Statute-barred tax liabilities secured by mortgage

For several years, the Tax Code contains Article 70 § 8 which is problematic for taxable persons and which stipulates that “tax liabilities secured by mortgage or tax lien are not subject to the statute of limitation, but upon the expiry of the limitation period they may be collected solely from the assets on which the mortgage or lien was established”. This article repeats Art. 70 § 6 of the Tax Code as applicable till 31 December 2002 (supplemented with a tax lien).

Of course, it would not be intriguing if on 8 October 2013 the Constitutional Tribunal did not rule (Ref. No. SK 40/12) that Art. 70 § 6 of the Tax Code as applicable till 31 December 2020 (i.e. providing for mortgage-secured tax liabilities falling into the statute of limitation) was inconsistent with Art. 64.2 of the Polish Constitution. In the justification of the judgement, the Constitutional Tribunal stated, among others, that there was no reason for real property owners to be responsible for tax payments for ever because there are no constitutional values that would provide for the stricter treatment of taxable persons owning real properties.

On the judgement date, the Tribunal formally stated that Art. 70 § 6 of the Tax Code which became void still before the end of 2002 was unconstitutional. Nevertheless, the Constitutional Tribunal also pointed out that the legal standard set out in Art. 70 § 6 of the Tax Code was repeated and expanded (with a tax lien) in Art. 70 § 8 of the Tax Code. In the judgement the Constitutional Tribunal confirmed that the unconstitutionality of Art. 70 § 6 of the Tax Code also applies to Art. 70 § 8 which was in force on the judgement date. However, the relevant ruling could not be incorporated into the sentence of the judgement solely because of the fact that the Tribunal was bound by adjudication limits referred to in the constitutional complaint.

Since the publication of the above judgement of the Constitutional Tribunal, administrative courts apply a so called secondary unconstitutionality of Art. 70 § 8 of the Tax Statute and argue that the obvious non-compliance of that regulation with the Constitution arising from the previous ruling of the Constitutional Tribunal sufficiently justifies the court’s refusal to apply such an article of the act. Therefore, the courts decide that tax liabilities, including those secured by mortgage, fall into the statute of limitation on the basis of general rules, i.e. in accordance with Art. 70 § 1 and § 1 a of the Tax Code.

Such an interpretation is unfortunately consistently avoided by tax authorities, which present a different opinion that Art. 70 § 8 of the Tax Code was not formally subject to the Constitutional Tribunal’s examination and that the Tribunal did not adjudicated on the unconstitutionality of this article, which means that this article is lawful and binding.

If, based on such an approach, the tax authority decides to collect statute-barred tax liabilities from the real property, the taxable person can apply for the discontinuance of the debt collection proceedings and, if the tax authority refuses, appeal to the administrative court. In this case, administrative courts share the taxable person’s opinion about the unconstitutionality of Art. 70 § 8 of the Tax Code and agree that tax liabilities fell into the statute of limitation on the basis of general rules, i.e. in accordance with Art. 70 § 1 and § 1a of the Tax Code.

However, it happens that the tax authority, being aware of the legal situation and the established interpretation approach, is passive and does not institute administrative enforcement proceedings and refuses to issue the consent to delete the mortgage from the mortgage and land register to the taxable person. Then, if the taxable person wants to regulate the legal status of their real property, they bring an action to have the mortgage and land register conciliated with the actual legal status.

Such a legal chaos concerning Art. 70 § 8 of the Tax Code, which has lasted for several years, has not been handled by the legislator and the unconstitutional regulation has not been repealed. Thus, as our experience shows, cases concerning statute-barred tax liabilities secured by mortgage are brought from time to time. The situation could be solved with another ruling of the Constitutional Tribunal which would formally apply to Art. 70 § 8 of the Tax Code, as initiated in 2016 by the Ombudsman. The Ombudsman’s request has been waiting for the Tribunal’s review since then.

Michał Korszla, attorney-at-law