On 28 March 2018 a summary of a decision of the Eastern High Court in a transfer pricing case involving Microsoft Denmark was published. The case was dealt with by the Supreme Court at first instance after the court had referred it as principle. The case had previously been dealt with in the National Tax Tribunal.

The case concerned, in particular, whether Microsoft Danmark ApS had received arm-length terms for activities performed for another company in the Microsoft group, the Irish company Microsoft Ireland Operation Limited, which sells Microsoft programs on the Danish market.

The Eastern High Court issued a decision in the taxpayer’s favour. The high court, however, also interpreted the Danish statutory measure concerning the date when transfer pricing documentation must be prepared, and the court’s decision has immediate compliance implications for companies operating in Denmark.

The decision, which upheld a Danish National Tax Tribunal ruling overturning the adjustment, rejected the tax administration’s argument that an intercompany commission arrangement failed to properly compensate the local affiliate for its marketing functions. “The court did not find that Microsoft Danmark ApS had carried out marketing activities that were not remunerated under the agreement. The fact that the activities could have an impact that was not documented or measurable on the U.S. Company’s sale of licenses to international PC manufacturers does not lead to a different result,” the announcement says.

The tax administration also argued that Microsoft’s transfer pricing documentation was inadequate and submitted late. Danish law generally requires that the government affirmatively establish that the taxpayer’s transfer prices are not arm’s length. However, taxpayers that do not comply with Demark’s transfer pricing documentation requirements bear the burden of establishing that the tax administration’s adjustment is incorrect.

According to the announcement, the court rejected the government’s argument that the deficiencies in Microsoft’s transfer pricing documentation were sufficient to shift the burden of proof. “The court did not find that Microsoft Danmark ApS’s transfer pricing documentation had been timely, but did not, in the circumstances, consider that this could result in the tax assessment being made discretionary. The court did not find that the documentation was inadequate to such an extent that for this reason a discretionary appointment could be made,” the announcement says.