Legal Alerts/19 Sep 2017

Legal Alert – New Precedent on Transfer Pricing Sets Limits to Re-characterisation of Transactions

The Supreme Administrative Court (SAC) issued a precedent on 13 September 2017 in a case concerning transfer pricing (KHO 2017:145). The ruling confirms the principle stated already by the SAC in its ruling 2014:119, according to which the Finnish TP adjustment provision does not authorise the re-characterisation of a transaction. Therefore, when estimating whether a certain business transaction follows the arm’s length principle, the evaluation must be based on the actually implemented business transaction as structured by the related parties. The ruling underlines the parties’ freedom of choice between different TP models and transaction structures.

Summary of the case

In this case, a Finnish multinational commenced an Enterprise Resource Planning (ERP) project, which purpose was to standardise e.g. the companies’ procurement, distribution, and production chains in order to increase cost savings. For this purpose, a new Finnish limited liability company (the Company A) were established. It was agreed that the Company A will develop, customise, and maintain the ERP system to meet the needs of the group companies and will offer customised ERP system services to other group companies. The implementation process caused remarkable costs to the Company A. It was provided in the agreement made by the group companies that in order to compensate the costs accrued from implementing and maintaining the ERP system, the Company A charged service fees during a period of 10 years from the other group companies as soon as the companies had implemented the ERP system. A remarkable portion of the costs had accrued before the group companies had implemented the ERP system.

The Finnish tax authorities and the Finnish Administrative Court provided that the arrangement should have been considered as a cost sharing arrangement, and that the costs accrued from developing the ERP system should have been charged from the other group companies benefitting from the ERP system as soon the costs had accrued. The SAC stated that such re-characterisation is not possible, and ruled that the transaction, as chosen by the parties (i.e. sale of services), should be respected in taxation. The case was referred to the tax authorities in order to evaluate the arm’s length pricing of the service fees.


The case confirms two essential aspects in terms of TP adjustments:

  • Disregarding the business transaction agreed and implemented by the parties would require an explicit authorisation which is not included in the Finnish TP adjustment provision; and
  • The OECD transfer pricing guidelines may not be used as the only grounds for re-characterisation.

We expect the ruling to have an impact on many pending TP litigations.

Borenius’ lawyers are available to assist in addressing any questions you may have regarding this client alert. Please feel free to contact any of the Borenius attorneys listed in this alert or those with whom you usually work.

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Additional information

Heikki Wahlroos



Einari Karhu