Intra-Group Loans an Analysis of Interest Determination and Interest Deduction in a Transfer Pricing Perspective

Sara Louise Pedersen & Celine Jeanett Walde Mongstad

Student thesis: Master thesis


This study has examined how intercompany loans are priced in Danish law and to what extent economic theory is applied. According to Ligningsloven ยง 2 and The Legal Guidance in Denmark, interest rate fixation must generally be based on an individual assessment of the loan transaction in accordance with the arms length principle. The assessment should be performed by applying a comparable uncontrolled price method or the loan margin method according to The Legal Guidance. An internal CUP method is based on a comparison of the intercompany loan and a loan obtained between independent parties. If an individual assessment of the transaction is not possible, the national bank's discount rate plus 4 pct. can be applied as a last resort. According to economic theory, a loan is priced based on a credit valuation to determine whether the borrower has the financial capacity to fulfil its obligations. The credit valuation consists of an analysis of the market, the industry, the company and the loan itself. The study concludes that the pricing of interest rates on intercompany loans in accordance with economic theory in Danish law occurs arbitrarily. There is no consistent way in which the tax authorities determine the interest rate on controlled loans. Therefore, it must be concluded that economic theory is not applied when using the discount rate plus 4 pct. The study has further examined if an implementation of the interest deduction rules in BEPS Action 4 will affect Danish companies. In this relation, the effect of implementing the suggested fixed ratio rule has been examined. It was concluded that the fixed ratio rule will yield a higher interest deduction for companies with high depreciation and amortization, while the current Danish interest deduction rules will yield a higher interest deduction for companies with low depreciation and amortization. Furthermore, the study shows that the debt-to-equity ratio has no effect with regards to the interest deduction calculated by the fixed ratio rule. It is therefore recommended that the Danish thin capitalization rules should still apply, even if the other interest deduction rules are replaced by the fixed ratio rule.

EducationsMSc in Commercial Law, (Graduate Programme) Final Thesis
Publication date2018
Number of pages122