Property tax is among the statutory charges that apply to both businesses and individuals who are not engaged in business activity. In accordance with the Act on Local Taxes and Fees (“Act”), property tax is levied on:
- Land
- Buildings or parts thereof
- Buildings or parts thereof related to the conduct of business activity
The definition of the object of taxation for the purposes of property tax has been a matter of much controversy for years, and the problem has ultimately found its way to the Constitutional Tribunal.
An immanent element of the disputes with the tax authorities was the proper definition of a structure for the purposes of paying property tax. There have been many attempts in case law to develop a definition, but this has not been sufficient to put an end to the disputes between taxpayers and tax authorities.
The failure to apply the definition in a uniform and effective manner led to the case reaching the Constitutional Tribunal, resulting in a landmark judgment of 4 July 2023 (Case No. SK 14/21) in which the CT declared Article 1a(1)(2) of the Act, which contains the definition of a structure, to be unconstitutional, but upheld this provision for a further 18 months.
Why there is a need for a new definition of a structure
The Act defines the property tax rate separately for buildings and structures. In the case of structures, the rate is 2 % of their value, and in the case of buildings, the tax is determined based on their usable area.
The correct determination of whether a facility is a building or a structure significantly affects taxation, which in most cases will be more favourable if the rate for buildings is deemed to be applicable.
The Act’s definition of a structure contains a reference to broadly defined construction law.
In the judgment in question, the Constitutional Tribunal noted that the reference to non-tax provisions on such an important issue as the object of taxation violates the Constitution. What is more, the definition contained in the construction law also does not lead to an explicit determination of whether a given facility should be taxed as a structure or as a building. In the statement of reasons for the judgment, the CT noted that the lawmakers should develop a new ‘autonomous’ definition of a structure for the purposes of tax acts.
What the new definition will contain
When drafting a new definition, the lawmakers may use the definition existing in the construction law, making only minor changes to it. However, this seems controversial considering that the provisions of construction law are full of ambiguities and so far the use of the definition based on them has led to hundreds of disputes between taxpayers and tax authorities.
Alternatively, the lawmakers could try introducing solutions based on cadastral tax.
A structural change to the property tax would in all likelihood increase revenue to the state budget, something to be considered beneficial from the perspective of the lawmakers, in contrast to the perspective of taxpayers.
The Act’s new definition of a structure will also be able to directly or indirectly affect income tax laws, including, in particular, depreciation provisions.
The new definition of structure provides grounds for taxable persons to claim a refund of overpaid tax
The previously mentioned 18-month period for expiry is not insignificant. During this period, the definition of a structure will continue to be applicable and the decisions issued on its basis will remain in force.
However, the inconsistency of the provision with the Constitution provides grounds for resumption not only of tax proceedings concluded with the issuance of a final decision by the second instance authority, but also of proceedings the correctness of which, as a result of appeals, was verified by administrative courts.
Taxpayers should review these cases and, where the legal basis was Article 1a(1)(2) of the Act, request resumption of proceedings.
From the taxpayers’ point of view, it is also important that the CT judgment may be the basis for submitting requests for refunds of overpaid tax. Tax authorities and courts will have to determine whether tax collection was allowed on the basis of unconstitutional provisions.
In the case of pending proceedings, taxpayers should refer to the said decision of the Constitutional Tribunal. If the CT declares a provision unconstitutional, this should be taken into account by tax authorities and courts in pending cases.
Summary
The issue of the definition of a structure for property tax purposes has been controversial among taxpayers for years. The landmark judgment of the Constitutional Tribunal is the beginning of the road to the introduction of a new definition, which will finally resolve the dispute that has lasted for over a decade.
From the taxpayers’ perspective, however, it is important to note that the CT decision opens the way for the resumption of completed proceedings before tax authorities and administrative courts and, most importantly, may become the basis for claiming refund of excess tax paid on the basis of unconstitutional provisions.
It is thus advisable to make a property tax audit to verify whether any tax paid in recent years has been undue and whether you are therefore entitled to a refund.
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