On July 4, 2023, the Constitutional Tribunal ruled in case SK 8/20 that Article 11 of the Law on Proceedings before Administrative Courts (p.p.s.a.), which binds administrative courts to findings made in criminal proceedings, is consistent with the Constitution. This decision has sparked widespread legal debate and controversy, as it has significant consequences for taxpayers, particularly regarding their right to defense in tax proceedings and fair trial principles. The ruling upholds the principle of precedent, meaning that determinations made in criminal proceedings will be binding on administrative courts. This could have substantial implications for taxpayers, especially concerning their ability to defend themselves in tax proceedings and the application of administrative procedures in similar cases.
Case Background
The case involved an entrepreneur who was denied the right to deduct VAT based on invoices issued by a business partner. The tax authority determined that the invoices were so-called “empty invoices,” documenting fictitious transactions, based on a prior criminal conviction of the taxpayer’s business partner. The key issue was that the taxpayer had not participated in the criminal proceedings and had no opportunity to defend their interests in the criminal court.
In administrative proceedings, both the Voivodeship Administrative Court and the Supreme Administrative Court ruled that they were bound by the findings of the criminal court, even though they concerned a different person. As a result, the taxpayer lost the right to deduct VAT, despite not having had the chance to challenge the findings made in the criminal trial of their business partner. This situation led to the taxpayer potentially being burdened with tax liabilities for transactions whose existence was questioned solely based on a criminal conviction of another person.
In their complaint to the Constitutional Tribunal, the taxpayer argued that binding the administrative court to a criminal verdict violated their right to a fair trial, as they were unable to present their own evidence in the administrative proceedings. They claimed that such an interpretation of the law deprived taxpayers of legal protection and gave tax authorities an excessive procedural advantage, leading to inequality in the application of tax regulations.
Justification of the Constitutional Tribunal’s Ruling
The Constitutional Tribunal ruled that binding an administrative court to a final criminal conviction serves to ensure legal certainty and consistency in case law. It argued that administrative courts still have an obligation to conduct their own assessment of the evidence, and taxpayers, in theory, had the opportunity to present additional evidence in their tax proceedings. Thus, according to the Tribunal, it could not be concluded that the taxpayer was entirely deprived of the right to a fair trial.
The Tribunal also emphasized that the extended precedent effect of a criminal conviction helps avoid inconsistencies in case law and prevents unnecessary duplication of evidence proceedings. In its view, this approach prevents situations where administrative courts could challenge criminal court findings, which could lead to legal chaos. However, in practice, taxpayers often have limited means to effectively prove that their transactions were legitimate.
Controversies and Dissenting Opinions
The Constitutional Tribunal’s ruling was decided by a majority vote, but two judges expressed dissenting opinions.
Judge Michał Warciński argued that the case should have been dismissed because administrative courts do not rule on the merits of tax decisions but only examine procedural compliance. He stressed that applying Article 11 p.p.s.a. in the tax context could lead to abuses and effectively deprive taxpayers of their right to defense, as well as limit the ability to conduct a fair evidentiary process.
Judge Andrzej Zielonacki contended that Article 11 p.p.s.a., in this interpretation, deprives taxpayers of their real right to defense, undermining the purpose of evidentiary proceedings in administrative cases. In his view, the principle of extended precedent weakens fundamental procedural justice principles and restricts taxpayers’ ability to prove that their transactions actually took place. This situation could lead to the danger of collective liability for taxpayers who were not parties to the criminal proceedings.
Implications of the Ruling for Taxpayers
The Constitutional Tribunal’s decision means that taxpayers may face consequences based on criminal verdicts concerning their business partners, even if they were not a party to those proceedings. In practice, this means that tax authorities may deny VAT deductions solely based on a previous conviction of another person, without the need to conduct a full evidentiary proceeding. This raises concerns about the legal security of businesses and the necessity of maintaining meticulous transaction documentation.
This stance is highly controversial, as it limits the ability to defend against allegations based on findings made in criminal proceedings involving third parties. Entrepreneurs must exercise extreme caution when selecting business partners, as their potential misconduct could result in negative tax consequences.
Additionally, this ruling may influence the practices of tax authorities, who may increasingly use criminal convictions of business partners as a key argument in tax disputes. As a result, taxpayers should scrutinize transaction documentation even more carefully and take proactive measures to minimize tax risks.
The Constitutional Tribunal’s ruling in case SK 8/20 sets an important precedent, reinforcing the principle of precedent from criminal judgments in administrative cases. This could have severe consequences for taxpayers, particularly those who had no opportunity to defend their interests in criminal proceedings.
Taxpayers should therefore pay greater attention to selecting business partners and thoroughly document each transaction to avoid the repercussions of criminal convictions involving third parties. Moreover, in case of tax disputes, it is advisable to seek professional legal assistance to effectively protect their rights and avoid unfavorable financial consequences.
