Landmark transfer pricing ruling favours leading Europe IT Distributor

In a recent landmark decision[1], the Danish Supreme Court ruled that EET Group A/S (the “taxpayer”) had acted in line with the arm’s length principle in relation to its controlled intercompany transactions that took place during the financial years 2010-2012.

The Supreme Court held that the Danish Tax Agency was not entitled to make a discretionary increase to the EET Group’s taxable income based on alleged significant deficiencies in its transfer pricing documentation.  Crucially, the Supreme Court clarified that the fact that certain intercompany margins fall outside the interquartile range, but remain within the full range of comparables, is not, by itself, sufficient enough to prove that the prepared transfer pricing documentation is so deficient that it is equivalent to a lack of documentation.

Facts of the case

The EET Group, Europe’s leading supplier of IT products, is primarily engaged in the purchase and resale of IT components and spare parts. The taxpayer, a central entity within EET Group, purchases IT products from independent suppliers and manufacturers and resells the products to its subsidiaries (“sales companies”).

The sales companies are located across various European countries. The sales companies are free to purchase products from the taxpayer or from external suppliers, including directly from the taxpayer’s suppliers. While the majority of the sales companies primarily purchase their products from the taxpayer, the subsidiaries in Norway and Spain sourced a significant portion of their products from external suppliers during the years 2010–2012.

Sales to the sales companies were priced using a cost-plus model, where the taxpayer’s purchase price was increased with additional mark-ups for costs such as freight, insurance, storage costs as well as a gross profit margin. All sales companies were offered the same price for a particular product.

By decision of 8 July 2016 the Danish Tax Authority increased the EET Group’s taxable profits over the years 2010-2012 under Section 2 of the Danish Tax Assessment Act. The Danish Tax Authority argued that the taxpayer had not acted on arm’s length terms in relation to certain sales companies as their earnings fell outside the interquartile range. Specifically, it argued that the comparability analysis included in the taxpayer’s transfer pricing documentation was not applicable in relation to the sales companies in Norway and Spain. Furthermore, it argued that the comparability analysis contained flaws, as the search strategy included inventory and intangible assets, whereas most of the sales companies did not hold any inventories nor did any of the sales companies owned any intangible assets. As a result, the Danish Tax Authority applied a discretionary increase on the taxpayers taxable profits.

The Danish Tax Tribunal partially upheld the decision of the Danish Tax Authority but reduced the income increase to the years 2011 and 2012.

Transfer pricing documentation EET Group

The taxpayer prepared transfer pricing documentation, including Master Files and Local Files. Under the taxpayer’s transfer pricing model, the sales companies – classified as low risk distributors – purchased goods from the taxpayer at a cost plus a profit mark-up.

The taxpayer described in its transfer pricing documentation that the Transactional Net Margin Method (“TNMM”) was applied using gross margins as comparative figures. For purposes of applying the TNMM, the relevant data was aggregated into gross profits and comparable external gross margins were used for comparison.

The documentation included benchmark studies to support the application of the TNMM. According to these studies, the total gross margins of the sales companies fell within the full range, although the gross margins for a number of sales companies fell outside the interquartile range.

Judgement of the Supreme Court

Under Danish tax law if the transfer pricing documentation prepared by the taxpayer is inadequate or pricing is unjustified, the tax authorities may disregard the prepared documentation and discretionary adjust the taxable income to reflect an arm’s length outcome. However, the burden of proof that the transfer pricing documentation provided is significantly inadequate, lies with the tax authorities. The mere fact that the tax authorities disagree with or raise justified doubts about the comparability analysis does not in itself mean that the documentation is significantly deficient.

Whether the tax authorities has lifted the burden of proof must be assessed based on a customary assessment of the evidence in the case, in light of the taxpayers activities and the overall circumstances. Statistical methods, such as the interquartile range may be included in this assessment. But in line with paragraph 3.57 OECD Transfer Pricing Guidelines, these statistical methods must be used with caution, particularly when the comparison is based on a limited number of comparables.

The Supreme Court ruled that the fact that the profit margins for seven of the sales companies fell outside the interquartile range of the benchmark study was not in itself sufficient to prove that the taxpayer did not act on arm’s length terms. Consequently, the Supreme Court ruled that the Danish Ministry of Tax did not met the burden of proof to justify discretionary income adjustments. 

Implications

This ruling marks a significant win for taxpayers as the Supreme Court has clarified that in certain cases and circumstances it is accepted to use of the full range to determine whether a taxpayer has acted on arm’s length terms. This ruling deviates from the standard approach by the Danish Tax Authority of adjusting taxable results to the median of the interquartile range. The Supreme Court held that the adjustment to the interquartile range was inappropriate due to the limited number of reliable comparables.

In particular, the case emphasizes that the use of statistical methods, such as the interquartile range, is not always suitable to remedy alleged comparability defects. In case the interquartile range is used to increase the reliability of a comparability analysis, caution is necessary, especially when there are limited comparables.

This landmark decision affirms that compliance with the arm’s length principle must be evaluated in a comprehensive manner, taking into account the broader context including the taxpayer’s activities and overall circumstances, rather than relying solely on the interquartile range.

For questions and more information please contact Taco Wiertsema, Partner Transfer Pricing or Quirine Brinkman, Consultant Transfer Pricing.

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[1] Danish Supreme Court, Case BS-35371/2024-HJR, 21 May 2025.