On 16th December 2011, Polish Supreme Administrative Court declared that “amounts of money” paid for undue length of civil or criminal proceedings should be exempted from taxation. Those amounts are paid on the basis of special law of 2004 on complaint on excessive length of proceeding (skarga na przewlekłość postępowania). Tax authorities had unclear approach to amounts of money adjudicated on the basis of said law. In some cases they treated them as an additional profit and requested payment of taxes. In some other cases they took into consideration their compensatory nature for negligence of courts and declared that awarded “amounts of money” should be exempted from taxation.
It should be reminded that on 26 October 2000, the European Court of Human Rights in Kudła against Poland (application no. 30210/96) declared violation of Article 13 of the European Convention of Human Rights, because Polish law at that time did not provide an effective remedy giving the applicant the possibility of preventing or at least compensating the infringement of the right to hear the case within a reasonable time. It was the first case of that type decided by the ECtHR, having impact on legislation in Poland but also in other Council of Europe states having problems with proper operation of courts. The ECtHR judgment resulted in Poland with enactment in 2004 of the said Act on the complaint of excessive length of proceedings. In 2009 the Act has been amended in order to cover not only court proceedings but also length of proceedings at the investigation stage.
In general, according to the Act on excessive length of proceeding provisions, the party of a lengthy proceeding has a right to file a complaint on excessive length of proceeding. If the court reviewing the complaint considers that the there was a protraction of proceedings and the complaint was legitimate, the court may under some conditions award an appropriate “amount of money” to the party for the excessive length of proceedings (amounting form 2.000 to 20.000 PLN, i.e. between approx. 450 EUR and 4.500 EUR).
According to the statistical data collected by the HFHR, the complaint on excessive length of proceedings is more and more frequently used Number of complaints and the amount of money awarded for the parties to the proceedings increases every year. For instance, only in 2011, more than 4.200 complaints were filed, whereas the average amount of money awarded was 3.000 PLN (approx. 700 EUR). Money awarded for excessive length of proceeding amounted to 2.4 mln PLN (approx. 0.55 mln EUR).
In May 2011, the HFHR published a policy paper that presented fundamental problems associated with operation of the complaint on the length of proceedings in Polish law system. In the policy paper the HFHR claimed inter alia that it is unclear, whether the amounts awarded by courts for undue length of proceedings should be released from taxation.
The matter of the taxation of “amount of money” awarded to the party of the proceeding for the excessive length of proceeding was now examined by the Supreme Administrative Court. So far, this issue was subject to disagreement in doctrine and practice of tax law and subject to an unfavorable interpretation of tax authorities. In particular, the interpretations of the tax authorities presented the view that the abovementioned amount shall be subject to taxation under Act on Income Tax (Ustawa o podatku dochodowym od osób fizycznych). The general rule under Polish tax law is that the compensations and damages awarded to the individuals by courts are released from taxation with income tax.
The main cause of diversity in interpretation presented by tax authorities and administrative courts was the discrepancy of terminology adopted on the grounds of Act on the complaint on excessive length of proceedings and Act on Income Tax. In particular, the Act on complaint on excessive length of proceeding introduces the definition of a “amount of money” awarded to the party to the proceeding, whereas the Act on Income Tax introduces the term of “damages” and “compensation” awarded to individuals, that are released from taxation. Due to the above terminological distinction, the tax authorities refused to classify the “amount of money” awarded for the excessive length of proceeding as damages of compensations and presented the view that this sum of money (as a type of income) should be taxed under regular rules of taxation.
The HFHR presented the amicus curiae brief to the Supreme Administrative Court. The HFHR presented analysis of the legal nature of the complaint on the length of the proceedings and the and taxation rules of the “amount of money” awarded for excessive length of proceedings with respect to taxation basis of Act on Income Tax provisions. HFHR presented the view that the “amount of money” shall be understood as compensation to the party to the proceeding and shall be therefore released from taxation.
The Supreme Administrative Court dealt with that taxation matter of this kind for the first time. In the judgment of 16th December 2011, the Court held that the “amount of money” is a form of compensation to the party to the proceedings and should be therefore released from taxation.
Considering the increasing number of complaints and “amounts of money” awarded to the party to the lengthy proceedings, the Supreme Administrative Court’s decision will have a significant impact on the practice of tax authorities and it will lead to tax exemption of the “amount of money” awarded to the parties of the lengthy proceedings. Thanks to this approach, the compensatory nature of the awarded “amounts of money” for undue length of proceedings will be underlined.
Małgorzata Mączka, Lawyer at the Strategic Litigation Program of the Helsinki Foundation for Human Rights
Author : Europe of Human Rights