In practice, we can see that the tax authorities have increased their control activities, and in view of the state of public finances, this trend can be expected in the future as well. The initiation and conduct of a tax audit bring the inspected taxpayers not only higher costs to defend their rights, but also the risk of damage caused by the decision or maladministration of the tax administrator. The authorised representative of the taxpayer should consider claiming possible compensation for such damage with regard to the duty to act with due managerial care.
Under the conditions laid down by law, the state is liable for damage caused by the tax administrator. This is an no-fault liability that cannot be exempted. The right to compensation is a private law claim that is asserted by a civil court. The basic conditions for the establishment of a liability relationship are: (i) an unlawful decision or maladministration, (ii) the occurrence of damage and (iii) a causal link between the first two conditions. These three conditions must be fulfilled cumulatively, otherwise the liability of the state is not established.
An unlawful decision in the field of taxation is an effective or provisionally enforceable decision issued by the tax administrator that has been amended or revoked due to unlawfulness. The unlawfulness of the decision is thus established even before the submission of an action for damages in tax proceedings or subsequent administrative court proceedings. In practice, we most often encounter an incorrectly determined tax, but it can also be, for example, a cancelled securing order or an enforcement order.
What is maladministration?
Maladministration is any activity related to the exercise of the powers of the tax administrator, if the prescribed rules have been violated when performed or as a result of its performance. It is also a breach of the obligation to take an action or issue a decision within the statutory period or within a reasonable period. The condition of maladministration can thus be fulfilled by various acts, omissions or inactions of the tax administrator. For example, it may be a failure to prescribe interest paid by the tax administrator to the personal tax account of the taxpayer, remitting an overpayment to the incorrect bank account of the taxpayer, unauthorised conduct of tax distraint, unlawful tax inspection, delays in tax administration proceedings or excessive length of the audit procedure.
It is for the civil court to assess whether a specific act, omission or inaction of the tax administrator constitutes the incorrect official procedure in the context of hearing an action for damages. A taxpayer that succeeds before administrative court with an action for unlawful interference or an action for inaction before filing an action for damages, will be put in a better procedural position. The civil court deciding on damages is bound by the decision of the administrative court.
Damage can be both property or non-proprietery
The damage incurred can be both damage to property and non-proprietary damage. Damage to property can take different forms, depending on the type of unlawful decision or maladministration and on the business activity of the taxpayer. In the field of taxation, we most often deal with lost profits and wasted investments or transactions. Damage may also be interest on a loan that the taxpayer was forced to negotiate in order to pay an unlawfully assessed tax, or damage incurred to assets and inventories or incurred by the irrecoverability of the receivable.
Non-proprietary damage consists of the violation of the personal interest of the injured party, which has no value measurable in money, e.g. their dignity, honour or good reputation. A special type of non-proprietary damage is the uncertainty into which the injured party has been placed as a result of excessively long proceedings and in which they have been maintained. Unlike other types of injury, there is no need to prove the occurrence of such non-proprietary damage. According to a current judgment of the Supreme Court, it is newly possible to enforce this claim even in the case of an unreasonable length of tax audit, thereby amending the existing case law.
A certain difficulty in practice is the fact that the taxpayer has to prove the causal link in civil proceedings. They must also prove the occurrence of the damage and its amount. The means of proof may be any admissible means of proof, such as documents, witness statements or expert opinions. Given the complexity and possible length of the tax proceedings that precede the assertion of a claim for damages, the active procurement of the means of proof as part of tax proceedings and the use of the institutes of public law, such as an action for unlawful interference or an action for inaction, have proven itself in practice.
A claim for damages must first be filed out-of-court with the Ministry of Finance within a limitation period of
3 years, or 6 months in the case of non-proprietary damage. The Ministry is obliged to assess the asserted claim within 6 months. If the taxpayer is not fully satisfied by the Ministry, they can pursue their claim in a civil court. An application for judicial proceedings for damages is subject to a fee, but unlike ordinary disputes over monetary performances, the court fee is negligible.
A specific feature of claims for damages in the field of taxation is the possibility to obtain a lump-sum compensation already as part of tax proceedings in some cases, in the form of interests paid by the tax administrator. Their advantage is the fact that the taxpayer does not have to prove the occurrence of damage and its amount or causal link. Entitlement to interest arises even if no damage has been suffered by the taxpayer. Payment of interest can be requested up to 6 years retroactively.