Faroe Islands transfer pricing

Who this applies to

Under Tax Act §37a, covered relationships include foreign control, control of legal persons, common-group entities and foreign/Faroese permanent establishments. Control generally requires more than 50% of capital or votes; indirect holdings, related persons and joint-control agreements matter. Denmark and Greenland count as foreign jurisdictions. Section 118a separately requires controlled-transaction disclosure, including domestic relationships. Test both provisions rather than assuming identical wording. Current Tax Act, §§37a and 118a

This Guide addresses pricing and documentation. It includes the statutory thin-capitalisation screen below. PE existence, corporate residence, country-by-country reporting and treaty relief require their separate analyses.

Rates, bands and thresholds

These are documentation thresholds, not tax rates.

Test	Amount	Tax year / official source
General capital/vote control threshold	More than 50%	2026; Tax Act §37a(2)
Documentation-exemption balance sheet total	DKK 36 million	2026; two consecutive financial years; Tax Act §118a(6)
Documentation-exemption net turnover	DKK 72 million	2026; same two-year test; Tax Act §118a(6)
Documentation-exemption average full-time employees	50	2026; same two-year test; Tax Act §118a(6)
Thin-capitalisation debt/equity boundary	Greater than 4:1	2026; Tax Act §37b(1)
Related-party contributed equity permanence	At least two years to count under the stated rule	2026; Tax Act §37b(3)

For the §118a(6) exemption, assess the taxpayer alone or together with its group: at each of two consecutive year-ends, at least two limits must not be exceeded. TAKS retains power to demand documentation in special cases. The exemption concerns preparation/retention under subsection 4, not the separate disclosure requirement. 2018 amendment, §1(11), effective 1 January 2019; current §118a(6).

The base

Use independent-party prices and terms for covered transactions. Keep the ownership chart and voting agreements distinct: multiplication of economic ownership does not establish voting control. Tax Act §37a

TAKS's older guidance recommends a transaction inventory covering goods, services, financing, intangibles and other economic dealings. Document functions, assets, risks, contracts and comparables; explain the selected method for each transaction type. Its methods include CUP, resale price, cost plus, TNMM and profit split. A single method is not automatically suitable throughout a group. Its DKK 500,000 discussion is not a blanket exemption for smaller dealings. TAKS guidance, pages 8–13

Practical workpaper: reconcile each counterparty total to the ledger, identify the pricing evidence available when the transaction occurred, and record why any proposed adjustment follows from that evidence. An illustrative markup is never a safe harbour. The documentation must support an assessment of arm's-length terms, not merely list invoices. Tax Act §118a(4)

Separate thin-capitalisation calculation

Tax Act §37b applies where a §1 company has debt to a §118a(1) related party and its year-end debt/equity ratio exceeds 4:1. Deny interest and exchange-loss deductions on the controlled-debt portion exceeding that boundary, unless the company proves comparable financing could be obtained between independent parties. A pricing study supporting the interest rate alone does not establish that financing-volume exception. Third-party debt guaranteed directly or indirectly by the specified owners or group is treated as controlled debt. Exactly 4:1 does not exceed the ratio test. §37b(1)

Use year-end market value of the statutory financial-claim and convertible debt. Equity is market value of assets less that debt; related-party equity contributions count only to the extent they remain for at least two years. Do not substitute accounting net assets without this reconciliation. For a simple positive-equity case where all relevant debt is controlled, identify excess debt as max(0, debt − 4 × equity), then trace the interest and exchange losses actually attributable to that excess. Mixed borrowing, different rates, zero/negative equity and valuation disputes need a supported allocation beyond that simple formula. Disallowed exchange losses can offset later exchange gains on the same loan under §37b(1); do not infer a corresponding general carryforward for disallowed interest. §37b(1)–(3)

Apply §37b(4)'s combined asset/debt calculation where companies fall under the statutory common control: eliminate participating-company shares and intercompany claims/debts as directed. The rule also applies to foreign-company Faroese PEs, using only connected PE assets/debts under subsection 6. The detailed ownership/family and voting provisions in subsection 5 control the group perimeter. Retain the market-value and two-year capital evidence with the financing comparables. §37b(4)–(6)

Deadlines and filing

Disclose transaction type and volume on the tax return. Required written documentation must reach TAKS within 60 days of its request. §118a(1), (4)

TAKS's company-return guidance gives 1 July as the ordinary return deadline. Accounts accompany the return and must be submitted through Borgaragluggin. A justified extension requires application; the published outer limit is 15 August. Preserve the actual extension decision. TAKS tax returns

Do not substitute the Danish documentation timetable. Retrieve the current Faroese return and appendices for the relevant filing year; the 2017 PDF's form identifier is historical.

Penalties and interest

Missing required documentation permits estimated assessment under §118a(5). That subsection also requires approval from Stýrið before the tax authority makes an arm’s-length income adjustment. Tax Act §141(1)(3) provides a fine for intentional or grossly negligent failure to supply information required by §§118–124; the provision states no fixed amount. Evasion intent or other aggravating circumstances can raise punishment to detention or imprisonment up to two years under §141(2). False/misleading information used for tax assessment/control has separate §§139–140 exposure. Do not describe estimated assessment as the only consequence. Tax Act §§139–141

Ordinary company late-payment interest is 0.7% per commenced month under §81(2), subject to §146's separate under-assessment rule, including its specified 12% annual company interest. These are not flat TP-documentation fines. The actual assessment and offence facts determine the applicable route. Tax Act §§81, 146 §118a(5)

Cross-border points

Evaluate the relevant treaty and any corresponding-adjustment procedure separately. The older English guidance is useful for analytical examples but predates the 2019 documentation exemption. It cannot establish current filing obligations on its own. The separate CbCR Guide applies its own group-revenue, notification and exchange tests; a documentation exemption here does not establish a CbCR exemption.

Tax Act §37a(4) permits avoidance of specified secondary consequences by undertaking payment on the corrected terms, subject to its foreign-authority taxation condition in the stated cross-border cases. Preserve actual acceptance/payment and foreign treatment; do not treat a journal entry alone as treaty corresponding relief. Ordinary amendment limits for §§37a, 37b and 118a matters are five years under Tax Administration Act §8, with different start points for authority action and taxpayer requests. Treaty mutual-agreement deadlines and exceptional reopening need their own review. Tax Act §37a(4); Tax Administration Act §§8–9

Two worked examples that recompute

1. Evidence-supported cost plus

Assume the reviewer establishes that DKK 800,000 is the appropriate cost base and independent comparables support a 6% markup for these services. The resulting charge is DKK 848,000. An actual charge of DKK 820,000 leaves DKK 28,000 to investigate; this illustration does not itself authorise a tax adjustment.

name: Faroese services illustrative cost-plus reconciliation
inputs:
  cost: 800000
  markup: 0.06
  actual: 820000
steps:
  supported_charge: cost * (1 + markup)
  difference: supported_charge - actual
expected:
  supported_charge: 848000
  difference: 28000

2. Documentation size boundary

Assume the consolidated figures are identical in both relevant years: balance sheet DKK 36 million, turnover DKK 73 million and average employees 50. Two limits are met at equality; turnover exceeds its limit. Subject to a special TAKS demand, the subsection 4 documentation exemption applies. Disclosure and arm's-length pricing still need their own assessment. If employees instead average 51 in either year, only one limit is met for that year, so this two-year exemption test fails. §118a(6), enacted by the 2018 amendment

name: Faroese documentation threshold margins
inputs:
  assets: 36000000
  turnover: 73000000
  employees: 50
steps:
  asset_margin: 36000000 - assets
  turnover_margin: 72000000 - turnover
  employee_margin: 50 - employees
  alternative_employee_margin: 50 - 51
expected:
  asset_margin: 0
  turnover_margin: -1000000
  employee_margin: 0
  alternative_employee_margin: -1

The checks recompute arithmetic; the legal conclusions require the stated facts and review.

Ask the client first

• Who owns capital and votes, directly, indirectly and under voting agreements?
• Which related parties and PEs transact, where are they resident, and what are the ledger totals?
• What are the standalone/group figures for each of the two relevant years?
• Has TAKS requested documentation, and when was that request received?
• What evidence supports the pricing method and actual transaction terms?

Sources

Source	Provisions / purpose	Read on
Current Tax Act	§§37a–37b, 81, 118a, 139–141, 146; pricing, debt restrictions, disclosure and sanctions	2026-10-25
Act 191 of 21 December 2018	§1(8)–(11), §2; historical enactment of the current exemption	2026-10-23
TAKS English TP guidance, 2017	Pages 8–13; transaction inventory and methods, read against current law	2026-10-25
TAKS return procedure	Company return/accounts and extension process	2026-10-25
Tax Administration Act	§§8–9; five-year TP amendment rule and exceptional cases	2026-10-25

Not yet confirmed: current return fields/appendix, documentation retention duration, new-company application of the two-year test, complex thin-capitalisation debt allocation and negative-equity cases, current fine assessment practice, treaty corresponding-adjustment/MAP procedure and deadlines. These remain gaps; no professional attestation or complete TP coverage is claimed. CbCR's separate exchange/operational gaps are recorded in that Guide. Independent whole-pack AI review accepted this material for partial tier-2 draft publication on 25 October 2026. Professional attestation remains pending.