Tax law is typically considered everywhere to be highly complicated and full of potential traps that may result in severe financial trouble for any taxpayer. Such a view is commonly expressed in Poland, particularly by business societies which constantly complain regarding the quality of tax regulations and—more importantly— their interpretations by tax authorities.

As a response to those views and complaints, in 2004 the Polish government introduced a specific law on binding tax rulings. Under this law, taxpayers are entitled to obtain a tax ruling from tax authorities on the relevant tax treatment of their particular case, whether concerning past or future (even theoretical) transactions. The law came with a strong binding effect, i.e., protection for taxpayers against unfavorable decisions of the tax authorities if a taxpayer receives a tax ruling and follows the tax treatment presented in it. The entire binding tax rulings system was designed to be fully transparent and objective, which was sealed by a possibility to appeal unfavorable tax rulings to the administrative courts (including the Supreme Administrative Court). The tax ruling system was thus to provide taxpayers with the required level of tax certainty in doing business and planning business transactions. The administrative fee for applying for a ruling is minimal.

After several years of the law being in place, what was very well received at first has become the subject of litigation between taxpayers and tax authorities in Poland. Flooded with tens or hundreds of thousands of applications for tax rulings each year, the tax authorities have gradually become less eager to issue positive tax rulings, i.e., rulings that would confirm a favorable interpretation of tax regulations for the benefit of the applicants. As a result, it is now officially estimated that more than 70 percent of court cases on taxation are tax ruling cases, which leaves less than 30 percent for actual tax assessment cases. Needless to say, the waiting periods for court hearings have grown significantly.

One of most recent cases involved the taxation of shareholders in Polish joint-stock partnerships. Joint-stock partnerships are not legal persons, but are legal entities that can conduct business activity in their own name and on their own behalf. At least one partner in the partnership must bear unlimited liability for the partnership’s liabilities and at least one partner should be a shareholder whose position is generally the same as any shareholder of a capital company. Joint-stock partnerships (like all partnerships in Poland) are transparent for income tax purposes, i.e., their profits (revenues and costs) are allocated to partners in proportion to their share in profits and the partners are responsible for making tax settlements as if the activity of the partnership was their own activity. A controversy arose regarding the tax advances that each business in Poland would be obliged to pay (monthly or quarterly) during the tax year.

The tax authorities have taken the position that all partners in any partnership have the same obligations towards the state budget since the tax law does not provide a specific regime for joint-stock partnerships. As a consequence, shareholders should monitor the activity of their partnership and report taxable profits and make tax advances on a regular basis as the profits are generated by the partnership. The approach of the tax authorities was therefore very literal and formal in nature.

Taxpayers have argued that such a tax treatment is inappropriate considering the position of a shareholder, who does not receive cash until a dividend is distributed. Requiring a shareholder to pay taxes before the dividend date is de facto requiring him to pay taxes without income being received. Moreover, shareholders generally have limited access to a partnership’s accounting records, thereby limiting the ability of a taxpayer to determine the right amount of taxes to pay. Shareholding is easily and often transferred, so it may well be that a shareholder may pay taxes and sell its shares before getting any dividend out of the partnership. The argument of taxpayers is thus very much based on “common sense” and a sense of justice rather than a precise reading of the law.

In hundreds of tax ruling applications, taxpayers tried to convince the tax authorities that shareholders in such partnerships should only pay taxes upon receiving a dividend. The tax authorities responded negatively to all such applications. Taxpayers appealed, and in some cases, the lower instance administrative courts ruled in the taxpayers’ favor. Nevertheless, the tax authorities continued to issue negative tax rulings on this issue. Finally, on January 16, 2012, a case was brought before seven judges of the Polish Supreme Administrative Court.

The Supreme Administrative Court (“SAC”) ruled in favor of the taxpayers. According to that judgment, a shareholder of a joint-stock partnership derives income only upon receipt of a dividend, whereas the partnership’s profits should remain untaxed in the proportion in which they are allocable to a given shareholder. The court determined that the specific position of a shareholder is enough of an argument to defer taxation until profits are distributed to the shareholders. This ruling was a surprise, as in most cases the SAC rules in favor of the tax authorities and, more importantly, the judges favor the letter of the law, which in this case arguably supported the tax authorities’ view, rather than that of the taxpayers.

Analysis of the decision seems to imply that the court equated the position of a shareholder in a joint-stock partnership to that of an investor in an investment fund. Investment funds are tax-exempt legal entities in Poland, i.e., their profits are not subject to income tax until they are distributed to investors either as a dividend or through redemption/buyback of investment certificates. Investment funds can therefore reinvest money without suffering taxation, thus creating more value for investors than a usual LLC. This special tax position of investment funds comes with a cost of being a regulated entity, operating on the basis of a permit, being subject to close supervision from fund authorities and having significant diversification requirements. Now, joint-stock partnerships can do the same with no restrictions or supervision.

Is this situation too good to be true? The Polish tax authorities seem to think so. Under the Polish legal system, there is no common precedent rule, i.e., court rulings do not have a direct binding effect outside the individual case that was ruled upon. Tax authorities are therefore using the argument that a new case means new litigation. Taxpayers may, of course, generally expect that courts will follow the same pattern established by the SAC; however, there are no legal guarantees. Moreover, the tax authorities are starting to use delay tactics to their advantage. It takes approx. 3 – 4 months to obtain a tax ruling in Poland. Appealing a ruling means an additional 3 – 4 months. Then, the case can go to court, which takes about 9 – 12 months to resolve. Taking a case to the SAC adds an additional 15 – 18 months. After the decision of the SAC, the tax authorities are legally bound to issue a positive ruling, which takes approximately another 3 months. Therefore, if a tax official resists a ruling sought by a taxpayer, it can take up to 3.5 years to obtain a favorable tax ruling. What business can afford to wait that long before the commencement of operations? This sounds like a rhetorical question, but one that has real business implications.

Does this mean that tax ruling requests in Poland are pointless? Well, no; there are still many cases in which the tax authorities can be convinced to issue positive rulings without the threat of the SAC forcing them to do so. Nevertheless, the emphasis on tax planning in Poland is slowly shifting toward obtaining tax opinions issued by reputable advisors instead of only applying to the tax authorities for a tax ruling and waiting for their response.