The taxation of an immovable property of a person conducting economic activity SK 39/19
Case ref. no. SK 39/19 (summary)
On 24 February 2021, the Constitutional Tribunal delivered its judgment with regard to Mr Z.W.’s constitutional complaint concerning the taxation of an immovable property of a person conducting economic activity (ref. no. SK 39/19).
The Constitutional Tribunal adjudicated that Article 1a(1)(3) of the Act of 12 January 1991 on Local Taxes and Duties – construed in the way that what weighs in favour of linking land, a building, and/or a structure with the conduct of economic activity is the fact of holding the land, the building, and/or the structure by an entrepreneur or another person conducting economic activity – is inconsistent with Article 64(1) in conjunction with Article 31(3) and Article 84 of the Constitution of the Republic of Poland. The ruling was unanimous. The role of the Judge Rapporteur was performed by Judge Rafał Wojciechowski.
The constitutional complaint was filed with relation to the following facts of the case. The complainant is the owner of immovable properties located in N. He is also a self-employed natural person carrying out economic activity as an entrepreneur. By the decision of 16 January 2014 with regard to the amount of the immovable property tax, the mayor of N. calculated for the complainant the amount of the immovable property tax for 2014 according to the higher tax rates for immovable properties linked with the conduct of economic activity, and not according to the lower tax rates which are appropriate for immovable properties not linked with the conduct of economic activity.
The complainant did not agree with the decision and appealed against it to an appellate body of local self-government in K. (Pol. Samorządowe Kolegium Odwoławcze w K.)., which by its decision of 6 August 2014, upheld the decision issued by the first instance authority. Then, the complainant filed an appeal against the latter decision with the Voivodeship Administrative Court in K. The said appeal was dismissed by the judgment of 21 November 2014. Subsequently, the complainant lodged a cassation appeal with the Supreme Administrative Court, which in its judgment of 16 May 2017 dismissed the cassation appeal.
According to the complainant, the provision that he has challenged in his constitutional complaint violates his constitutional right to the ownership of funds, by burdening the complainant with a tax obligation manifesting the state’s excessive taxation policy, as a result of which the complainant paid the immovable property tax at an inflated rate only due to the fact that, as a natural person carrying out economic activity, holds an immovable property, although the immovable property in question which belongs to the complainant is in no way linked with the economic activity conducted by the complainant. The complainant also argued that the challenged provision is defective and violates the principle of proportionality, as a result of which, in the same circumstances (i.e. the lack of the actual use of an immovable property within the scope of carrying out economic activity), the complainant as a natural person conducting economic activity is in a worse financial situation (he is obliged to pay several times the rate of the immovable property tax) than he would be if he had not been conducting economic activity (as then he would be obliged to pay the immovable property tax at a lower rate, which is provided for in the case of immovable properties that are not linked with the carrying out of economic activity).
In the statement of reasons for its judgment, the Constitutional Tribunal indicated that the problem presented in the constitutional complaint concerns the automatic inclusion of immovable properties held by a natural person carrying out economic activity into the category of land, buildings and/or structures linked with the conduct of economic activity. Natural persons carrying out such economic activity are assigned to two categories in the context of the Polish tax law: (1) as entrepreneurs and (2) as private parties (as regards their personal funds). The complainant argued that it is inconsistent with the Constitution to classify land held by such persons as land linked with the conduct of economic activity and – consequently – to apply the higher tax rate, regardless of the fact whether the land is actually linked with the carrying out of such activity, or not.
The Tribunal held that, for the determination of the present case, the most important matter was to assess whether the challenged provision is consistent with the constitutional principle of proportionality (Art. 31(3) of the Constitution), when juxtaposing the individual’s right to ownership (Art. 64(1) of the Constitution) with the individual’s obligation to pay public-law imposts (Art. 84 of the Constitution).
The principle of proportionality – arising from the constitutional principle of a democratic state ruled by law, expressed in Article 2 of the Constitution, as well as its more precise rendering in Article 31(3) of the Constitution – has many times been indicated as a higher-level norm for a review of the constitutionality of Polish tax law (cf. inter alia the following judgments of: 20 November 2002, ref. no. K 41/02, OTK ZU No. 6/A/2002, item 83; 27 April 2004, ref. no. K 24/03, OTK ZU No. 4/A/2004, item 33; 25 October 2004, ref. no. SK 33/03, OTK ZU No. 9/A/2004, item 94; 30 November 2004, ref. no. SK 31/04, OTK ZU No. 10/A/2004, item 110; 4 September 2007, ref. no. P 43/06, OTK ZU No. 8/A/2007, item 95; 8 October 2013, ref. no. SK 40/12, OTK ZU No. 7/A/2013, item 97; 11 February 2014, ref. no. P 24/12, OTK ZU No. 2/A/2014, item 9). Due to the subject matter of the case under examination, which concerns the legislator’s interference with a constitutional subjective right (the right to ownership), it is necessary to indicate Article 31(3) of the Constitution as a higher-level norm for the constitutional review, which expresses the constitutional principle of proportionality. As the Tribunal pointed out in its judgment of 12 December 2017, ref. no. SK 13/15, Article 31(3) and Article 64 of the Constitution may constitute adequate higher-level norms for the constitutional review of tax law in two instances. Firstly, when, under the guise of a tax regulation, the legislator introduces a measure that serves purposes other than fiscal ones, in particular purposes of nationalisation or repression (e.g. by assigning a tax with the characteristics of the forfeiture of property). Secondly, if tax provisions regulate not the imposition of tax obligations, but the fulfilment thereof. This means the possibility of invoking the aforementioned higher-level norm for the constitutional review with regard to matters regulated by tax law provisions pertaining e.g. to: a tax return (cf. the judgment of 13 October 2008, ref. no. K 16/07, OTK ZU No. 8/A/2008, item 136); formal requirements making it possible to lower the amount of payable tax (cf. the judgment of 22 May 2007, ref. no. SK 36/06, OTK ZU No. 6/A/2007, item 50); financial situation statements allowing tax authorities to obtain information (cf. the judgment of 20 November 2002, ref. no. K 41/02).
Even prior to the entry into force of the 1997 Constitution [which is currently in force], the Constitutional Tribunal, invoking the principle of proportionality, adopted the so-called test of proportionality, which consists in analysing legal provisions challenged before the Constitutional Tribunal with regard to the following three aspects: (1) whether the introduced legislative provision can bring the effects intended by the legislator; (2) whether the provision is indispensable for the protection of a public interest to which it is related); (3) whether the effects of the introduced provision are appropriately proportionate to the burdens imposed by the provision on citizens (cf. the ruling of 26 April 1995, ref. no. K 11/94, OTK of 1995, item 12; the origin of the principle of proportionality, the development of its understanding in the jurisprudence of the Tribunal, as well as relations between Article 2 and Article 31(3) of the Constitution in the context of the aforementioned principle of proportionality were extensively discussed by the Tribunal in its judgment of 11 February 2014, ref. no. P 24/12). The test of proportionality was applied by the Tribunal to evaluate the constitutionality of the challenged provisions within the scope of tax law, inter alia in the following cases concluded with the issuance of the Tribunal’s judgments: of 27 April 1999, ref. no. P 7/98, OTK ZU No. 4/1999, item 72; of 20 June 2005, ref. no. K 4/04, OTK ZU No. 6/A/2005, item 64; of 17 June 2008, ref. no. K 8/04, OTK ZU No. 5/A/2008, item 81.
After the entry into force of the Constitution, the Tribunal indicated that the principle of proportionality binds the legislator not only when he introduces limitations to the exercise of constitutional rights and/or freedoms, but also when he imposes obligations on citizens and/or other persons that are subject to the legislature’s power. The legislator acts in accordance with the principle of proportionality where, among admissible measures, he opts for those which are least burdensome for persons with regard to whom they are to be implemented, and/or burdensome to a degree not higher than necessary for attaining a set and justified constitutional goal (cf. the judgment of 25 October 2004, ref. no. SK 33/03). In the same judgment, the Tribunal noted that Article 84 of the Constitution provides for the possibility of enacting statutes that impose a tax obligation, and therefore a tax obligation alone should not be regarded as a restriction of constitutional rights and freedoms. By contrast, measures for enforcing that obligation which interfere with the realm of citizens’ rights and obligations may be assessed in the light of the requirements specified in Article 31(3) of the Constitution.
Article 1a(1)(3) in conjunction with Article 5(1)(1)(a) as well as Article 5(1)(2)(b) of the Act on Local Taxes and Duties correlate the imposition of a higher rate of the immovable property tax – namely, the higher rate which is set with regard to immovable properties linked with the conduct of economic activity – solely with land, a building, and/or a structure held by an entrepreneur or another person conducting economic activity. The literal wording of Article 1a(1)(3) of the Act on Local Taxes and Duties does not take account of whether an immovable property is actually, and/or may be potentially, used for the purposes of carrying out economic activity. The consequence of the wording of Article 1a(1)(3) of the Act on Local Taxes and Duties is that land, buildings and structures linked with the carrying out of economic activity have been included in the relevant legal definition, and this in turn entails the applicability of the higher tax rate to all (except those specified in Article 1a(2a) of the Act on Local Taxes and Duties) immovable properties held by a taxpayer carrying out economic activity, regardless of the fact whether the taxpayer actually uses and/or might use them in his/her economic activity. Such understanding of the challenged provision results in the situation where the mere fact that a taxpayer carrying out economic activity holds an immovable property necessitates the payment of the higher rate of the immovable property tax. Thus, for the purposes of the payment of the immovable property tax, the legislator does not differentiate the situation of taxpayers holding immovable properties and using them when carrying out economic activity versus the situation of taxpayers holding immovable properties and not using them when carrying out economic activity. Hence, both groups of the entrepreneurs will be obliged to pay the higher rate of the said tax, which is set for immovable properties linked with the conduct of economic activity. The lack of the aforementioned differentiation, in particular, concerns entrepreneurs who are natural persons, and thus who participate in legal transactions in the two roles: as private parties (i.e. within the limits of their personal property) and as entrepreneurs.
The Constitutional Tribunal noted that this leads to collecting the immovable property tax in different amounts with regard to similar – from the constitutional perspective – immovable properties which are actually not linked with the conduct of economic activity. Irrespective of the use of a given immovable property, a natural person being an entrepreneur will pay the higher rate of the tax, only due to the fact that the said person carries out economic activity. By contrast, a natural person who does not carry out economic activity will pay the lower rate of the tax. Each of those taxpayers does not actually use an immovable property for purposes related to carrying out economic activity. In such a situation, the status of an entrepreneur (a natural person) is not connected with the way of using the subject of taxation and does not affect the value of the immovable property. In both cases, an immovable property is not linked with the conduct of economic activity. The mere fact of carrying out economic activity by a natural person is irrelevant for the taxation of an immobile property at the tax rate set for immovable properties linked with the conduct of economic activity. Given the ratio of applying the higher tax rate, namely the possibility of obtaining revenue from the use of an immovable property in economic activity, it is indispensable to determine the actual way of using the taxed immovable property.
In the Tribunal’s view, entrepreneurs may not be charged with the higher tax rate solely for the reason that they hold immovable properties which they do not use for the conduct of economic activity. The application of the higher rate of the immovable property tax to plots of land and/or buildings which are not used, and may not potentially be used, for the conduct of economic activity – solely due to the fact that they are held by an entrepreneur or another person carrying out economic activity – was deemed by the Tribunal to be inconsistent with Article 64(1) of the Constitution. Article 1a(1)(3) of the Act on Local Taxes and Duties constitutes an instrument intended for purposes other than fiscal ones, and is a disproportionate tax burden, due to the lack of a distinction drawn between the tax situation of taxpayers holding immovable properties but not using them when carrying out economic activity versus the tax situation of taxpayers who do not use the immovable properties they hold when carrying out economic activity. The applied criterion of “the holding of land by an entrepreneur” does not serve only the fiscal purpose, and hence it results in the constitutionally unjustified infringement of the right to ownership. At the same time, the challenged provision may not be justified by the protection of a public interest, which leads to the conclusion that the prerequisites making up the test of proportionality are not met here. Therefore, the Tribunal ruled that the challenged provision was also inconsistent with Article 31(3) and Article 84 of the Constitution. According to the Tribunal, the interference with the constitutional right to ownership is disproportionate due to the lack of the criteria – apart from “the holding of land by an entrepreneur” – which makes it possible to determine an actual and/or potential link of land and/or a building with the conduct of economic activity. The application of the higher tax rate for immovable properties linked with the conduct of economic activity (Art. 5(1)(1)(a) and Art. 5(1)(2)(b)) of the Act on Local Taxes and Duties), solely on the basis of the criterion of the holding of land by an entrepreneur or another person carrying out economic activity constitutes disproportionate interference with those persons’ rights to ownership.