The permit is valid as long as the zone is operating
RIGHTS | The Minister of Economy has changed his position regarding the possibility of extending the period for which consent was granted to the investor for pursuing business activity in SEZ. The Ministry has started to agree with economic arguments raised by companies.
Until recently the position of the Minister of Economy regarding the possibility of extending the term of validity of permits for pursuing business activity in a special economic zone, issued for a definite period of time, was quite univocal and unfavourable for taxpayers. Arguments raised by investors were not agreed to by the Minister of Economy, who enjoys a discretionary right to change the contents of decisions issued previously under which permits are granted for pursuing business activity in a special economic zone, also as regards the term of their validity.
Essence of the problem
The problem concerns permits issued after 1 January 2001 wherein the Minister of Economy specified the term of their validity. Just to remind – the legislator specified for administration authorities univocally a closed catalogue of elements constituting a permit for pursuing business activity in a special economic zone (Article 16 of the Act on Special Economic Zones of 20 October 1994, consolidated text: Journal of Laws of 2007 No. 42, item 274, as amended; see the frame). The catalogue includes, apart from definition of the scope of business activity, also the conditions for such activity which relate, in particular, to hiring a specific number of employees and implementing investments in excess of a specified amount. The catalogue does not include the term of validity of a permit, neither do the provisions of the above law set forth any conditions for granting a permit for a shorter or longer period. What is also important for the matter, the provision which stipulated that a permit shall be granted for a definite period of time was repealed as of 1 January 2001. In the rationale for the amendment it was explained that the new wording of the provisions was to constitute the legal regime under which a permit would cease to be the basis for pursuing business activity in the zone and would instead serve as the basis for using state aid. That objective was to be achieved, among others, by repealing the provision about the term of validity of a permit. It means that if the legislator had wanted permits issued under the Act on Special Economic Zones to include designation of the term of their validity, the above provision would not have been removed.
What is stipulated by law
Article 16 of the Act on Special Economic Zones in its current wording stipulates that:
1. The basis for using state aid granted under the Act shall be a permit for pursuing business activity within a zone concerned which entitles a business entity to use state aid, hereinafter referred to as the “permit”.
2. The permit shall define the scope of business activity, as well as the conditions that refer particularly to the following:
1) the business entity pursuing business activity within a zone shall hire a certain number of employees within a specified time;
2) the business entity shall implement the investment within a zone, the value of which shall exceed the specified amount;
3) the date of the investment completion;
4) the maximum amount of eligible costs of the investment and eligible costs of labour for the period of two years;
5) the requirements referred to in Article 5.3. and 5.4, if the investment is to be implemented within the land which is owned or under perpetual usufruct of entities other than referred to in Article 5.1.
3. The permit may be granted if the undertaking of business activity within a zone shall contribute to the achievement of objectives defined in the zone development plan, referred to in Article 9.
4. The minister competent for economy shall grant, revoke and change the permit. The permit may be revoked or changed under conditions specified in Articles 19.2 to 19.4.
5. Before taking a decision on granting, revoking or changing the permit, the minister competent for economy shall request for an opinion of the zone managing authority.
6. The provisions of the Code of Administrative Procedure of 14 June 1960 shall apply to the procedure for granting, revoking of changing the permit.
As the statutory law does not empower the authority issuing the permit to specify the term of its validity, we should conclude that the permit granted to a given business entity is governed by the provisions of the Act on Special Economic Zones. And since that Act does not stipulate any regulations to the contrary and does not authorise the administration authority to restrict the term of validity of the permit, the latter always extends on the entire period of operation of the zone concerned.
The position of tax authorities was shared by courts
Nevertheless, the authorities did not agree with the argument so construed. According to the position of the Minister of Finance, the entity which received the permit for a definite period of time could use the benefit consisting in income tax exemption of revenues generated from the activity pursued in the special economic zone only within the period set forth by the contents of the permit (cf. individual binding ruling issued by the Fiscal Chamber in Katowice on 27 December 2013, ref. no. IBPBI/2/423-1249/13/CzP). Similar position was taken by regional administrative courts, which rejected the objection raised by investors that the authority issuing the permit was not authorised by law to specify the term of its validity. We may give the judgment issued by the Regional Administrative Court in Warsaw on 11 September 2012, ref. no. VI SA/Wa 1213/12, as an example.
Landmark judgment of the Supreme Administrative Court
It was the above case resolved by the Regional Administrative Court in Warsaw which has recently came to an end before the Supreme Administrative Court. In a judgment of 11 March 2014 (ref. no. II GSK 136/13), the Supreme Administrative Court found that: „(…) neither Article 16 of the Act on Special Economic Zones, in its wording effective as of 1 January 2001, nor Article 19.1 of that Act may serve as the basis for specifying in the permit for pursuing business activity within the SEZ the end date for the term of validity of such permit, and so for issuing the permit for a definite period of time.” Such authority is not enjoyed the more so in connection with Article 22 of the Constitution of the Republic of Poland, according to which limitations upon the freedom of business activity may be imposed only by means of statutory law and only for important public reasons. The Court also reminded that pursuant to Article 7 of the Constitution of the Republic of Poland public authorities shall act on the basis, and within the limits, of the law which means that “the power of the authority to act must be based explicitly on the applicable legal norms and cannot be implied. So a decision may be issued only if there exists a provision serving as the basis for the administration authority to take the action concerned.” Since on the date when the permit was issued there were no regulations having the force of statutory law which would empower the authority to set forth the term of validity in the permit, such restriction was made without any legal grounds.
Supreme Administrative Court gave the basis to investors to assert their rights
The Supreme Administrative Court challenged the legality of specifying the term of validity in the permit, giving an argument to investors for requesting that disputed provision in the permit be found invalid. It is especially important for all investors who anticipate that within the term of validity of their permits they will be unable to consume to a satisfactory degree state aid consisting in revenue tax exemption to which they are entitled in connection with incurred investment expenditure. If we take into account that the existence of special economic zones in Poland has been recently extended by 2026, it seems reasonable to take legal steps and has chances for success, especially that there are no systematic solutions to that extent as yet.
In the rationale for its judgment the Supreme Administrative Court noted that „(…) when examining again the request by the company (…) for declaring invalidity of the permit (…) for pursuing business activity in the Special Economic Zone in its part concerning the term of its validity, the Minister of Economy shall take into account the interpretation of legal regulations as presented by the Supreme Administrative Court”. But the judgment given in the investor’s individual case is not a systematic solution. As it is binding only in that single case, it cannot translate directly to the situation of other entities for which there are also conditions for finding invalidity of the provision setting forth the term of validity of issued permits. So taxpayers may apply to the Minister of Economy, similarly as the company whose case was examined by the Supreme Administrative Court, requesting declaration of invalidity of the permit in its part concerning the term of its validity, and challenging legitimacy of the authority to set forth the term of validity in the permit. It is possible that such cases will be finally resolved in court.
Resolution in court is highly probable in view of a decision which has been received recently by one of the investors in the Katowice Special Economic Zone. The company applied to the Minister of Economy, requesting a change in the permit for pursuing business activity in that zone to the extent of its term of validity. Apart from legal arguments, including of course the lack of authorisation of the authority issuing the permit to set forth its term of validity as discussed above, the company also raised economic arguments indicating impossibility to consume the eligible level of state aid in connection with the occurrence of many factors beyond its control. What is important, such economic argumentation has been rejected by the Minister of Economy to date, who claimed that lower business profitability arising from fluctuating economic situation and factors beyond control of the entity was a part of risk of pursued business activity, and argumentation based on forecasted figures subject to error should not be examined. In spite of the judgment by the Supreme Administrative Court, which evidently found lack of legitimacy of the authority to limit the freedom of business activity, in his decision issued at the end of April 2014 the Minister addressed the objection that setting forth the term of validity of the permit was inadmissible and said that the catalogue of elements constituting the permit was open, which meant that an element not listed in the catalogue could be included therein, such element being for example the term of validity. We will look in vain for any connection of such argumentation with the landmark judgment given by the Supreme Administrative Court only six weeks earlier.
Common sense prevailed
Nevertheless, the request was resolved in favour of the company. The authority took into account its economic argumentation, which emphasised the impact of macroeconomic factors on the performance and consequently on the level of “consumption” of available state aid. In view of the position taken by the Minister of Economy to date, it is an important change. What contributed to admitting the request was, according to the Minister, a just interest of the company. It would give a possibility to use state aid for a longer period of time and to a larger extent by pursuit of business activity, contributing at the same time to achievement of the objectives for which the special economic zone has been established in accordance with the law. In his decision the Minister of Economy took into account a positive opinion of the zone managing authority, obviously bearing in mind the current line of judicial decisions (cf. judgment of the Regional Administrative Court in Warsaw of 18 July 2012, ref. no. VI SA/Wa 883/12). So it is worth noting that investors may obtain a change to the contents of their permits by just argumentation, not being limited strictly to finding invalidity of the provision on the term of validity, and not only in the course of tedious, time-consuming and costly court battles. Even in view of (as it seemed) a landmark judgment given by the Supreme Administrative Court this year in March.
Agnieszka Jasica-Skalbmierska, tax advisor, Partner, ATA Finance
Barbara Otrzonsek, tax consultant, ATA Finance