On 28 October 2019, the Eastern High Court of Denmark published a case (Denmark vs Adecco; Case No SKM2019.537.OLR of 4 July 2019) decision and agreed with the tax authority that a Danish loss-making company could not deduct royalties paid to its Swiss parent for the use of marketing intangibles.  

Summary of the case:

The Danish subsidiary was ultimately owned by a Swiss company, and both companies were active in the staffing industry. This Swiss parent company is one of the largest staffing companies in the world, with operations in more than 60 countries. The Swiss parent company owned the intangibles of the group and licensed the intangibles to its subsidiaries.

In this case, the question arose whether the expenses of a Danish subsidiary for the payment of royalties to the foreign parent company of the international group for the use of the parent company’s trademarks and trade names, the know-how, the intangible assets of the international network and the business concept were deductible expenses for tax purposes or not.

The High Court stated that the company had the burden of proof that the royalty payments constituted a deductible operating cost and that the assessment of whether the burden of proof had been lifted should be made in the light of the available information on the relevant market, the company’s income in the period and the community of interest between the company and the ultimate parent company.

The High Court also found that there were circumstances which indicated that the company’s payment of royalties was a deductible operating expense, but regardless of these, the national court found that the company had not lifted the burden of proof that the payments of royalties to the group’s parent company constituted a deductible operating expense, cf. Section 6 (a) of the State Tax Act.

Decision of the court:

Among other things, the High Court referred to the fact that the company operated on the Danish market, where price was by far the most important competitive parameter and that for a very long period the company had largely only had a deficit. The High Court further pointed out that the company’s ultimate parent company had to be presumed to have its own purposes of being represented on the Danish market, as well as the available information on the marketing expenses which respectively the Danish company and the parent company had held. The High Court also pointed out that, during the case, the company had failed to respond to relevant requests from the Ministry of Taxation to provide details of the Danish company’s and the parent company’s circumstances.

Therefore, the royalty payments made could not be considered as a deductible operating expense. The Ministry of Taxation was therefore innocent. The case was referred for a preliminary ruling at first instance as a matter of principle.