This section explains the EU Arbitration Convention used as part of a mutual agreement procedure in transfer pricing double taxation situations between two or more EU member states.

The section contains the following aspects:

  • The rule;
  • Scope of the Convention;
  • Submitting a case;
  • Advisory commission;
  • Result of the negotiations.

The rule

The latest version of the EU Arbitration Convention can be found in the Danish Consolidation Act no. 111 of 21 February 2006 on Elimination of Double Taxation in Connection with the Adjustment of Profits of Associated Enterprises (EU Arbitration Convention).

(Reference - not translated)

A Code of Conduct for the effective implementation of the Convention accompanies the Convention.

The EU Arbitration Convention covers all EU member states.

The EU Arbitration Convention only concerns the elimination of transfer pricing adjustments and represents an alternative to the application of a DTC between EU member states.

Please note

The EU Arbitration Convention uses the term “enterprise". This means that both natural and legal persons who otherwise fulfil the requirements of the Convention may submit a request.

Scope of the convention

The EU Arbitration Convention applies to enterprises and permanent establishments. Accordingly, most situations that occur in practice will be covered.

In the view of the Danish Tax Agency, thin capitalisation disputes can be resolved within the scope of the rules of the EU Arbitration Convention. This is conditional upon the competent authority of the other state being of the same view. Not all states have the same view as Denmark, as is apparent from the revised Code of Conduct, paragraph 1.2. Thin capitalisation.

The competent authority of the Danish Tax Agency has no obligation to initiate a procedure within the scope of the EU Arbitration Convention nor to set up the advisory commission referred to in Article 7 if it is definitely established through a judicial or administrative procedure that a serious penalty can be imposed on one of the enterprises concerned due to actions, which give rise to a transfer pricing adjustment. In Denmark, the concept of “serious penalty" means a penalty for the intentional infringement of penalty provisions of the Criminal Act or special laws in cases that cannot be decided administratively.

(Reference - not translated)

Submitting a case

The enterprise must submit the request for MAP based on the EU Arbitration Convention to the competent tax authority of the state in which the enterprise is resident, or in which its permanent establishment is situated.

In Denmark, the competent authority is conferred on the Danish Tax Agency, Large Companies, Competent Authority. See Danish Executive Order no. 260 of 21 March 2006 on the EU Arbitration Convention.

The fact that an enterprise submits a request within the scope of the EU Arbitration Convention does not deprive the enterprise of the possibility of simultaneously availing itself of the ordinary appeals system (Tax Appeals Agency - courts).

Issues covered by the scope of the EU Arbitration Convention cannot, however, be processed by the Advisory Commission if the issue is referred to the Danish courts. See Directive no. 260 dated 21 March 2006 regarding the EU Arbitration Convention.

The case must be presented within three years of the first notice of the transfer pricing adjustment to the enterprise. See Article 6 of the EU Arbitration Convention. In Denmark, the date of the tax authority’s final decision on an assessment is considered the first notification.

Once the case has been presented to one of the competent authorities within the time limit, the two states’ competent authorities have two years to reach an agreement to resolve the double taxation issue. See Article 7 of the EU Arbitration Convention. According to the Code of Conduct, the time limit of two years begins only once the taxpayer has provided the following documentation (minimum information):

  • Identification (such as name, address, tax identification number) of the enterprise of the member state that presents its request and of the other parties to the relevant transactions;
  • details of the relevant facts and circumstances of the case (including details of the relations between the enterprise and the other parties to the relevant transactions);
  • identification of the tax periods concerned;
  • copies of the tax assessment notices, tax audit reports or equivalent leading to the alleged double taxation;
  • details of any appeals and litigation procedures initiated by the enterprise or the other parties to the relevant transactions and any court decisions concerning the case;
  • an explanation by the enterprise of why it considers that the principles set out in Article 4 of the Arbitration Convention have not been observed;
  • an undertaking from the enterprise to respond as completely and quickly as possible to all reasonable and appropriate requests made by a competent authority and have documentation at the disposal of the competent authorities; and
  • any specific additional information requested by the competent authority within two months upon receipt of the taxpayer's request.

See section 5(a) of the Arbitration Convention Code of Conduct.

According to the Code of Conduct, the two-year period begins on the latter of the following dates:

  • The date of the tax assessment notice, i.e. the final decision of the tax administration on the additional income, or equivalent;
  • The date on which the competent authority receives the request and the minimum information set out above.

See paragraph 5(b) of the Code of Conduct.

If within two months of receiving the taxpayer’s request the competent authority requests any additional information, the two-year period only begins once the additional information has been received.

The term “presented" in Article 6 of the EU Arbitration Convention is to be interpreted in accordance with paragraph 5(a) of the Code of Conduct. Thus, it is a condition for a case to be regarded as having been presented to the competent authority within the time limit in Article 6 that the minimum information has been presented before the expiration of the three-year time limit.

(Example - not translated)

As mentioned in paragraph 5(a) of the Code of Conduct, the purpose of the minimum information is, for example, to provide the competent authority to which the request is submitted with the necessary basis to commence negotiations for the elimination of double taxation with a foreign competent authority. The objective of the information referred to in paragraph 5(a) (i) and (ii) of the Code of Conduct, is, for example, to provide the competent authority with information on which parties the taxpayer wishes to be the subject of the discussion for the elimination of double taxation as well as information on the double taxation to be eliminated.

The competent authority determines whether the information received is sufficiently comprehensive for the case to be considered to have been presented.

The competent authority’s decision on the non-acceptance of a request in accordance with the EU Arbitration Convention cannot be appealed to any other administrative authority but must instead be brought before the courts. See decision SKM2016.354.VLR, where the Danish High Court decided that the EU Arbitration Convention must be considered to be within the provision contained in Directive no. 1029 dated 24 October 2005 regarding the competent authority.

Advisory commission

If the two states’ competent authorities fail to reach an agreement that eliminates the double taxation within the two-year period, they must set up an advisory commission.

With the consent of the enterprise it may, however, be agreed that the two-year timeframe is extended.

Issues covered by the scope of the EU Arbitration Convention cannot be processed by the advisory commission if the issue is referred to the Danish courts.

The time limit to set up the advisory commission is six months.

The advisory commission must deliver its opinion on the distribution of income and expenditure by no later than six months from the date of the presentation of the case to the commission.

The competent authorities then have six months to take a decision that eliminates the double taxation. The decision must not necessarily be consistent with the Advisory Commission’s decision.

According to article 9(4) of the EU Arbitration Convention, each EU member state must designate five independent persons to the advisory commission and these persons must appear on a public list. See the public list (European Counsil).

Result of the negotiations

The enterprise will always be asked to approve the result of the negotiations with the foreign competent authority.

If the enterprise refuses to accept the MAP result, which eliminates the double taxation, the original tax assessment will be upheld, including the resulting double taxation.

If the enterprise accepts the result of the negotiations, the decision will be made conditional upon the enterprise’s withdrawal of any ongoing domestic appeals.

(Overview of decisions related to the subject - not translated)