Microsoft Case Denmark

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 cases addresses two interesting points as discussed below.

1. Contemporaneous transfer pricing documentation or not?

In the recent years a regular discussion point with the Danish tax administration has been the required timing for the preparation of Danish transfer pricing documentation. Although the letter of the law was clear and only stated that transfer pricing documentation should be “submitted upon request” whereas it did not contain any requirement as to when transfer pricing documentation should be prepared, for a number of years the Danish tax administration has argued that transfer pricing documentation must be prepared prior to submitting the corporate income tax return. If not, the tax administration took the position that late preparation could entitle the tax administration to perform a discretionary assessment of the taxable income.

On this point the Eastern High Court found that late preparation of transfer pricing documentation did not entitle the tax administration to perform a discretionary assessment.

This being said it should be noted that new legislation has been enacted with effect as from the 2018 income tax year that requires taxpayers to prepare contemporaneous transfer pricing documentation in line with the latest recommendation by the OECD for transfer pricing documentation in Paragraph 5.30 of the 2017 OECD Transfer Pricing Guidelines. Now, non-compliance explicitly allows the Danish tax administration to perform a discretionary assessment of the taxable income under the arm’s length principle.

2. Compensation for sales of Windows operation systems

The Danish tax administration argued an interesting point, namely that the marketing activities performed by Microsoft Denmark should result not only in a commission for sales of Microsoft products in the Danish market by Microsoft Ireland but also in a compensation when a Microsoft Windows operation system was sold as an integrated part of the sale of a computer of any brand in the Danish market. The rationale was that the marketing activities of Microsoft Denmark affected the sale of all Microsoft products. However, also on this point Microsoft won, and the court held that no additional compensation was due.