Refusal to issue an individual interpretation due to abuse of right

At a time when dozens of new provisions are added to tax laws each year and the legal state changes more often than the weather in Iceland, the institution of official interpretations of laws is a valuable tool that provides taxpayers with support in the interpretation of tax laws and the opportunity to obtain legal protection in their application. Individual interpretations of tax law are of great importance in both tax and business practice, as they are often the only way to determine the correct application of tax laws, which in turn can translate into the planned or undertaken actions of taxpayers.

However, there are situations in which an authority may refuse to issue an individual interpretation to a taxpayer. One of these is the so-called “reasonable suspicion of abuse of the law.”

Pursuant to Articles 14b § 5b and 5c of the Tax Ordinance, the authority, when conducting proceedings to issue an individual interpretation, is required to analyze whether any elements of the factual state or future event presented in the application may constitute tax avoidance. In the event of a “reasonable suspicion” that a factual state or future event may constitute tax avoidance, the authority is required to request an opinion from the Head of KAS as to whether tax avoidance is occurring or may occur in the specific factual state or future event, respectively, unless the factual state or future event corresponds to an issue that was the subject of a previously obtained opinion from the Head of KAS.

The Head of KAS shall issue an opinion as to whether, with respect to the elements of the factual state or future event presented in the application, there is a reasonable suspicion that they may:

1) constitute an act or element of an act specified in Article 119a § 1 (to which an anti-avoidance clause applies) or

2) be the subject of a decision issued with measures restricting contractual benefits, or

3) constitute an abuse of the right referred to in Article 5(5) of the VAT Law.

This regulation is sometimes used in practice by the Director of National Tax Information (DKIS) as a basis for not issuing an individual interpretation. DKIS often asks the Head of KAS for an opinion as to whether tax avoidance is taking place in the situation described in the application, or presents an opinion issued (in the opinion of the authority) in an analogous case, and then issues a decision to refuse to issue an interpretation, limiting itself to referring to the contents of the opinion (without explaining what raised its “reasonable suspicion”). In practice, this has the effect of limiting taxpayers’ access to interpretations.

Our practice shows that the problem of refusal to issue individual interpretations often affects TSUs in the field of interpretations concerning the right to deduct VAT from investments.

For example, an entity, in the performance of its own tasks, carries out an investment involving the construction of a facility that will be used exclusively for commercial purposes. The facility is leased under a contract with the municipality. The lease is for a fee, but the municipality will charge a rent of several hundred zlotys (small in relation to the value of the object). The entity wonders whether it can take full VAT deduction – after all, the investment is related to its taxable activities. Therefore, the entity applies for an individual interpretation – to its surprise, it receives a refusal to issue an individual interpretation due to the existence of a reasonable suspicion of abuse of the right.

Unfortunately, the authorities in similar cases often do not undertake an adequate analysis of the facts, referring the case to the Head of KAS, who issues an opinion on possible tax avoidance, and then [the authorities], referring to the content of this opinion, refuse to issue an individual interpretation.

The decision to refuse to issue an individual interpretation, does not have to be the end of the road towards a correct interpretation of the regulations. This is because the case law indicates that a “reasonable assumption” should be based on objective reasons, and not on conjecture or a sense of the authority, and the reasoning of the NSA in this regard should be convincing (cf. judgment of the NSA of 20.12.2019, II FSK 452/18; judgment of the NSA of 27.06.2019, II FSK 2373/17; judgment of the NSA of 3.10.2018, II FSK 218/18; judgment of the NSA of 14.12.2017, II FSK 1970/17). Bearing in mind that decisions to refuse to issue an interpretation often do not contain any objective justification (in addition to the authorities’ concerns that are not justified in any way), it is possible to appeal the decision to the WSA.

Often, the authorities’ position stems from a misunderstanding of the essence of the concept of abuse of rights, in particular whether in a given case there may be an advantage to the taxpayer at all that is contrary to the purpose of the VAT regulations (e.g., the use of an artificial transaction scheme resulting in a VAT deduction to a higher extent than would result from the actual purpose of the investment for taxable activities). When a municipality leases infrastructure, a key issue may be the level of rent agreed upon. For example, if the municipality deducted VAT in full when realizing an investment and then leases the object of this investment to a municipal company, for the purpose of carrying out so-called “mixed activity” (entitling to deduct VAT and not entitling to do so) using it, a lease agreement with a rent at arm’s length should be evaluated differently, and differently when the rent is at a purely symbolic level.

If you are in a similar situation and are looking for help in challenging a decision to refuse to issue an individual interpretation, please contact us. We will be happy to help.