Can tax law be retroactive?

What does ‘retroactive effect’ mean?

The essence of the rule against retroactive application is that, as a general rule, the law should apply to future events from the moment it comes into force, so that people can plan their actions. Looking at it from another angle, this means that events occurring whilst old laws were in force must be assessed in accordance with those laws. As a rule, what the new provisions say is irrelevant to these events if the assessment is made whilst they are in force.

The principle of non-retroactivity, or true retroactivity, must be distinguished from a very similar principle, namely retrospectivity, also known as apparent retroactivity. The latter concerns relationships that arose previously and are still ongoing. Most importantly in this regard, the principle of non-retroactivity derived from Article 2 of the Constitution does not apply in the case indicated above. Consequently, it is possible to apply new laws to events that began whilst the old law was in force and are continuing whilst the new provisions are in force.

One of the most significant exceptions to the principle of retroactivity is the provision of Article 5 of the Act on the Publication of Normative Acts and Certain Other Legal Acts. It provides for the possibility of a new Act applying to earlier events, provided that the principles of a democratic state governed by the rule of law do not preclude this.

In its judgment reference number K 4/19, the Constitutional Tribunal specifies the conditions that must be cumulatively met for this exception to the principle to apply: – these are not provisions of criminal law nor regulations imposing subordination of the individual to the state (e.g. tax law);

– they have the force of statute;

– their introduction is necessary (essential) for the realisation or protection of other, more important and specifically identified constitutional values;

– the principle of proportionality is satisfied, i.e. the constitutional grounds justifying retroactivity outweigh its negative effects;

– they do not result in a restriction of rights or an increase in the obligations of those subject to the legal provisions, but rather improve the legal position of certain persons subject to the provision in question, without being at the expense of the other persons subject to that provision;

– the problem addressed by these regulations was not previously known to the legislature and could not have been resolved in advance without the use of retroactive provisions;

In view of this, the principle of lex retro non agit is subject to a clear limitation, justified by serious considerations relating to matters of fundamental importance to a democratic state. However, such exceptions occur very rarely in practice.

How does the principle of non-retroactivity apply in tax law?

The principle of non-retroactivity is not explicitly stated in tax legislation. This does not in any way mean that it does not apply in this branch of law. An indirect reference to it can be found in Articles 120 and 121 of the Tax Ordinance. The first states that: “Tax authorities act on the basis of legal provisions”. The second specifies that: “Tax proceedings should be conducted in a manner that inspires confidence in the tax authorities”. Both of these provisions, in a sense, refer to the principle of lex retro non agit. They relate to the entire legal system, and thus in particular to the Constitution, which sets out the most important principles of Polish law. It adds that legal provisions are primarily concerned with the safety and protection of citizens. For this reason, the taxpayer must have confidence that the authorities will treat them in accordance with the law in force. Any exceptions to this should be thoroughly justified and specified, such as those arising from the Constitutional Tribunal’s judgment discussed above.

Examples of breaches of the principle of non-retroactivity in tax law

The most recent and clearest example of the authorities departing from the lex retro non agit principle is the dispute concerning the temporal application of the anti-tax avoidance clause set out in Articles 119a to 119f of the Tax Ordinance.

The dispute in this case concerned the application of the above provisions, which came into force on 15 July 2016, to events that took place and were concluded before that date. The tax authority justified its decision on the grounds that the Act of 14 June 2016 introducing the aforementioned provisions into the Tax Ordinance provided in Article 7 that:

The provisions of Articles 119a–119f of the Act amended by Article 1 shall apply to tax benefits obtained after the date of entry into force of this Act.

The Head of the National Revenue Administration concluded from this that, given that under the provisions the tax liability under PIT arises at the end of the tax year, the taxpayer only obtained the tax benefit on 31 December 2016. The anti-tax avoidance clause was already in force at that time. The authority had no doubt that the taxpayers’ actions constituted a breach of the provisions of Article 119a of the Tax Ordinance. The most significant point in this regard is that the aforementioned actions were completed in April 2016, i.e. several months before the clause came into force.

The authority and the Anti-Tax Avoidance Council justified their decisions on the grounds that, under the PIT Act, a taxpayer must declare their income after the end of the tax year in a return submitted by 30 April of the following year. In their view, the tax benefit therefore arose on 31 December 2016. In the view of the aforementioned bodies, all elements of the tax liability were only known at the end of the tax year; it was only then that the tax liability became specific.

The judgments of the Supreme Administrative Court have dispelled doubts regarding the application of the anti-tax avoidance clause retroactively

In its judgment of 9 November 2023, reference number II FSK 1227/23, the Supreme Administrative Court clearly stated that the provisions on the anti-tax avoidance clause in the Tax Ordinance cannot be applied to personal income tax payers for 2016, i.e. the year in which they came into force. A very similar ruling was issued in the context of CIT taxation for 2016.

The Court justified its decision by arguing that retroactive regulations in the field of tax law should be particularly well-founded in terms of values. Elaborating on its view, it noted that the retroactive application of the provisions in this case runs counter to the fundamental principles governing the creation of a tax liability and a tax obligation. Furthermore, in the opinion of the Supreme Administrative Court, this is contrary to the fundamental principles of law, namely the principle of legal certainty and the principle of citizens’ trust in the state and the law it enacts. Thanks to these principles, a taxpayer can act on the basis of the predictability of the law and the consequences of their actions.