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State Treasury’s liability in damages for defective tax decisions

The defectiveness (unlawfulness) of a tax decision isn’t enough. Injury must also be proved, and an ordinary causal link between issuance of the decision and the injury.

The State Treasury is generally liable in damages for unlawful behaviour of state bodies, including issuance of tax decisions that are found to be unlawful.

My own view is that the State Treasury bears liability in damages for both defective final decisions (Civil Code Art. 4171) and for defective decisions that are not legally final (based on Civil Code Art. 417). To hold otherwise would, in my view, violate Art. 77 of the Polish Constitution. However, it must be stressed that the unlawfulness of a tax decision cannot be determined independently by the civil court considering the claim for damages. The defectiveness (unlawfulness) of the decision must first be determined in a tax proceeding or administrative court proceeding.

Beyond that, issuance of a defective tax decision, which is always an unlawful act, fulfils only one of the grounds for the State Treasury’s liability in damages.

A finding of the unlawfulness of a tax decision does not release the plaintiff from the duty to demonstrate an injury and an ordinary causal connection between issuance of the defective decision and the loss. (Under Civil Code Art. 361, “The party required to pay damages shall be liable only for the ordinary consequences of the act or omission giving rise to the injury.”)

If a tax is paid or executed on the basis of a tax decision and the decision is then set aside as incorrect, and the tax is refunded (as an overpayment), the taxpayer is entitled under the tax law to interest on the amount of tax unduly paid or executed. The interest on overpayment of tax is specified by Art. 78 of the Tax Ordinance.

Under the current case law of the Supreme Court of Poland, it cannot be effectively disputed that the interest on overpayment of tax provided for in Art. 78 of the Tax Ordinance is in the nature of damages (also within the meaning of civil law). The interest compensates for the injury arising as a result of payment of a tax that was not due. This does not deprive the taxpayer of the right to seek supplementary damages (e.g. Supreme Court judgment of 26 March 2014, Case V CSK 284/13, and resolution of seven-judge panel of the Supreme Court of 26 April 2006, Case III CZP 125/05). But if the taxpayer alleges that it suffered an injury (actual loss or lost benefit) exceeding the amount of interest on the overpayment of tax, the taxpayer must prove this in a civil trial.

It may even happen that the mere issuance of a tax decision (without enforcement) causes an injury to the taxpayer, but practically it may be very difficult to prove the injury in that situation.

It may also be difficult to prove a sufficient (ordinary) causal connection between issuance of a defective tax decision and the injury to the taxpayer, particularly in light of the current case law of the Supreme Court (e.g. judgment of 26 March 2014, Case V CSK 284/13).

For example, the plaintiff alleges in the statement of claim against the State Treasury that as a result of a defective tax decision the plaintiff suffered an injury (exceeding the amount of interest on the tax) due to failure of a commercial venture. Then the plaintiff will have to prove that the failure did not result from the taxpayer’s own behaviour or the behaviour (act or omission) of third parties, but only (or at least in large measure) from the issuance of the defective tax decision.

If the evidence shows that the failure of the venture resulted primarily from unfortunate commercial decisions by the taxpayer (or third parties), the taxpayer should expect to lose the case against the State Treasury.

In summary, the State Treasury should bear liability in damages for any unlawful tax decision that causes injury to the taxpayer. But before asserting a claim for damages the chances for proving the grounds for liability of the State Treasury in the civil proceeding must be examined thoroughly.

Adam Studziński, Difficult Receivables Recovery practice, Wardyński & Partners