Act unless all parties to the transaction are taxed only under the relevant act, or subject to certain other special rules of the Corporation Tax Act.
This relaxation in documentation is provided vide Law no. 2194.
The transfer pricing documentation is mainly based on the OECD guidelines, which includes the following:
- Local file referring specifically to material and controlled transactions of the local taxpayer;
- Master file containing standardized information relevant for all the members of a Multinational Enterprise (‘MNE’) Group; and
- Country-by-Country (CbC) report containing certain information relating to the global allocation of the multinational group’s income and taxes paid together with certain indicators of the location of economic activity within the group (see below).
A simplified, less-onerous regime applies to companies qualifying as SMEs as defined under EU law. A company so qualifies if it has:
- Less than 250 employees; and
- A balance sheet total of less than DKK 125 million; or
- An annual turnover of less than DKK 250 million.
Eligible SMEs must still comply with the arm’s length principle but are released of a number of the onerous formal requirements (but not of the tax return disclosure annex). Also, the administrative relief provided does not extend to transactions with entities/permanent establishments in non-EU/EEA countries with which Denmark does not have a tax treaty.
Upon request from the SKAT, a taxpayer must submit an independent auditor’s statement regarding compliance with the arm’s length principle, within 90 days of such request. An independent auditor’s statement may only be requested from companies that either have transactions with related parties in non-EU/EEA countries with which Denmark does not have a tax treaty, or which have incurred a negative operating profit for 4 consecutive years.
Master file requirements apply in Denmark from the reporting fiscal years beginning on or after 1 April 2017. The Master file must be prepared and maintained by enterprises that have declared revenue exceeding EUR 50 million or its DKK equivalent for each year of assessment, as recorded in the books of account.
The contents of the Master file include the following:
- Details of the MNE's organizational structure, including a chart illustrating the MNE’s legal and ownership structure and geographical location of operating entities;
- Description of the MNE’s business(es), including important drivers of business profit, description of the top five goods or services of the MNE group by revenue, important service arrangements between members of the MNE group, and other information;
- Description of the MNE’s intangibles, including a description of the MNE's strategy regarding intangibles, location of R&D facilities and management, a list of important intangibles of the MNE group, transfer pricing policies regarding R&D and intangibles, and other information;
- Details of the MNE's intercompany financial activities, including how the group is financed, financing agreements with unrelated lenders, group members providing a central financing function for the group and other information; and
- Information on the MNE's financial and tax positions, including annual consolidated financial statements for the year concerned and a list and description of any existing advance pricing agreements (APA) and tax rulings related to the allocation of income.
If the Master file for the relevant year is not ready by the deadline for submission of the transfer pricing documentation (see above), the Master file for the prior income year can be submitted as a preliminary Master file provided it is less than one year old. The taxpayer must state by when the Master file for the relevant year will be submitted and also briefly describe any significant changes concerning the taxpayers that are not covered in the local file (country-specific documentation). An extension of deadline for submission of Master file can be requested in all cases. However, the extension must be compulsorily requested if:
- A Master file less than a year old is not available; or
- The taxpayer will not be able to submit the Master file for the relevant year before the preliminary Master file becomes one year old.
The contents of the Local file must include the following:
- Taxpayer’s address and ID number;
- Legal and organizational structure;
- Summary of statutory financial results of the last three years (for each party to the controlled transactions);
- Description of the group and Danish company’s business and structure;
- Justification of losses incurred, if any;
- Description of all controlled transactions (including value);
- Description of products or services transferred in the controlled transactions;
- Analysis of functions performed, risks assumed, and assets employed by each party to the controlled transactions, i.e., description of the value chain;
- Comparability analysis, including terms and conditions of controlled transactions;
- List of inter-company agreements;
- Description of TP methods considered;
- Selection of the most reliable method;
- Rejection of methods not selected as most reliable;
- Description of the relevant database searches, if any; and
- Assumptions, strategies, and policies, if any, that influenced the determination of the transfer prices.
More than one company can be included in a single documentation report, as well as several financial years, and multiple transactions can be tested and covered by the same report. However, if multiple companies or financial years are included in the same report, it is a requirement of the SKAT that the report specifies for which company and for which year the specific information applies.
Denmark has implemented Country-by-Country (CbC) reporting requirements in line with BEPS Action 13 from 1 September 2016. The requirements are applicable to companies that are members of an MNE group with consolidated group revenue of DKK 5.6 billion or more in the previous year.
The primary reporting obligation falls on the ultimate parent entity of the group (UPE) if resident in Denmark. Under a secondary filing obligation, constituent (non-UPE) entities are required to file locally in Denmark if:
- The UPE is not resident in Denmark and is not obligated to file a CbC report in its jurisdiction of residence;
- The UPE’s jurisdiction of residence has a current international agreement with Denmark but does not have a qualifying competent authority agreement in effect with Denmark by the time the CbC report is due; or
- An agreement is in place, but there has been a systemic failure for spontaneous exchange of CbC reports with the UPE’s jurisdiction of residence, and the failure has been notified by the Danish tax authority to the constituent entity resident in Denmark.
Where there are more than one Danish constituent entities of the same MNE Group and one or more of the conditions set out above apply, the MNE Group may designate one of such constituent entities to file the CbC report and notify the Danish tax authority that the filing is done on behalf of all the constituent entities in Denmark.
Further, the non-parent local filing requirement is not applicable where a surrogate parent entity (SPE) (i.e., a constituent entity appointed as a sole substitute for the ultimate parent company to file the CbC report) is designated in a jurisdiction. The SPE must file the CbC report with the tax authority of its jurisdiction of tax residence no later than 12 months after the last day of the reporting fiscal year of the MNE Group. The following conditions are required to be satisfied:
- The jurisdiction of tax residence of the SPE requires the filing of CbC Reports conforming to the requirements mentioned in the Danish tax regulations;
- The jurisdiction of tax residence of the SPE has a Qualifying Competent Authority Agreement in effect to which Denmark is a party on or before 12 months after the last day of the reporting fiscal year of the MNE Group;
- The jurisdiction of tax residence of the SPE has not notified the Danish tax authority of a systemic failure;
- The SPE has notified in its jurisdiction of tax residence that it is designated as the SPE on behalf of the MNE Group; and
- A notification has been provided by the Danish constituent entity to the Danish tax authority providing details of the SPE.
Where the CbC report is required to be filed locally in Denmark, the contents of the CbC report include the following for each jurisdiction:
- Table 1:
- tax jurisdictions
- revenues (unrelated parties, related parties, and total);
- profit (loss) before tax;
- income tax paid (cash basis);
- income tax accrued - current year;
- stated capital;
- accumulated earnings;
- number of employees; and
- tangible assets - other than cash and cash equivalents.
- Table 2:
- constituent entities resident in each tax jurisdiction (including Tax ID and address);
- jurisdiction of organization or incorporation if different from jurisdiction of residence; and
- main business activities of each constituent entity.
- Table 3:
- additional information or explanation deemed necessary to understand the CbC report.
Further, a notice of obligation for CbC reporting must be provided to the tax authority that includes the following:
- If the ultimate parent company is resident in Denmark: Identifying information of the group company submitting a CbC report;
- If the ultimate parent company is not resident in Denmark: Identifying information of the group company that will be submitting a CbC report and its jurisdiction of residence.
The CbC report must be submitted electronically within 12 months after the end of the reporting fiscal year Notice must also be given if the requirement to submit a CbC report no longer applies due to a change in circumstances.
The Danish tax authority has published instructions and guidance regarding the electronic submission of the CbC report and notification.
Denmark has also implemented the EU Mutual Assistance Directive with respect to the exchange of CbC reports.
The transfer pricing documentation may be prepared in one of the following languages: English, Danish, Norwegian, or Swedish.
The submittal of incorrect information in the statutory transfer pricing affidavits that need to be filed with the tax return may result in the imposition of fines and penalties. The penalty is related to either the turnover or the number of employees and corresponds to the higher amount resulting from either. Fines based on turnover are regressive and are due at the rate of 0.5% of turnover up to DKK 500 million, 0.1% of turnover between DKK 500 million and DKK 1 billion, and 0.05% on turnover in excess of DKK 1 billion. Fines based on the number of employees correspond to DKK 250,000 if there are up to 50 employees, and are increased by DKK 250,000 for each additional 50 employees. Where the company employs 500 employees or more, the fine is fixed at DKK 2 million.
Documentation-related penalties are not dependent on the reassessment of income and they may be imposed regardless of whether or not a tax readjustment is made. It is sufficient that the documentation requirement was not observed, whether intentionally or due to gross negligence. Effective 1 January 2021, delay in submission of the transfer pricing documentation attracts penalties. The penalty is equal to DKK 250,000 per financial year, and per entity where the documentation prepared is inadequate and cannot be used by the Tax Administration to assess whether the transfer prices used follow the arm’s length principle. Penalties may also be imposed for the non-submission of related documents such as benchmark studies or auditor’s statements.
Tax adjustment related penalties correspond ordinarily to 10% of the reassessed income. Substantially higher penalties apply in the case of tax evasion.
The statute of limitations is 5 years and applies to audits as well as requests to submit documentation and independent auditor’s reports (see Sec. 14.4.).