Danish Supreme Court Rules On Software Giant's Transfer Pricing Case

; posted on
February 5th, 2019

Denmark’s supreme court has affirmed a 2018 court decision in Microsoft’s favor regarding the company’s transfer pricing arrangements, holding that a Danish subsidiary maintained adequate documentation and used an appropriate revenue base for calculating its commission.


Microsoft Denmark (DK Co) performed local marketing and sales support services for an Irish group entity (IE Co) responsible for marketing Microsoft products in Europe, the Middle East, and Africa. A market development agreement between the two companies entitled DK Co to the greater of its marketing costs plus 15 percent or a commission on licenses to Danish original equipment manufacturers (OEMs) for preinstalled Microsoft software.

The Danish tax authorities (SKAT) object to the absence of revenue from multinational OEMs for software preinstalled on devices ultimately sold to Danish customers in the commission base. According to Microsoft, the revenue was not covered by the agreement as DK Co did not sell directly to individual users and large OEMs — none of which were located in Denmark — licensed software from a U.S. entity.

Furthermore, the tax authorities argued that, since the TP documentation was insufficient, the burden of proof of prices being at arm's length had transferred from the tax authorities to DK Co.

Supreme Court

In its decision, the Supreme Court generally upheld a March 2018 decision of the High Court, finding in favor of Microsoft. Concerning the documentation, the five judges panel all agreed that the documentation prepared was adequate and therefore the tax authority could not make a discretionary assessment. However, the judges were split over whether SKAT had successfully proven that the commission was not arm’s length.

Three judges found that the existence of beneficial spillovers on user demand for computers with preinstalled Microsoft software does not imply that Microsoft Denmark should earn a commission on end-user revenue. DK Co's marketing activities may have had some indirect effect on the revenue generated from multinational OEMs - none of which are located in Denmark- but they had only an insignificant effect. According to the judges, DK Co also somewhat benefited from multinational OEMs that recommended Microsoft products and discounts given by Microsoft's parent company in the United States.

Moreover, the judges also considered that it was unlikely that an unrelated marketing company would be remunerated for the sale of OEM licenses to multinational computer manufacturers outside Denmark without DK Co participating in those sales.

In contrast, the other two judges found that there could be an impact of the DK Co marketing efforts and therefore the income years should be reexamined. With the majority opinion, the High Court decision is upheld.

Source: Danish Supreme Court

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