Ruling description

In the resolution of seven judges of February 17, 2014 (case ref. II FPS 8/13), the Supreme Administrative Court stated that in light of the legal regulations binding since January 1, 2004, the sale for consideration of a real property or its part or of interest in the real property, used for business-related purposes, but not included in the register of fixed assets and intangible assets  (the “Register”), which do not constitute assets listed  in Art. 14 sec. 2c of the Personal Income Tax Act, does not  constitute  income  from  business  operations  in  the meaning of Art. 14 sec. 2 point 1 letter a of the PIT Act.

In the abovementioned resolution the Supreme Administrative Court stated that the legislator clearly and unequivocally pointed out in Art. 14 sec. 2 point 1 letter a of the PIT Act that income from the sale of real property may be considered to be income from business operations only if the two following prerequisites are jointly fulfilled. Firstly, the sale must concern a fixed asset. Secondly, a fixed asset must be entered in the Register. According to the Supreme Administrative Court the  terms used by the legislator are unequivocal. As a result, the Supreme Administrative Court considered that a failure to enter a real property in the Register, despite the obligation arising from Art. 22d sec. 2 of the PIT Act, does not allow for classifying revenues from the sale of the real property as revenues from business operations. In consequence, the Supreme Administrative Court entirely acceded to the standpoint that the effects of the internal systemic interpretation of the PIT Act may not challenge results arising from the basic interpretation i.e. the linguistic interpretation.

Comment

The above resolution of the Supreme Administrative Court concerns the issue of the hierarchy of methods of interpretation of the tax law, which is very important to tax practice. On the one hand, the tax law jurisprudence and administrative courts (most of them) assume the priority of the linguistic interpretation over the systemic or teleological interpretation. The above principle manifests itself in practice in the determination of the tax consequences of economic events only on the basis of the linguistic (grammatical) meaning of legal regulations, assuming that the  content of the regulations is unequivocal. On the other hand, most tax authorities and the remaining part of the administrative courts, depending on the situation, depart from the priority of the linguistic interpretation and allow for deriving tax implications from the entirety of the provisions of given statutory law or the broadly understood purpose of tax regulations - though both grounds of interpretation are contrary to the unequivocal linguistic content of the fiscal law norm governing a given economic event.

In this resolution, the Supreme Administrative Court rightfully acceded to the priority of the linguistic interpretation. In the analyzed case the Supreme Administrative Court considered that pursuant to the unequivocal wording of Art. 14 sec. 2 point 1 letter a of the PIT Act, the failure to enter a real property in the Register does not allow for regarding revenues from the sale of the real property as revenues from business operations. It is irrelevant in this case that taxpayers using a real property for business operations are obligated to enter it in the Register. Making the application of Art. 14 sec. 2 point 1 letter a of the PIT Act dependent on entering the real property in the Register would create a completely new legal norm and would contradict the above regulation.

It is worth noticing that there are numerous disputes between taxpayers and the tax authorities currently pending before administrative courts, which require the courts to express their standpoint either in favor or against the priority of the linguistic interpretation. The position of the Supreme Administrative Court expressed in this resolution should significantly affect the eventual formation of a unanimous judicial practice of administrative courts confirming the priority of the linguistic interpretation.

It is also worth pointing out that the conclusions arising from the above resolution may allow natural persons to take advantage of tax exemption in case of the sale of a real property referred to in Art. 10 sec. 1 point 8 of the PIT Act. A condition for applying a tax exemption to a real property not included in the Register (but used in business operations) is its sale after the lapse of a 5-year period counted from the end of the calendar year in which it was acquired or built.

However, it should also be added that there are certain amendments to Art. 14 sec. 2 point 1 letter a of the PIT Act being planned at the moment. In accordance with the bill, revenues from the sale of any real property  that should be entered in the Register, not only those actually entered in the Register, will be considered revenues from business operations. This amendment  is expected to come into force on January 1, 2015, hence the application of the above tax exemption will only be possible until the end of this year, which may potentially affect a decision on the possible acceleration of a sale transaction.