The initiation of criminal tax proceedings does not always result in the suspension of the limitation period for a tax liability. The mere initiation of criminal tax proceedings cannot automatically lead to the suspension of the limitation period if it is not based on specific findings of fact and evidence (initiation for procedural purposes).
Client's situation
A customsregarding the correctness of personal income tax returns, inter alia in connection with the receipt of remuneration for serving as board members of the company.
In the course of the audit, the tax authority established that the company, despite being formally registered in Malta, was in fact managed from within Poland and was therefore subject to unlimited tax liability in Poland. Consequently, the authority concluded that the remuneration received by the Clients should also be subject to taxation in Poland and declared in their PIT returns as income from activities carried out personally. On this basis, the tax authority assessed a tax liability for the taxpayers in respect of their 2016 PIT returns.
Given the time that had elapsed since the end of the tax year to which the decisions related, the issue of the limitation period for the tax liability arose in the case. The limitation period for the 2016 liability was, in principle, due to expire at the end of 2022. However, the tax authority considered that the running of the limitation period had been suspended pursuant to Article 70 § 6(1) of the Tax Ordinance in connection with the initiation of criminal tax proceedings, which, in the authority’s view, allowed for a decision to be issued after the expiry of the original limitation period.
The issue
DMS TAX’s task was to prove, in the course of tax court proceedings, that the initiation of criminal tax proceedings by the customs and tax office was undertaken solely for the purpose of suspending the running of the limitation period.
Our approach
We lodged an appeal against the tax authority’s decision and, following its upholding by the second-instance authority, lodged a complaint with the Provincial Administrative Court in Wrocław.
During the court proceedings, we challenged the validity of the suspension of the limitation period, arguing that the initiation of the criminal tax proceedings was merely a procedural manoeuvre. We argued that the criminal tax proceedings had been initiated whilst the customs and tax audit was still ongoing, i.e. before the audit had been completed and before any decisions determining the tax liability had been issued. We pointed out that, at the time these proceedings were initiated, the authority did not have sufficient evidence to justify a reasonable suspicion that a prohibited act had been committed. We argued that the mere initiation of criminal tax proceedings cannot automatically lead to the suspension of the limitation period if it is not based on specific findings of fact and evidence.
Successfully challenging the suspension of the limitation period and having tax decisions set aside
The Provincial Administrative Court in Wrocław upheld our appeal and quashed the contested decisions. The Court noted that there were significant doubts as to whether the initiation of the fiscal criminal proceedings had been undertaken with a view to achieving its statutory objectives, or whether it had led to the institution provided for in Article 70 § 6(1) of the Tax Ordinance being used solely for the purpose of bringing about the effect of suspending the running of the limitation period.
The Provincial Administrative Court noted that the criminal tax proceedings had been initiated even before the customs and tax audit had been completed, and that the authorities had failed to demonstrate what specific findings and evidence they had at their disposal at the time of their initiation. Consequently, the court challenged the authorities’ position regarding the validity of the suspension of the limitation period.
For the clients, this meant the annulment of the decisions determining their personal income tax liability.
What this means
The ruling confirmed our position that the application of Article 70(6)(1) of the Tax Ordinance requires proof of a genuine link between the initiation of criminal tax proceedings and a reasonable suspicion that a prohibited act has been committed. The mere formal initiation of criminal tax proceedings does not automatically result in the effective suspension of the limitation period.