Legal Pragmatism – A Useful and Adequate Explanatory Model for Danish Adjudication on Tax Avoidance?1

2.1. Philosophical pragmatism

The origin of pragmatic philosophy is usually ascribed to the three American philosophers: Charles Sanders Pierce (1839–1914), William James (1842–1920), and John Dewey (1859–1952).12 (New York Paragon 1979, originally published in 1929). Even though their views and methods were diverse, they had in common a turning away from the traditional philosophical agenda of the West, i.e. in essence Plato and the tradition of deductive logic.13 Moreover, philosophical pragmatism can be viewed as an aspiration to construct an alternative to the then dominant schools of philosophical thought: German rationalism and British empiricism.14 Pragmatism took a backlash in popularity around 1940 but was rehabilitated around 1980 by philosophers such as Richard Rorty.15

The core tenets of philosophical pragmatism can be boiled down to two basic concepts: a method of inquiry and a theory of truth. The first basic concept implies that knowledge is not acquired simply by observing but by doing. In other words, pragmatism replaces the spectator conception of knowledge with an operative one, as pragmatism is mostly preoccupied with actions and consequences. The second basic concept argues for an instrumental conception of truth which entails that knowledge is relied upon only as long as it is useful, i.e. only as long as it adequately explains the phenomenon in question. Put differently, truth is what works and truths can change.16 Altogether, pragmatists are thus anti-fundamentalists, in the sense that they refuse any idea of certain knowledge, and pluralists, as they acknowledge that there can be several adequate ways to understand a given situation.17

2.2. American legal pragmatism

Oliver Wendell Holmes (1841–1935), who was a United States Supreme Court Judge, is typically seen as the founding father of American legal pragmatism.18 Holmes was a member of the so-called Metaphysical Club, which also included Charles Sanders Pierce and William James (mentioned above in section 2.1), and in 1881 he published a book titled The Common Law, in which he criticized the then prevailing mode of analyzing common law concepts as if they were essentialist notions of timeless provenance with a necessary internal structure. Instead, Holmes employed historical analysis and concluded that “The life of the law has not been logic: it has been experience”.19

In an article published in 1897 called The Path of Law, Holmes continued his pragmatist quest and, among other things, argued that law is a social tool and therefore concerned with consequences rather than with moral truths.20 Moreover, he reasoned that social scientific methods are essential to evaluating the consequences of law, that law is relative to public opinion, that history illuminates but should not dominate law, and that law ultimately is a prediction of what judges will do with a case if presented to them.21

Another central figure within American legal pragmatism was Benjamin Cardozo (1870–1938), who published his book The Nature of the Judicial Process in 1921.22 Cardozo's reasoning followed the lines of thinking of Holmes, and he was particularly interested in the various methods by which judges, having identified the rule or principle potentially applicable to the case at hand, try to “fix the bounds of and the tendencies of development and growth” of that principle.23 However, in comparison with Holmes, Cardozo seems more moderate, as he does not deny the relevance of more traditional legal reasoning but argues that it should be supplemented with economic and in particular sociological methods.24

A second wave of American legal pragmatism started to gather momentum in the 1990s with the writings of scholars like Brian Tamanaha and probably most famously Richard Posner.25 According to Posner, the core of (modern) legal pragmatism is pragmatic adjudication, i.e. heightened judicial awareness of and concern for consequences, and thus a disposition to ground judgements in facts and consequences rather than in conceptualisms and generalities. Hence, the ultimate criterion of pragmatic adjudication is reasonableness, as law should be understood as a social tool oriented to social ends. Having said that, pragmatism should not be seen as a synonym for ad hoc adjudication, but it requires a judge to consider systemic consequences and not merely case-specific consequences. However, Posner also stresses that only in exceptional circumstances will the pragmatic judge give controlling weight to the systemic consequences.26

2.3. Nordic legal pragmatism

Philosophical pragmatism may not have left a significant footprint in European philosophy, but it seems clear that pragmatism has influenced European legal theory.27 In a Nordic context, pragmatist traits have been salient in legal thinking at least since the early nineteenth century when Anders Sandøe Ørsted (1778–1860) published his work Haandbog over den danske og norske Lovkyndighed.28 In his book, Ørsted turned against the two predominant and strongly hierarchical views of that age, i.e. 1) that valid law solely follows from statutory laws and customary law (tacitly) accepted by the legislator, or 2) that law should be deduced from overall concepts and legal doctrines (inspired by German natural law thinkers).29 According to Ørsted, these two views were incomplete and he argued that law originates from multiple sources that arise from the resolutions of real life problems.30 In other words, Ørsted was preoccupied with the practical application of law based on reasonableness and justice.31

Traces of Ørsted's pragmatic thoughts can be retrieved, to a larger or lesser extent, in the writings of several other prominent Nordic legal scholars, in particular Danish and Norwegian academics such as Anton Martin Schweigaard (1808–1870), Frederik Stang (1808–1884) Viggo Benzon (1861–1937) og Carl Ussing (1857–1934).32 However, the pragmatist protagonists also received criticism from various central actors, including from proponents of Scandinavian legal realism such as Alf Ross (1899–1979).33 Scandinavian legal realism achieved political importance in Scandinavia as well as importance for Scandinavian jurists’ conception of legal reasoning, but it appears that it did not strongly influence the actual research results of legal scholars and the practical application of the legal method. Moreover, even though Ross was inspired by logical positivism, pragmatist elements were also present in his works.34

In more recent years, legal pragmatism has experienced increased interest in Nordic legal literature, for example within the writings of Jørgen Dalberg-Larsen, Sverre Blandhol and Steen Schaumburg-Müller.35 Blandhol has argued in favor of the existence of a “school” for Nordic legal pragmatism with traces back to Ørsted, but not all scholars agree that such a distinct “school” exists and that pragmatism is an adequate label for the general Nordic tradition of legal thought.36 However, the unifying and predominant view appears to be that pragmatist thinking is a significant ingredient in Nordic legal science and adjudication – historically as well as presently.37

4.1. Interpretation of tax law – the doctrinal perspective

Section 43 of the Danish constitution prescribes that no taxes shall be imposed, altered or repealed except by statute.43 This principle of legality reflects three basic aspects for tax regulation in Denmark: 1) administrative tax regulation, such as executive orders and regulations, cannot be in conflict with statutory law, 2) executive orders cannot constitute an independent basis for taxation, and 3) tax authorities are only allowed to impose taxes if a legal basis for taxation can be found in statute.44

The last aspect of this principle of legality has caused a considerable debate, which was particularly intense in the late 1990s after the Supreme Court had decided against the Danish Ministry of Taxation in a number of prominent cases.45 As a consequence of the lost cases, the ministry published an announcement in which it was concluded that the Supreme Court by its decisions had underlined that a clear statutory legal basis is a precondition for imposing tax. The ministry also argued that the Supreme Court's decisions apparently showed – at least with respect to situations not involving avoidance and abuse – that the interpretation of tax statutes cannot be extended beyond what is actually stated in the wording of the statute and perhaps also in the travaux préparatoires. In continuation of this, the ministry also deduced that uncertainty concerning the scope or reach of a provision normally should entail that the provision should be subject to an expansive interpretation, if this is in the interest of the taxpayer.46

That taxation should presuppose a clear statutory basis has also been advocated in the Danish scholarly literature. Jan Pedersen has in his earlier writings argued that section 43 of the constitution prescribes such a requirement.47 However, at the same time, he added that the requirement does not prevent interpretation based on analogy and that interpretation of tax legislation does not differ from the interpretation of other kinds of administrative law.48 Considering these modifications, it has been argued that it is quite hard to see what is actually left of the postulated requirement for a clear statutory basis.49

In a dissertation from 2003, Jakob Graff Nielsen initially classified section 43 of the constitution as belonging to a broader group of legal areas where a requirement of clear statutory basis has to be respected (e.g. criminal law and legislation interfering with citizens’ private life).50 However, after a thorough examination of court cases related to taxation, he concluded that case law concerning this matter was nuanced and that the requirement of a clear statutory basis was not absolute. Moreover, he argued that analogical interpretation is possible and that there is no maxim according to which tax legislation has to be interpreted in favor of the taxpayers or in favor of the tax authorities.51 According to Jacob Graff Nielsen's findings, it could therefore be argued that it is difficult to see what is actually left of the postulated requirement of a clear statutory basis.52

Jens Peter Christensen has criticized the views originally presented by both Jan Pedersen and Jakob Graff Nielsen.53 Thus, Jens Peter Christensen argues that it would be more appropriate to state that section 43 of the constitution does not say anything about how clear the statutory basis should be. Secondly, the courts’ assessments of the requirement for a clear statutory basis varies to such a degree that abstract assertions about the existence of such a requirement do not make sense. What matters according to customary administrative law is the extent or intensity of the specific government interference and not the fact that the interference generally could be categorized as a matter of tax. Thus, tax legislation should be interpreted along the same lines as other kinds of legislation interfering with for example the citizens’ private lives. Jens Peter Christensen places emphasis on the fact that the underlying aim of section 43 of the constitution historically was to regulate the power relationship between the parliament and the administration. Hence, the main idea behind article 43 was not to provide protection for the individual citizens but to regulate the relationship between the institutions of government.54 As a result, the conclusions presented by Jens Peter Christensen appears convincing.55

Despite these (previous) disagreements, the present doctrine largely appears to agree on the general characteristics for interpretation of Danish tax legislation.56 Accordingly, the Danish courts’ interpretation of tax legislation has generally been described as non-formalistic, which implies a method of interpretation whereby the courts pay attention to the actual wording of the provision but also to; other sources of law, including the travaux préparatoires, the objective and historical background of the rule, the coherence of the tax regulations, established case law, principles from other areas of law, and broader considerations.

Jan Pedersen et al. thus describe the courts’ approach to interpretation of tax provisions as characterized by the application of diverse sources of law that go beyond the actual wording of the provisions and statements in the travaux préparatoires. Hence, the courts apply an outcome-based and realistic approach, in which considerations concerning reasonableness and practicality also play a role.57

Despite the plurality of legal sources, some prioritization of the various legal sources appears to take place. Accordingly, the interpretation is mainly based on the wording of the provision in question and clear statements in the travaux préparatoires.58 However, in more complicated cases, other sources of law are also relied upon, including broader considerations.59

With respect to the legal source broader considerations, it has correctly been observed that the courts do normally not make explicit references hereto in tax cases. In this context, Erik Olsen has found that the courts – in more difficult cases – do not refrain from including considerations of administrative, economic or social nature, including the need for control by the tax authorities or the risk of tax avoidance.60

4.2. A court developed anti-avoidance doctrine?

Abuse of tax law has been debated in a Danish context for many years,61 even though until recently no statutory general anti-avoidance rule (GAAR) existed in Danish tax law.62 However, this did not mean that avoidance could not be mitigated by the tax authorities as Danish case law contains several examples where courts have struck down the arrangements of a taxpayer, inter alia, by taking the substance of the transaction(s) into account when interpreting and applying the law.63

In this context, the so-called doctrine of reality has been formulated in the academic literature to explain the longstanding inclination of the courts to place emphasis on the substance of the transaction when interpreting and applying tax provisions.64 Briefly described, the doctrine states that fictitious or artificial transactions may be set aside for tax purposes if the formal private law basis of an arrangement has been manipulated to such an extent that the underlying substance of the transaction significantly deviates from the outer legal shell.65

Nevertheless, not all scholars agree that an actual coherent doctrine of reality can be considered to exist in Danish tax law. Broadly speaking, these scholars instead argue that the inclination of the courts to place emphasis on the substance of an arrangement simply follows ordinary rules for interpretation of the law, according to which the existence of abusive behavior constitutes one of several elements that may be taken into account in the interpretation process – often with significant weight attached to it.66 Accordingly, in the eyes of these scholars, the existence of a doctrine of reality would be hard to reconcile with the requirement for a statutory basis for taxation prescribed in article 43 of the constitution.67

Despite these disagreements in the literature, it appears to be a commonly accepted fact that the courts – one way or the other – are willing to take abusive behavior into consideration when interpreting and applying tax provisions. Against this background, I thus agree with Danish Supreme Court judge, Jon Stokholm, who has argued that it seems to be a matter of taste whether the doctrine of reality should be acknowledged or dismissed.68 In my view, it would therefore potentially be more fruitful to explore whether the pragmatic style of the Danish courts – and in a broader sense legal pragmatism as such – provides a more expedient and reliable model for explaining the case law on tax avoidance unfolding in the Danish courts.

In line with this reasoning, an analysis of the Supreme Court's more recent decisions in tax avoidance cases is carried out in the next section. An important reason for strictly focusing on the Supreme Court's more recent decisions is to make a necessary delineation and prioritization of the vast amount of case law on tax avoidance delivered over time.69 Other reasons are that decisions from the Supreme Court carry the highest precedential value, that more recent decisions have a preferential position compared to older decisions,70 and that the Supreme Court over the years has become more willing to elaborate on the reasoning behind its judgements.71

4.3. Signs of legal pragmatism in Danish case law on tax avoidance

Several Supreme Court judgements on tax avoidance show strong signs of pragmatic adjudication. A good example is SKM2014.422.HR (Topdanmark) which illustrates well how the Court addresses a complicated case on tax avoidance where the plain wording of the relevant provision undoubtedly speaks in favor of the taxpayer but where such a result might seem unreasonable.

Briefly explained, the case concerned a Danish group that – in cooperation with a bank – had entered into a number of oppositely directed forward exchange transactions which led to losses in two of the groups’ subsidiaries and to almost equivalent gains in two other subsidiaries. All the Danish group companies were subject to joint taxation. In order to cover the losses in the two loss-making subsidiaries, the parent company injected capital by way of capital increases carried out fully in line with corporate law requirements. Subsequently, but before the shares had been owned in three full years, the shares in the loss-making subsidiaries were sold to other group companies, thereby triggering realization of losses on the shares transferred intra-group. However, the Danish tax authorities refused to accept that the selling group companies could fully deduct these losses.72

The Supreme Court started out by consulting the wording of the then applicable provision in section 2(2) of the Danish Act on Capital Gains on Shares, which plainly stated that losses realized by the sale of shares held for less than three years could be offset against taxable gains realized on other shares. According to the rules, such losses should be calculated as the difference between the acquisition price and the selling price (however, the tax authorities had refused to take the above-mentioned capital increases into account when calculating the acquisition price).

After having consulted the wording of the relevant provisions, the Supreme Court stated that the transactions did not involve any notable economic risks for the group (as the losses came alongside almost equivalent gains) and that the transactions did not rest on commercial grounds. Moreover, the Supreme Court noted that the transactions were carefully planned, and that the sole purpose and effect of the transactions were to create deductible losses. In conclusion, and based on an overall assessment, the Supreme Court therefore found that the losses – created by the forward exchange transactions and subsequent capital increases in the loss-making companies – were not real losses and therefore not deductible.73

The reasoning of the Supreme Court is quite brief, as the Danish adjudication tradition prescribes. However, it appears as if the Court chose a pragmatic approach and decided that this was one of those difficult cases – as mentioned by Børge Dahl in Section 3 above – where considerations about reasonableness should play an important role. In other words, it seems to be a good example of a case were controlling weight is given to the systemic consequences and to reaching a reasonable result – i.e. an outcome that prevents taxpayers from manufacturing artificial tax losses.

Another interesting judgement is the Danish Supreme Court's case in SKM2016.16.HR (TAKS), which dealt with a case under Faroese tax law.74 The case concerned the shareholders of a Faroese holding company (OldCo) which had established a new Faroese holding company (NewCo) with the exact same division of ownership. After the establishment of NewCo, the shareholders transferred all the shares in OldCo to NewCo. The selling price received by the shareholders from NewCo consisted of cash, a note (debt claim), and new shares in NewCo. Before any installments were paid with respect to the shareholders’ debt claim, NewCo and OldCo merged with OldCo as the receiving company. Subsequently, OldCo repaid the debt claim.

The Faroese tax authorities (TAKS) argued that a part of the shareholders’ sale of OldCo to NewCo (amounting to the sales price minus the contribution in kind in exchange for shares in NewCo) should not be considered a tax-exempt transfer of shares for tax purposes. Instead, this part of the selling price should, in the eyes of the tax authorities, be considered a taxable distribution of dividends, as the shareholders – through the above described arrangements – had created a situation in which cash was taken out of OldCo in the form of repayments of debt without altering the original division of ownership.

The Supreme Court initially looked at section 2 of the Faroese Act on Taxation of Capital Gains which prescribes that all distributions made from a corporation to its owners should be considered dividends. Subsequently, the Court made a reference to the travaux préparatoires which stated that all financial benefits should be considered dividends if the shareholders have received the benefits in their capacity as shareholders.

The Supreme Court then carefully considered the facts of the case and noted that OldCo through the years had accumulated a substantial amount of capital and that dividends had not been distributed to the shareholders in a period of several years. Accordingly, the Court found that the objective of the shareholders was to find a way to take out capital without surrendering any property rights to the shares.

Against that background, the Supreme Court found that the transactions did not rest on commercial grounds and that the purpose of the whole arrangement was to find a way to transfer the accumulated capital in OldCo to the shareholders, without triggering any dividends taxation pursuant to section 9(1) of the Faroese Act on Taxation of Capital Gains. In conclusion – and based on an overall assessment – the Supreme Court thus stated that a significant part of the shareholders’ sale of OldCo to NewCo should not be considered a tax exempt transfer of shares for tax purposes but instead a taxable distribution of dividends.75

The Supreme Court's reasoning and result in SKM2016.16.HR (TAKS) is perhaps not very surprising when bearing in mind the conclusions drawn by the Supreme Court in the earlier mentioned case SKM2014.422.HR (Topdanmark). Hence, in both cases the Supreme Court based its decision on an overall assessment and relied on the fact that the arrangements did not rest on commercial grounds. However, in light of an earlier judgment from the Supreme Court – SKM.2006749.HR (Finwill) – the result perhaps was a bit surprising.76

The case from 2006 concerned a company (SellerCo) that wished to sell the shares in a company (TargetCo) to another company (BuyerCo). If SellerCo sold the shares directly to BuyerCo, the capital gain on the shares would be taxable because they had been owned for less than three years. Oppositely, if SellerCo sold the shares back to the issuing company (TargetCo), the proceeds would be considered a tax-exempt dividend since the shares had been owned for at least one year. As a consequence, it was decided that SellerCo should sell the shares back to TargetCo and that the repurchase should be financed by a simultaneous capital increase made by BuyerCo.

The tax authorities tried to set aside this arrangement by considering it one sole transaction (i.e. a taxable sale of shares directly from SellerCo to BuyerCo). However, the Supreme Court decided in favor of the taxpayer and stated that the arrangement had to be accepted as consisting of two separate transactions: a tax-exempt resale of shares and a capital increase.77

In the literature, it has been argued that the decision in SKM.2006749.HR (Finwill) showed that the tax authorities cannot set aside an arrangement simply because the steps are made in order to obtain a tax advantage if the transactions are in fact based on valid corporate law transactions.78 However, as described above, the Supreme Court in SKM2016.16.HR (TAKS) actually did set aside an arrangement (partially) based on valid corporate law transactions.

The Ministry of Taxation has in the travaux préparatoires to a number of recent bills commented on SKM2016.16.HR (TAKS).79 Here, the Danish Ministry of Taxation has expressed the view that valid corporate law transactions also may be set aside pursuant to a general anti-avoidance doctrine exemplified by the Supreme Court's judgement in SKM2016.16.HR (TAKS). However, against this view, it has been argued that there are significant differences between the legislation in Denmark and the Faroe Islands as the latter regime does not have the same amount of detailed provisions in place regulating corporate dividend distributions.80

In my view, the different outcomes in SKM.2006.749.HR (Finwill) and SKM2016.16.HR (TAKS) illustrates the pragmatic approach applied by the Danish Supreme Court in cases concerning tax avoidance. Hence, because Danish law contains a vast number of provisions adopted through a parliamentary process – which specifically regulate the treatment of dividends in various situations – the Supreme Court did not find sufficiently compelling reasons to set aside the transactions dealt with in SKM.2006.749.HR (Finwill) – despite the fact that the transactions in question were carefully planned in a way to avoid triggering taxation.81

However, the circumstances were different in SKM2016.16.HR (TAKS) as Faroese law did include such detailed regulation. Accordingly, the need for protecting the overall functioning and integrity of the tax system was more pronounced in the Faroese context. Probably because of this and taking into account the lack of actual commercial reasons, the Supreme Court decided to give controlling weight to the damaging systemic consequences of allowing such tax avoidance.

Another area of Danish tax law that is quite densely regulated concerns taxpayers’ carry-forward and utilization of tax losses from previous income years. In 2010, the Supreme Court decided a case (SKM2010.26.HR (Feri-Lux)) which again showed that the Court appears to restrict itself from setting aside taxpayers’ tax motivated transactions if the area of concern has already been quite densely regulated by specific provisions enacted by the Parliament.

In short, the case concerned a situation where an activity was relocated from one company (A-Co) to another related company (B-Co), among other things in order to carry-forward and utilize tax losses in B-Co. However, the tax authorities tried to gun down this tax planning idea by arguing that B-Co was not the rightful recipient of the income generated by the relocated activity. The Supreme Court initially noted that the relocation of the activity was motivated by commercial as well as tax-optimizing reasons. Against that background – and with explicit reference to the then applicable provision regulating utilization of tax losses in section 15 of the Tax Assessment Act – the Court ruled in favor of the taxpayer and concluded that the relocation of the activity should not be set aside for tax purposes.

Accordingly, the judgement appears to illustrate that when the legislator has adopted detailed provisions in order to deal with specific situations (e.g. certain kinds of tax avoidance), it is not the task of the Supreme Court to repair or stretch out the wording of such detailed provisions by referring to broader anti-avoidance deliberations.82 Put differently, the Supreme Court appears to give controlling weight to rule of law considerations in such situations – including predictability for taxpayers and the separation of powers – and not to possible systemic consequences of accepting such tax motivated behavior.83

On the other hand, when the legislator has not specifically addressed a given issue, the Supreme Court appears to find more room for including broader considerations of various kinds when deciding a case. A good example of this is SKM.2010.123.HR (A ApS), which briefly explained, concerned a company that had issued a convertible bond with certain atypical features to a bank and used the proceeds to invest in other bonds. The High Court had ruled in favor of the tax authorities and the Supreme Court confirmed the High Court's conclusion as well as its reasoning.

The Court stated that the loan arrangements in question included no risks for the involved parties and that the transactions did not rest on commercial grounds, as the only reason for entering into the arrangements was to obtain a tax benefit (deductible interest payments combined with tax exempt capital gains). Accordingly, and based on an overall assessment, the Court found that the interest payments in question, which the taxpayer originally had deducted, lacked reality for tax purposes.84

Examples of judgements in which the Supreme Court has placed emphasis on deliberations concerning lack of commercial grounds and/or lack of reality also involves tax motivated bodies of agreements related to investments through (limited) partnerships,85 successive transfers of contracts,86 and tax motivated transfers of assets and businesses between related parties.87

In conclusion, the case law analyzed above displays that the Supreme Court, in cases on tax avoidance, actually do show judicial awareness of and concern for consequences. Moreover, the case law exhibits an understanding for the need to ground judgements in facts and consequences rather than in conceptualisms and generalities, and it appears to (silently) appreciate reasonableness as an important part of adjudication. In other words, the case law of the Supreme Court does show strong signs of legal pragmatism.

4.4. Normative assessment

It has been shown above that the Danish judiciary generally applies a pragmatic approach and more specifically that the Danish Supreme Court's case law on tax avoidance displays strong signs of legal pragmatism. Against this background, it will now be discussed whether this is actually a good thing. For that reason, a normative assessment will be made.

In the literature, it has been argued that the general pragmatic approach of the Danish judiciary is commendable, as neither (excessive) formalism nor idealism should establish a foothold. Hence, on the one hand, the pragmatic approach entails an expedient balancing act between acknowledging the significance of traditional legal sources and interpretation methods (like formalism) and, on the other hand, the significance of accommodating flexibility and openness towards underlying values (like idealism).88

However, in connection to cases on tax avoidance, the Supreme Court's pragmatic approach has occasionally received criticism in the Danish literature. One example of which is the criticism put forward by Ann Rask Vang and Thomas Booker of the Supreme Courts’ judgement in SKM2014.422.HR (Topdanmark).89 They argue that even though it may appear reasonable that the Supreme Court assists the tax authorities in their fight against taxpayers’ tax avoidance arrangements, it is simply not the Supreme Court's rightful task. Hence, if the legislator finds that there is a need to combat such kinds of tax avoidance, appropriate legislation should put in place.

In contrast, Jon Stokholm has – with reference to the Supreme Court's judgement in TfS 2000, 1011 (Simon Bent Sørensen) – argued that a reasonable judgement from the Supreme Court can be a more supple and expedient way of regulating tax avoidance, as it may be difficult to draft a provision that adequately separates the taxpayers’ desirable behavior from their undesirable behavior.90 Nonetheless, a valid objection against such a pragmatic approach to handling tax avoidance is that it harms the taxpayers’ possibilities of predicting the consequences of their actions.91

In addition, it must be acknowledged that applying reasonableness as the litmus test in difficult cases on tax avoidance is not unproblematic. Hence, different people have different ideas about what is reasonable, and a particular commitment to reasonableness will therefore not dictate particular legal doctrines or case outcomes.92

Against that criticism, it may be argued that this is actually the point – there is no master concept that will generate correct answers to difficult legal questions, and therefore judges should focus on facts and consequences when deciding a case.93 However, how should it be decided which consequences are desirable and which are not? Without an answer to this question, it may be hard to see how pragmatism can serve as a guide to decision making at all.94

Nonetheless, with respect to Danish tax law, there seems to be a basic consensus concerning the main underlying principles of the tax system. These include the need for ensuring sufficient revenue for the welfare state, appropriate income distribution, legitimacy, efficiency, neutrality, and legal protection of taxpayers (for example by acknowledging the importance of predictability and by securing that the tax charge reflects the taxpayers’ abilities to pay).95

An understanding of these basic considerations and principles may, in my view, sufficiently equip the courts with the tools needed to carry out the necessary balancing act and reach reasonable judgements in difficult cases on tax avoidance.96 In my opinion, this is also reflected in the Danish Supreme Court's more recent decisions in cases on tax avoidance, which the court has generally handled in a quite systematic and sensible way.97

Moreover, as the Supreme Court's case law on tax avoidance do in fact show strong pragmatic signs, I would argue that legal pragmatism may function as a useful and coherent explanatory model for the case law on tax avoidance actually unfolding in the Danish courts. In addition, as the Supreme Court's interpretation and application of the law in cases on tax avoidance do exhibit a number of particular features – including the weight attached to (lack of) commercial grounds, reality, economic risk and the eye for the systemic consequences) – awareness of the Court's pragmatic approach do add value in the process of understanding and predicting the behavior of the Supreme Court in cases on tax avoidance. These particular features may be overlooked if the Court's approach to tax avoidance is trivialized as instances of ordinary interpretation, or oppositely placed on a pedestal and conceived as a consequent application of a court-developed general anti-avoidance rule.98

In conclusion, I would therefore argue that legal pragmatism may function as a convincing and adequate explanatory model for the case law on tax avoidance actually unfolding in the Danish courts.