Can penalties be waived where abuse of tax law has been involved?

The Supreme Administrative Court (SAC) addressed this issue in one of its recent judgments. The tax authority dealt with an issuance of one-crown bonds, concluding that the presented scheme was an abuse of law. It therefore assessed additional tax including penalties, against which the company unsuccessfully defended itself in appeal proceedings and subsequently in court. We wrote about the case here.

At the same time, the company applied for the waiver of the related penalty. The tax authority denied the request claiming that the conduct involving an abuse of law was so serious that the penalty could not be waived. The company fought the rejection of its request before the courts.

According to the courts, an abuse of law in itself does not enjoy legal protection, and such legal protection cannot be granted even to the related penalty. Although the company defended itself by arguing that it had paid the tax in the early stages of the tax proceedings, this did not convince the court. The court held that in this particular case, the taxpayer’s conduct could not enjoy the state's generosity (exceptional favour) in the form of a waiver of the penalty, as this would lead to promoting the abusive conduct.

The court also disagreed with the company's argument that the General Financial Directorate's instruction on the waiver of penalties did not expressly provide for the possibility of denying a waiver on the grounds of an abuse of law. According to the court, it is important that the instruction does not exclude it. The possibility of considering the taxpayer’s original conduct when waiving penalties has already been established by the SAC’s case law in the past. Thus, in abuse of law cases, it cannot be relied upon that part of the penalty will be waived even if all other conditions are met.