The Supreme Court rules entirely in favour of EET Group A/S in landmark transfer pricing case

The EET Group's intra-group sales and transfer pricing documentation

The EET Group is one of Europe's largest distributors of IT components and spare parts. Operating in 23 markets, the Group sells more than 1,100 brands and serves over 30,000 customers annually.

The transfer pricing dispute concerned intra-group resale of goods for the income years 2010-2012. 

The taxpayer, a Danish company, purchased goods from independent suppliers and resold them to affiliated sales companies. The resale prices were determined using the cost plus method and were identical across all subsidiaries for a given product. Each sales subsidiary independently set its own customer resale prices.

EET Group A/S' transfer pricing documentation included a comparability analysis based on gross margin comparisons between the group entities and independent benchmark companies. Market data were sourced from internationally recognized databases for each income year. During the proceedings, EET Group A/S also submitted supplementary market data for the relevant years.

The Danish Tax Agency's decision and subsequent proceedings

On 8 July 2016, the Danish Tax Agency made a discretionary adjustment to EET Group A/S' taxable income for 2010-2012, increasing it by DKK 128,810,000. Similar adjustments were made for subsequent years.

The Tax Agency found that the transfer pricing analysis based on gross margins performed by EET Group A/S should be disregarded and replaced it by a net margin-based analysis. Some of the Group companies' net margins fell outside the interquartile range (IQR) of comparable independent companies leading the Tax Agency to conclude that EET Group A/S had undercharged its affiliated sales companies. Consequently, the Agency adjusted EET Group A/S' taxable income as if the affiliated sales companies' net margins had corresponded with the median net margin of the benchmark companies, consistent with Agency's long-standing practice.

EET Group A/S appealed to the Danish Tax Tribunal, which on 28 October 2020 ruled in favour of the company and reduced the adjustment to DKK 29,587,135. As basis for its ruling, the Tax Tribunal found that EET Group A/S had produced appropriate transfer pricing documentation and rightfully applied a gross margin-based analysis, but - at the same time - that any gross margins amongst the sales subsidiaries that fell outside the IQR amongst the benchmark companies in the transfer pricing documentation should be considered non-arm's length. In such case an adjustment to the upper quartile (rather than the median as claimed by the Tax Agency) should be performed. 

On 19 June 2024, the Eastern High Court upheld the ruling by the Tax Tribunal. The Ministry subsequently appealed to the Supreme Court.

The Supreme Court judgment

The Ministry of Taxation asked the Supreme Court to uphold the Tax Agency's original ruling but at the same time acknowledged that the group's transfer pricing documentation was generally adequate except in relation to two group companies. The Supreme Court was thus asked to consider:

• Whether the transfer pricing documentation for the two subsidiaries was materially deficient and could be disregarded.
• Whether EET Group A/S had applied arm's length prices and terms in its intra-group transactions, including whether gross margins (as used by EET) or net margins (as argued by the Ministry) provided the appropriate basis for comparison.
• The scope of the tax authorities' discretionary powers, particularly the appropriateness of using the interquartile range to determine arm's length ranges and, if so, whether adjustments must be made to the median or another point within the range.

The Supreme Court ruled entirely in favour of EET Group A/S. 

It held that the transfer pricing documentation for all group companies including the two group companies challenged by the Ministry was appropriate and could not be disregarded. The Supreme Court also affirmed that the Group's transfer pricing was consistent with the arm's length principle and that comparing gross margins was appropriate. The Ministry had not substantiated that a net margin-based analysis was called for.

A key issue in the case was the Tax Agency's reliance on the IQR as the arm's length range. The Tax Agency has applied a long-standing practice of setting aside prices or margins that fall outside the IQR, even if they lie within the full range of comparables.

The Supreme Court found no legal basis for limiting the arm's length range to the IQR. The Supreme Court emphasized that while statistical methods can support comparability analyses, caution is required - particularly when the underlying data is limited, in line with OECD Transfer Pricing Guidelines 2010, para. 3.57.

Moreover, the Supreme Court held that the IQR was of limited value in this case due to the small number of comparable companies for which gross and net margin data were available. The Ministry had not demonstrated that using the IQR could appropriately correct any alleged comparability issues.

This landmark ruling is the Supreme Court's first decision on the scope of tax authorities' administrative practice regarding the IQR. It is expected to have significant implications for both pending and future transfer pricing cases.

The case was argued by Lasse Esbjerg Christensen and Jef Nymand Hounsgaard, assisted by Mathias Kjærsgaard Larsen, Anne May With, and Lasse Plejdrup Frank.

Thanks to Peder Reuther and his team at KPMG Acor Tax for excellent collaboration and valuable contributions throughout the proceedings.