On 11 August 2021, we successfully represented our client, Elektrim S.A., (“the Company”) in a dispute before the Supreme Administrative Court. Court and administrative proceedings were initiated by Elektrim's complaint filed against the decision of the Director of the Tax Chamber in Warsaw (currently the Director of the Tax Administration Chamber in Warsaw) issued in August 2016 and relating to determination of the amount of corporate income tax liability for 2011. The value in dispute exceeded PLN 526 million (total value including interest was approximately PLN 900 million).
The essence of the dispute between the tax authorities and Elektrim concerned tax deductible costs of Elektrim incurred during 2011 for the purchase of shares in Polska Telefonia Cyfrowa Sp. z o.o. (hereinafter also referred to as “PTC”; Era network operator) in the amount of over PLN 2.77 billion. In the CIT-8 tax return for 2011, Elektrim included, inter alia, revenues and costs related to the purchase of shares of Polska Telefonia Cyfrowa Sp. o.o. The tax authorities however questioned the value of expenses incurred by Elektrim for the acquisition of shares in Polska Telefonia Cyfrowa Sp. z o.o. from a company based in Cyprus and determined that the Company’s corporate income tax liability for 2011 should be over PLN 526 million higher than that declared by the Company. In years 2005 and 2006, in connection with a legal dispute over the ownership of PTC shares, in which Deutsche Telekom AG and Vivendi Telekommunications International SA were involved, Elektrim made a number of transactions, as a result of which it sold and then re-acquired PTC shares. These transactions resulted in an increase in the cost of purchase of PTC shares in relation to the original amount of expenses that Elektrim had incurred for the acquisition of PTC shares before 2005 and were recognized by the Company as tax deductible costs in 2011 in this amount. According to the tax authorities, there was no cause-and-effect relationship between the expenditure incurred and the revenues generated within the meaning of the Corporate Income Tax Act, and therefore they refused to consider the amount of over PLN 2.77 billion as tax deductible costs for 2011. The authorities claimed that at the time of taking steps to transfer PTC shares through its subsidiaries, Elektrim was aware that their sale to Deustche Telekom AG for consideration would result in generating revenues. Moreover, they pointed out that the course of actions carried out by Elektrim proved that the purchase price of PTC shares from a company based in Cyprus was adjusted to the revenues obtained from Deutsche Telekom AG.
Elektrim did not agree with the position of the tax authorities and brought a complaint to the administrative court. The dispute was resolved in the first instance by the Voivodship Administrative Court in Warsaw which dismissed the complaint against the decision of the Director of the Tax Chamber in Warsaw. However, a cassation complaint was brought against this decision to the Supreme Administrative Court in Warsaw and it was the Supreme Administrative Court that finally resolved the dispute by issuing a binding decision in favor of Elektrim and providing guidelines for the tax authorities subsequently adjudicating in the case.
In the cassation complaint filed, the Company stated that in Poland in 2011 there were no legal provisions that would allow (for the purposes of determining the amount of the tax liability) disregarding legal consequences of valid legal actions e.g., civil law contracts concluded in connection with the transfer of shares by subsidiaries. The Company emphasized that, apart from the justifiability of the actions taken (the sale of PTC shares to subsidiaries was to protect these assets against their takeover by Deutsche Telekom AG or the Vivendi group), the tax avoidance regulations had only been applicable in the Polish tax system since 2016, which means that that before that date the tax authorities could not question tax consequences of valid and effective legal acts under Art. 15 (1) of the CIT Act. This argument was fully shared by the Supreme Administrative Court in its oral justification and this was the main reason why it set aside the judgment of the Voivodship Administrative Court in Warsaw.
The Supreme Administrative Court also confirmed Elektrim’s claims that the revenue assumed by the tax authorities as generated from the sale of shares did not arise in 2011 because in 2011 there was no tax-significant event that would be associated with the generation of revenues in the light of the Corporate Income Tax Act. The Supreme Administrative Court ordered the tax authorities to clarify this issue in detail in this respect. According to the Supreme Administrative Court, it is irrelevant that the Company itself declared these revenues for the purpose of CIT settlement for 2011.
It is worth emphasizing that also a strictly procedural claim of the Company regarding the effectiveness of service of the decision issued in the first instance turned out to be justified. The Director of the Tax Chamber in Warsaw considered that the decision of the Director of the Tax Office, which was issued and served in the traditional form, was delivered correctly, although it is the electronic form should be used when a party is represented by a highly-skilled attorney. The tax authority briefly justified the choice of the traditional form by referring to technical problems related to the service of decisions in the electronic form. The Company questioned this method of service by formulating relevant claims, which were considered as justified by judges representing the Supreme Administrative Court. In this regard, the Supreme Administrative Court also ordered the tax authorities to provide detailed explanations as to whether, in fact, there were technical problems which prevented the service being issued in the electronic form.
The judgment of the Supreme Administrative Court is important not only for Elektrim, but also for other taxpayers. First of all, according to established jurisprudence, it confirms that the tax authorities have no right to question beneficial in terms of taxes effects of valid legal actions that took place before 2016, i.e., before entry into force of the general anti-avoidance clause. It is also important that the Supreme Administrative Court pointed out to tax authorities’ their obligation to fully verify the correctness of a tax return submitted by the taxpayer without focusing only on those figures that may lead to an increase in the amount of tax in comparison to that declared (the proceedings may not be focused only on the value of tax, but primarily on determining material truth). The judgment in question limits the possibility not to use the electronic service in favor of the traditional service without justifying in detail why the adopted rules were not followed.
Andrzej Ladziński, tax advisor and managing partner of GWW Tax, was an attorney in this case.
