Tax authorities will not challenge tax optimisation if the same does not have the features of ostensible transactions – precedent judgment by the Supreme Administrative Court
On 15 January 2016, the Supreme Administrative Court gave a judgment on the possible challenge by tax authorities of transactions the purpose of which is in fact tax optimisation (case ref. no. II FSK 3162/13). The Supreme Administrative Court noted that Article 199a.2 of the Tax Regulations would be applicable only if an ostensible legal transaction is found in the trade, not a transaction effected in order to bring about the intended tax effect (tax optimisation) which does not have the features of being ostensible.
The case involved a company which was accused by the tax authorities that the transaction effected by the company and consisting in contribution in kind of the ownership right to property constituting the enterprise was in fact the sale of perpetual usufruct right to plots of land together with the right to buildings and structures situated on those plots, as well as the right to an Internet domain. In the opinion of the tax authorities, if a legal transaction was effected by the parties in order to hide another transaction that was actually intended, the intended transaction remains valid and the tax authorities may, pursuant to Article 191 of the Tax Regulations, assess on their own the nature of the transactions effected by the taxpayer and their tax effects. The tax authority did not find any reasonable rationale for the transactions effected by the company apart from an attempt to hide the actual sale of rights to the real property, which should in turn result in the taxable income on the part of the seller. This position was shared by the Regional Administrative Court in Gdańsk, which noted Article 199a.2 of the Tax Regulations prescribing that tax effects be derived from hidden transactions.
Position of the Supreme Administrative Court
The Supreme Administrative Court came to contrary conclusions than the Regional Administrative Court in Gdańsk. The Court found that the analysed case involved a number of legal transactions which, when taken together, “form an optimisation mechanism connected with such transaction schematic the execution of which is in principle deprived of any economic reasons, except for tax reasons”. So it should be only resolved whether the existing legal regulations, namely Article 199a.1 and 199a.2 of the Tax Regulations, give the authorities the right to prevent such conduct. Pursuant to Article 199a.1 of the Tax Regulations, when assessing the contents of a legal transaction, the tax authority shall take into account the mutual intention of the parties and the purpose of the transaction, not only the literal wording of the statements of will made by the parties to the transaction. While pursuant to Article 199a.2 of the Tax Regulations, if under a false appearance of effecting a legal transaction another legal transaction has been effected, the tax effects shall be derived from such hidden legal transaction. According to the Supreme Administrative Court, this provision is applicable only if an ostensible legal transaction is found in the trade, not a transaction which is effected in order to achieve a certain intended tax result but does not have the features of an ostensible transaction. According to Article 199a.2 of the Tax Regulations, ostensibility is in place when the parties effect an ostensible (simulated) transaction in order to hide another legal transaction (dissimulated) the legal effects of which they actually want to bring about. It is, however, important that in the case of ostensibility the parties to the transaction must be exactly the same both in the pretended (ostensible) transaction and in the hidden transaction (that is actually to take place), which was not the case in the analysed situation, when we take into account the number and course of the transactions (the parties to the transactions were in total three entities). The Supreme Administrative Court reminded also that the clause preventing the tax evasion included in Article 24b.1 of the Tax Regulations is no longer in force. Accordingly, provided that a legal transaction is valid, tax authorities have no legal grounds to negate the effects envisaged for a given type of transactions by the tax law.
So the judgment given in the discussed case confirms that in the prevailing legal regime there are no regulations on the basis of which tax authorities could attribute to transactions comprised in tax optimisation tax effects other than envisaged by the tax law, if such transactions do not have the features of being ostensible. Only in the case of ostensible transactions may Article 199a.2 of the Tax Regulations become applicable.
The decision is final and unappealable.