Danish insurance company Codan Forsikring successful in transfer pricing case before the Danish Eastern High Court
On 17 August 2022, the Danish Eastern High Court ruled in favour of Codan Forsikring in a transfer pricing case of general public importance, thus setting aside the Danish Customs and Tax Administration’s (SKAT) decision relating to the company’s taxable income for the income years 2010-2013. The Danish Ministry of Taxation has confirmed that the case will not be appealed to the Supreme Court. Codan Forsikring was represented by Plesner.
During the years 2010-2013, Codan entered into annual reinsurance agreements with the group related Irish company RSA Reinsurance Ireland Ltd. (“RSA Reinsurance”).
In 2016, SKAT (now the Danish Tax Agency) decided to make a discretionary increase of Codan Forsikring’s taxable income for the income years 2010-2012, while making a discretionary reduction of the company’s income for the income year 2013. SKAT did not find that the company’s transfer pricing (“TP”) method adequately substantiated that the four intra-group reinsurance agreements had been entered into at arm’s length in accordance with section 2 of the Danish Tax Assessment Act.
By a ruling made in 2019, the Danish National Tax Tribunal set aside SKAT's decision. The Danish Ministry of Taxation brought the case before the Danish courts, and the case was referred to the Danish Eastern High Court as the court of first instance due to its general public importance.
Before the courts the Ministry of Taxation changed the focus of the case to the effect that the issue was first of all whether the reinsurance agreements were in fact a “tax arrangement” that could be set aside. Consequently, the subject-matter of the case was primarily whether Coda Forsikring’s expenses relating to the reinsurance agreement could be deducted as operating costs.
If the High Court - in keeping with Codan’s allegation - found that the costs were deductible, the subject-matter of the case would then be whether the agreements had been entered into at arm’s length under section 2 of the Danish Tax Assessment Act, including whether Codan Forsikring’s TP-documentation for the income years 2010-2013 was inadequate to such an extent that the tax authorities had been entitled to make a discretionary assessment of the income under section 3B of the Danish Tax Control Act in force at the time.
The High Court agreed with Codan Forsikring’s views that the expenses relating to reinsurance generally has the required relation to the income of an insurance company.
The High Court further agreed with Codan Forsikring that this also applied to Codan Forsikring’s intra-group reinsurance agreements. The High Court pointed out in that connection that the advantages for the whole group also implied by the reinsurance agreement did not disqualify the reinsurance agreements in relation to the deduction of operating costs.
On that background, the Eastern High Court upheld Codan Forsikring’s claim that Codan Forsikring was entitled to deduct the expenses relating to its reinsurance agreements with RSA Reinsurance.
Accordingly, the question was whether the reinsurance agreements had been entered into contrary to the arm’s length principle, including whether Codan Forsikring's TP-documentation was inadequate to such an extent that SKAT would have been entitled to make a discretionary tax assessment under section 3B of the Danish Tax Control Act in force at the time.
The Danish Ministry of Taxation claimed that Codan Forsikring's TP-documentation was inadequate, including in particular that the comparability analysis was inadequate. The Ministry pointed out, among other things, that the RSA Reinsurance's risk profile and size differed significantly from the comparable companies identified by Codan Forsikring, and that these companies performed more complex functions than those performed by RSA Reinsurance during the relevant period.
Against this, Codan Forsikring claimed that Codan Forsikring, assisted by leading advisers, had prepared extensive TP-documentation which explicitly and in the best possible manner addressed the reinsurance agreements entered into.
The High Court first established with respect to transfer pricing documentation that the fact that the Ministry of Taxation had to disagree with or raise legitimate doubts about the comparison analysis is not sufficient to set aside the TP-documentation as inadequate.
The Eastern High Court pointed out, among other things, "that the TP-documentation has not been completely useless to SKAT which, following the correction made, has assessed RSA Reinsurance’s earnings on the basis of on an adjusted PLI compared with the companies in the comparison analysis".
Accordingly, the High Court found that a discretionary assessment could not be made of Codan Forsikring’s income pursuant to section 3 B of the Danish Tax Control Act in force at the time.
In accordance with previous case law, the question then was whether the Danish Ministry of Taxation had substantiated that Codan Forsikring had acted contrary to the arm’s length principle, see section 2 of the Danish Tax Assessment Act.
The Danish Ministry of Taxation argued that the extent of the reinsurance agreements - according to the Ministry - was unusual, and that the distribution of the premium income between Codan Forsikring and RSA Reinsurance was contrary to the arm's length principle. The Danish Ministry of Taxation pointed out, among other things, that Codan Forsikring’s costs were not covered by the reinsurance agreements with RSA Reinsurance, which an independent purchaser of reinsurance services - again according to the Ministry - would have ensured.
However, the High Court agreed with Codan Forsikring that it did not indicate lack of arm’s length that Codan Forsikring’s costs were not covered in some years, noting that Codan Forsikring's costs could not be expected to be covered in full every year but would vary from year to year.
Accordingly, the Danish Ministry of Taxation had not substantiated that the reinsurance agreements were outside the scope of that which could be agreed between independent parties, see section 2 of the Danish Tax Assessment Act.
On this background, the Danish Eastern High Court held in favour of Codan Forsikring that the changes to Codan Forsiking's taxable income claimed by the tax authorities were unjustified.
Read the Danish Eastern High Court’s comments (in Danish)
A team from Plesner represented Codan Forsikring before the Danish courts.
The Ministry of Taxation has not brought the case before the Supreme Court, and therefore the judgment is final.