Hungarian Constitutional Court annulled retroactive tax rule regarding statute of limitation
In its recent decision issued on 27 January 2022, the Constitutional Court annulled an important rule of the Tax Procedure Act with regards the prolongation of limitation period. The decision is fundamentally beneficial for taxpayers, but also triggers some uncertainty for repeated proceedings going forward.
The decision follows the Szeged Regional Court's request for a constitutional review of the applicable law in an ongoing lawsuit before it. The case concerned late payment interest and default penalty of HUF 142 million (approximately EUR 400,000) imposed by the tax authority for VAT fraud dating back to 2010. The case had gone through several stages of tax office and court proceedings in the past 10 years, finally to the Supreme Court (Kúria) and then to the Szeged Regional Court. The latter referred the case to the Constitutional Court stating that the applicable rules on the statute of limitation rule were unconstitutional and to be annulled.
Substantially, the Constitutional Court had to decide whether a subsequent extension of the default limitation period of five years could be applied in an ongoing case that had been pending for ten years. To make it more difficult, there were several changes in the applicable rule in the meantime: in 2012 Parliament extended the limitation period by six months, in 2015 by one year if the court orders a new procedure in relation to a decision of the tax authority and in 2018, with a new Code of Tax Proceedings coming into force, the one-year extension to be applied in new and repeated proceedings, as well. In practice, this resulted in the peculiar situation that the old rules were to be applied in tax proceedings having been initiated before 1 January 2018, but if a repeated proceeding was ordered, it had to be decided under the new rules.
It shows the importance of the case that Mr. Mihály Varga, Minister of Finance has also officially taken side in the question, arguing in his ‘amicus curiae’ that the given provision was not in conflict with the Constitution and even if it had been, the annulment of the provision would violate legal certainty.
The Constitutional Court, however, found that (1) the application of the new rules placed the taxpayer concerned in a more disadvantageous position, and (2) the examined legislation was of retroactive effect, since not a procedural but a substantial had been altered negatively, therefore, the extension of the limitation period violated the prohibition of retroactive application of the law.
As a consequence, the Constitutional Court, besides annulling the challenged provision, rendered that it cannot be applied in the case concerned. However, the Constitutional Court's judgment creates a degree of uncertainty regarding similar repeated proceedings in the future. In principle, this decision leaves it to the tax authorities and the courts to decide - given the explicit rule annulled - which set of procedural rules to apply in such cases.