The company applied for an individual corporate income tax interpretation in connection with an intended interest free loan to its affiliated family foundation. The company treated the planned loan as potentially a controlled transaction and wanted confirmation that, if local transfer pricing documentation were prepared, the company and the foundation could file the statutory statement that the transfer price was set on arm’s length terms.
The tax authority refused to initiate the interpretation proceedings. It took the view that answering the question would require examining whether the planned loan terms were market based and would require reviewing the local transfer pricing documentation and verifying arm’s length conditions, which belongs to evidentiary and control proceedings rather than the interpretation procedure.
The company challenged the refusal and argued that it was seeking a legal interpretation of the provisions on the statement, not an audit style assessment of the transaction. The lower court dismissed the complaint and agreed with the tax authority that an individual interpretation cannot be used to obtain a substantive arm’s length assessment that would interfere with the competences of the authorities responsible for evidence gathering and tax control.
Judgment
The Supreme Administrative Court dismissed the cassation appeal. It held that an individual interpretation is limited to clarifying the legal issue presented by the applicant on the basis of the described facts, and it cannot involve establishing facts, assessing documentation, or determining whether specific transaction terms are market conditions. Since the company’s question effectively required a market assessment of the planned interest free loan and verification of arm’s length conditions, the tax authority was entitled to refuse to initiate interpretation proceedings, and the lower court’s approach was upheld.
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