Constitutional Court reiterates obligation to address new arguments in tax dispute
The Constitutional Court set aside a judgment of the Supreme Administrative Court (SAC) concerning the tax deductibility of interest between related parties. According to the Constitutional Court, the SAC failed to address adequately the taxpayer’s new arguments, thereby infringing its right to a properly reasoned judicial decision. The judgment confirms the importance of well-developed legal arguments and a thorough knowledge of previous case law when defending taxpayers’ rights.
The dispute concerned whether the transfer of a 100% ownership interest to a bank by way of security created a capital relationship between the bank and the debtor (the taxpayer) for the purposes of the Income Taxes Act. Both the financial administration and the administrative courts concluded that it did and therefore disallowed the relevant interest expenses for income tax purposes. In doing so, the SAC relied on its earlier judgment in Grand Class, which concerned a similar legal question.
In its constitutional complaint, however, the taxpayer argued that their case could not be treated as directly comparable to the earlier case without further analysis. In its cassation complaint, the taxpayer presented a number of new arguments concerning the legal nature of a transfer of rights by way of security, the differences between that arrangement and a conventional transfer of an ownership interest or a pledge. In the taxpayer’s view, the SAC had failed to address these arguments and had merely taken over the conclusions of its earlier judgment.
Judgment primarily significant from a procedural perspective
The Constitutional Court (Judgment IV. ÚS 583/26 of 29 July 2026) reiterated that reference to established case law is a legitimate means of reasoning where a party merely repeats arguments that have already been addressed by that case law. The position is different, however, where the party presents new and potentially significant legal arguments. In that situation, the court must explain why those arguments do not warrant a departure from the existing legal position.
According to the Constitutional Court, this was precisely where the SAC had erred. The Grand Class judgment was based on a very brief cassation complaint, whereas the arguments in the present case were considerably more extensive and sophisticated. Nevertheless, the SAC largely referred to its earlier conclusions without considering the new arguments separately. The Constitutional Court also found that parts of the SAC’s reasoning were contradictory.
The Constitutional Court did not consider whether the transfer of the ownership interest by way of security actually created a capital relationship or whether the interest was tax deductible: it left those issues for the SAC to reassess. The significance of the judgment lies in confirming that established case law cannot in itself replace proper reasoning and statement of grounds in a judicial decision. Where a party to proceedings presents new and relevant arguments, the court must address them on their merits and explain why they do not warrant a departure from the existing legal position.