It is unreasonable to impose on the Company an obligation to pay VAT arising from an invoice issued by a director whose actions are contrary to the Company’s interests and did not result in a shortfall in budget revenue.
Client's situation
A tax audit has been initiated against our client to examine the correctness of VAT returns, inter alia in connection with a transaction involving the contribution of property by the company’s managing director, who, in carrying out this transaction, was not guided by commercial objectives but solely by personal ones – with the aim of transferring the property to another company with which he had personal ties, following the prior dismissal of another person from their position on the management board, who would not have consented to this transaction. The company filed a report with the District Public Prosecutor’s Office in Wrocław regarding the suspicion of a large-scale offence and the chairman’s actions to the company’s detriment.During the tax audit, the tax authority concluded that, in carrying out a plan to deprive the company of the property, the chairman, by issuing an invoice relating to a contribution in kind to another company with which he had personal ties, sought through his actions to obtain, via that other company, a VAT refund from the tax office amounting to approximately PLN 6 million. Consequently, the tax authority questioned the commercial nature of this transaction, finding that it was not related to business activities and had no economic justification. In the tax authority’s view, since the CEO, acting on behalf of the Company, issued the invoice despite the absence of a genuine economic purpose, the VAT shown on that invoice is payable by the Company pursuant to Article 108(1) of the VAT Act. The first-instance authority pointed out that, under this provision, the obligation to pay the amount stated on the invoice arises by operation of law on the date on which the entity in question puts the document into circulation, irrespective of the reason for issuing the VAT invoice. For the tax authority, the most important factor was that, since the managing director represented the Company on the date the inaccurate invoice was issued, the liability for payment of the tax shown on that invoice rests with the Company, even if the recipient of the invoice did not receive a refund of the input VAT shown on that invoice and, in fact, there was no reduction in state budget revenue.
The issue
DMS TAX’s task was to represent the Client before the tax authorities and administrative courts in order to prove that the criminal actions of the company’s managing director should not result in the Client being liable to pay VAT.
Section 108(1) of the VAT Act – where a legal person, an organisational unit without legal personality or a natural person issues an invoice showing the amount of tax, they are obliged to pay that tax.
Our approach
We lodged an appeal against the tax authority’s decision and, following its upholding by the second-instance authority, we lodged a complaint with the Provincial Administrative Court in Wrocław.During the court proceedings, we demonstrated that the Company cannot be subject to tax consequences in the form of an obligation to pay the VAT shown on the disputed invoice, in light of Article 108(1) of the VAT Act, in a situation the state budget, as a result of criminal conduct by its managing director—over which it had no control—did not suffer any actual economic loss. We argued that such a decision by the tax authorities violates the principle of VAT neutrality and is contrary to the constitutional principle of proportionality, which derives from Article 31(3) in conjunction with Article 2 of the Constitution of the Republic of Poland.
Ruling and outcome for the client
In the Court’s view, the tax authorities erroneously equated the acting in bad faith of the company’s manager with the actions of the company itself, disregarding the fact of a hostile takeover of the management and actions detrimental to the company. It was pointed out that the obligation to pay tax arising from the issue of an invoice is of a preventive nature – a point we raised in our complaint – and should only be applied where there is a real risk of a shortfall in budgetary revenue. In the case in question, no such risk arose, as the right to deduct VAT had been effectively blocked. Consequently, the Court ruled that a tax liability cannot be imposed on a company if it did not act in bad faith and there was no loss to the state budget.
The annulment of the decisions of the first- and second-instance authorities by the Provincial Administrative Court in Wrocław
The Provincial Administrative Court in Wrocław upheld our appeal and set aside the contested decisions of the authorities at both levels. The court pointed out that it was unjustified to impose on the company the obligation to pay VAT arising from the invoice issued, as the actions of the company’s manager were contrary to its interests and did not result in a loss of revenue to the state budget. It was emphasised that the case must be re-examined, taking into account the actual circumstances and the interpretation of tax legislation in the light of the case law of the Court of Justice of the European Union.In the Court’s view, the tax authorities erroneously equated the acting in bad faith of the company’s manager with the actions of the company itself, disregarding the fact of a hostile takeover of the management and actions detrimental to the company. It was pointed out that the obligation to pay tax arising from the issue of an invoice is of a preventive nature – a point we raised in our complaint – and should only be applied where there is a real risk of a shortfall in budgetary revenue. In the case in question, no such risk arose, as the right to deduct VAT had been effectively blocked. Consequently, the Court ruled that a tax liability cannot be imposed on a company if it did not act in bad faith and there was no loss to the state budget.
What this means
The ruling confirmed our position that the application of Article 108(1) of the VAT Act is preventive in nature and should only be applied where there is a genuine risk of a shortfall in budget revenue.