Transfer pricing and small corporations
Affiliated companies, etc. that trade with each other are covered by the rules stating that trading must be done under market conditions. This is called the arm's length principle. It requires that companies, etc. establish internal rules for billing, etc. - transfer pricing (TP) - between the companies, etc.
In Denmark, there are rules requiring companies, etc. to provide information to the tax authorities on intercompany transactions. They must provide, in many cases, written evidence that such transactions adhere to the arm's length principle.
Who is covered?
The rules apply to affiliated companies, branches and majority shareholders. That is, companies, etc. in which someone holds more than 50% of the capital or controls more than 50% of the votes.
A company that owns more than 50.5% of the shares in another company is then affiliated with this company, even if it only controls 10% of the votes.
Individuals’ shareholdings are included. If an individual owns shares in three different companies, these are affiliated. This applies even if the three companies have different owners, if these are closely related to each other. Corporate definition in this area is not the same as in the joint taxation area, where only companies that are affiliated and individuals’ shares are not included.
Which controlled transactions are covered?
Controlled transactions include all trade and economic relations between the parties. Examples include the provision of goods and services, transfer of assets, intangible assets that are provided and financial accounts. With regard to transactions between a permanent establishment in Denmark and a head office in another country or a permanent establishment abroad and a Danish headquarters, only those transactions for which rules on calculating a permanent establishment income require it to be done at arm's length are covered by the rules on documentation and disclosure.
An important exception
The specific requirements for written documentation of intercompany transactions do not apply to smaller corporations, etc. - that is, corporations with fewer than 250 employees and either a balance below DKK 125 million or a revenue below DKK 250 million.
The assessment of whether the limits are exceeded is determined at the corporate level, where all companies are included (including foreign companies). A small Danish company may therefore well be covered by the rules if it is owned by a large international corporation.
In connection with intercompany transactions with companies, etc. that are outside the EU/EEA or in non-agreement countries, it should always be documented in writing regardless of the corporation’s size. Although the smaller corporations do not need to prepare documentation, they are obligated to act with each other at arm's length.
The disclosure requirement
Affiliated companies - even those that are covered by the exception - are obligated to provide the tax authorities with information on corporate relations. This applies whether they have trade or other transactions with each other or not.
If there are transactions between the companies, they must also provide summary information on the transaction type and size as part of their tax return.