When discount rates decide the tax bill: why “routine” functions cannot be treated as low-risk by default.

Introduction

In May 2025, the Danish National Tax Tribunal (Landsskatteretten) issued a significant transfer pricing decision on the valuation of intellectual property in an intragroup restructuring. The case concerned the transfer of a bundle of intangible assets from a Danish company to a newly established group entity, followed by a conversion of the Danish company into a routine sales and service provider. The dispute focused on whether the agreed transfer price for the intellectual property complied with the arm’s length principle, and, more specifically, on how discount rates were applied in a discounted cash flow (DCF) valuation. The decision is notable because it addresses a recurring and highly technical controversy in IP valuations: the separation between “routine” functions and residual intangible value.

Key Legal Findings

The taxpayer relied on two valuation reports using the DCF method. Both reports first valued the entire business and then derived the value of the transferred intangibles by subtracting the value attributed to routine functions. Critically, the reports applied a 20 percent discount rate to the overall business, but only an 8 percent discount rate to the routine functions. This difference significantly increased the value attributed to routine activities and, as a consequence, reduced the value of the transferred IP.

The Tribunal accepted that the taxpayer had prepared compliant transfer pricing documentation, meaning the tax authorities bore the burden of proving that the transfer price was not arm’s length. However, the Tribunal concluded that the use of materially different discount rates was not justified. It held that the risks associated with the routine functions were closely linked to the overall business risks and could not be regarded as materially lower. On that basis, the routine functions had been overvalued, leading to an undervaluation of the transferred intangibles.

Importantly, the Tribunal endorsed the tax authority’s alternative DCF calculation, which was based on the taxpayer’s own valuation model but applied the same 20 percent discount rate to both the routine functions and the business as a whole. That approach was considered consistent with the arm’s length principle. The taxable adjustment was therefore upheld in principle, albeit reduced in amount.

Analytical Commentary

At its core, the case illustrates a fundamental valuation principle that is sometimes obscured by technical modeling: discount rates must reflect economic risk, not labels. Calling an activity “routine” does not, by itself, justify a lower discount rate if the cash flows remain exposed to the same commercial uncertainties as the rest of the business.

This reasoning is fully aligned with the OECD Transfer Pricing Guidelines 2022, which expressly caution against attaching decisive weight to labels or categories when analysing intangibles. Paragraphs 6.15 and 6.16 clarify that distinctions such as “routine” versus “non-routine” intangibles, or trade versus marketing intangibles, are merely descriptive shortcuts and do not determine the arm’s length outcome. Transfer pricing analysis must instead focus on the specific intangibles involved, the functions performed, and how those elements contribute to value creation in practice.

Paragraph 6.17 further reinforces that particular relevance attaches to “unique and valuable” intangibles, defined by their lack of comparability and their ability to generate excess future economic benefits. Against this background, the Tribunal’s rejection of a mechanically lower discount rate for so-called routine functions reflects the Guidelines’ core message: valuation outcomes must be driven by economic substance and risk exposure, not by formal classifications or terminology used in documentation.

The Tribunal also emphasized that where routine entities depend entirely on the group principal, face contract termination risk, and do not engage with third parties, their future remuneration may be subject to risks comparable to those affecting the overall business. In such circumstances, applying a materially lower discount rate artificially inflates the value of routine functions and distorts the allocation of value between functions and intellectual property.

Strategic Insight

For multinational groups, this decision serves as a clear warning against mechanically applying lower discount rates to routine activities in IP valuations. While cost-plus remuneration in the range of approximately 8 percent is commonly observed for routine functions under the OECD framework, such outcomes are not benchmarks in themselves. They remain contingent on a coherent risk analysis and on whether the routine activities are genuinely insulated from broader business risks.

From a controversy perspective, the case also demonstrates that tax authorities may successfully rely on a taxpayer’s own valuation framework, adjusting only specific assumptions rather than rejecting the analysis in its entirety. This significantly increases litigation risk where aggressive or inconsistent assumptions are embedded in otherwise sophisticated valuation models.

How can MCORE help

MCORE assists clients in designing and defending IP valuations that withstand tax authority scrutiny. We support groups in aligning functional analyses, DEMPE assessments, and valuation methodologies, with particular attention to discount rate selection and risk characterization. In audits and disputes, we help recalibrate existing models, anticipate authority challenges, and develop defensible positions grounded in OECD guidance and emerging case law.