On 25 June 2020, the Supreme Court made a decision on a case, entitled “Denmark vs. Adecco A/S”, in favor of Danish company, Adecco, and its Swiss parent company in a dispute involving the deductibility of royalties and the sufficiency of transfer pricing documentation.

In  2013, the Danish tax authorities had amended Adecco A/S’s taxable income for the years 2006-2009. Adecco A/S submitted that the company’s royalty payments were operating expenses deductible under section 6 (a) of the State Tax Act and that it was entitled to tax deductions for royalty payments of 1.5% of the company’s turnover in the first half of 2006 and 2% up to and including 2009, as these prices were in line with what would have been agreed if the transactions had been concluded between independent parties and thus compliant  with the requirement in the arm’s length principle. Specifically, Adecco A/S claimed that the company had lifted its burden of proof that the basic conditions for deductions in accordance with section 6 (a) of the State Tax Act were met, and the royalty payments thus deductible to the extent claimed. The company hereby stated that it was not disputed that the costs were actually incurred and that it was evident that the royalty payment was in the nature of operating costs, since the company received significant economic value for the payments.

The High Court ruled in favor of the tax authorities, by assessing that the royalty was not deductible as an operating expense rather than by assessing that the royalty was not at arm’s length terms. Adecco appealed the decision to the Supreme Court. Consequently, the Supreme Court made the decision in favor of Adecco. According to Supreme Court, the royalty payments had the nature of deductible operating costs and Adecco A/S’s transfer pricing documentation for the income years was not insufficient considering equal to lack of documentation. Again, the Court was not considered a royalty payments of 2% was not at arm’s length principle and stated that tax authorities have not the right to estimate company’s income.