Legal Alerts/3 Apr 2020

New Precedents from the Supreme Administrative Court on Transfer Pricing

The Supreme Administrative Court (“SAC”) issued two new precedents regarding transfer pricing on 2 April 2020 (KHO 2020:34 and KHO 2020:35). In both cases, the SAC annulled the decisions of the Administrative Court and ruled in favour of the taxpayers.

Borenius advised the company with relation to the decision KHO 2020:35 that dealt with transfer pricing and the tax authorities’ right to re-characterize actual intra-group transactions under Section 31 of the Finnish Act on Tax Assessment (“ATA”).

The main questions in the SAC’s decision KHO 2020:34 related to the arm’s length nature of the loss-making position of the subsidiary as well as the selection of the tested party in validating the arm’s length nature of the intra-group transactions.

These decisions can be considered to be in line with the previous transfer pricing decisions of the SAC. The decisions highlight the prohibition of derogating from the transactions chosen, actually conducted and documented by the taxpayer under Section 31 of ATA on one hand and taxpayer’s right to choose its operating model in accordance with the OECD Transfer Pricing Guidelines on the other. Furthermore, the decision KHO 2020:34 provided a welcome clarification to the treatment of group companies in a loss making position.

SAC’s precedent KHO 2020:35


X Group had implemented a restructuring of its intra-group financing function. A new financing company of X Group, a subsidiary of X Group’s Finnish parent company A, had been established in Belgium in 2008 and A had transferred unsecured intra-group loan receivables as contribution in kind to the Belgian financing company B.  In return, A obtained the shares in B. The interest income from intra-group loans was allocated to B who also had entered the receivables in its balance sheet. Furthermore, A and B had entered into an agreement on target levels on return on investment and, consequently, B had compensated the returns exceeding the target limit to A or alternatively A had compensated B should the returns go below the target limit.

During a tax audit performed, the Large Taxpayer’s Office had assessed that A would have assumed all the risks and performed all the significant functions of X Group instead of B, and that in fact, B would not have acted as a financing company of X Group but merely acted as a provider of financing related services. Therefore, the Large Taxpayer’s Office had made transfer pricing adjustments to A’s taxable income and imposed punitive tax increases. The Large Taxpayer’s Office had stated that the transactions had not been re-characterized but rather the taxation was based on delineation of the actual transactions between A and B.

Key aspects discussed in the precedent

In the precedent, the SAC considered, in accordance with its previous decision, that the tax authorities were not entitled to re-characterize the transactions between group companies under the Section 31 of the ATA. The SAC ruled that the Large Taxpayer’s Office had set aside the actual transactions between A and B and especially ignored the fact that B had become the creditor of the intra-group loans. The SAC held that the Large Taxpayer’s Office had, while adjusting the taxation to the detriment of the taxpayer, re-characterized the business transactions between A and B under Section 31 of the ATA.

As the above-mentioned transfer pricing adjustment provision does not entitle the re-characterization of the actual business transactions, neither had there been alleged that the refinancing arrangement would have been made in order to avoid taxes, the SAC ruled that the Large Taxpayer’s Office was not entitled to make adjustments to A’s taxation. Furthermore, the SAC highlighted that a transfer pricing adjustment under Section 31 of the ATA does not entitle to interfere in the cash flows between the parties of the transaction, but only to the pricing and other terms of the actual transaction conducted by the parties.

SAC’s precedent KHO 2020:34


A had operated as a Finnish marketing and sales company of a global group and had purchased all the products from the contract manufacturers of the group. Although the group operations in total had been profitable, A had made losses in several years. According to the groups transfer pricing documentation, modified cost plus method / transactional net margin method was applied in transfer pricing of the product purchases of A, and the contract manufacturers had been selected as the tested parties. In the transfer pricing documentation, four independent companies were presented as comparables in order to validate the arm’s length nature of the transactions.

The Finnish Tax Administration (“FTA”) considered that in circumstances between independent parties, A as a marketing and sales company would not have agreed to continue its loss making operations without pricing support or other similar adjustment. Furthermore, the FTA had considered that selecting the contract manufacturers as the tested parties of the transaction did not provide reliable analysis of the A’s situation. Thus, the FTA had used A as the tested party in validating the arm’s length profit level for A. Additionally, the FTA stated that tax adjustments were not aimed at the loss making position of A as such, but that there was a some sort of performance that A had not received.

Key aspects discussed in the precedent

According to the SAC decision, the losses in the group company A did not by itself indicate that A would have waived a claim for a service or some other fee from another group company whose business the operations of the loss-making A could have be considered to benefit. In its decision, the SAC stated, in accordance with the OECD Guidelines, that based on the analysis of the functions, assets and risk of A on one hand and the contract manufacturers on the other, A should not have been chosen as the tested party instead of the contract manufacturers. It had not been argued that the transfer pricing of A would not been in line with the group’s transfer pricing documentation or that the independent companies used as a comparables would not have been comparable. Therefore, and as A had presented business reasons for its loss making position, the SAC annulled the previous decisions and ruled that no tax adjustments or tax increases will be imposed to A.

Borenius’ lawyers are available to assist in addressing any questions you may have regarding these new precedents.

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Additional information

Einari Karhu



Sampo Viding

Senior Associate