2002/03/12 - Pl. ÚS 33/01: Retroactivity

12 March 2002

HEADNOTES

Thus,

if a certain model and manner of social thought and conduct has been

consensually established in the value system and consciousness of

society, which, for various reasons, e.g. as a result of the pressure

from a certain political system, could not find normative expression,

then the legal regulation of that conduct, containing retroactivity,

remains fully in accordance with the principles of a democratic state

based on the rule of law. In other words, it would, on the contrary, be

inconsistent with the principles of justice if, in such cases, true

retroactivity did not have its say. However, all this should all the

more distinctively indicate that true retroactivity has no place in a

state governed by the rule of law in situations where the legislature

already could have had its “say” but did not do so.
 
Because,

from a constitutional law standpoint, the legislature’s decision on the

manner of resolving the overlapping in time of old and new legal

regulations is not a matter of chance or arbitrariness, but is a matter

of consideration of conflicting constitutional law principles, the

Constitutional Court considered whether conditions exist for allowing an

exception from the principle of forbidding true retroactivity, which

would permit the constitutional admissibility of this legal norm. The

framing of tax policy is a matter for the state, which determines what

the tax burden on the taxpayer of a particular tax will be and how it

will regulate his obligations in connection with verifying the correct

assessment of tax. The Act on Income Taxes, in its original version of

1992, established the use of usual market prices in the event that

negotiated prices differ from them and the difference is not

satisfactorily documented, with this procedure to be used whenever there

was interconnection by personnel or economic interconnection between

the same legal entities or natural persons. Act No. 259/1994 Coll., in

effect as of 1 January 1995, added to the Act on Income Taxes the

obligation to satisfactorily document the difference between prices

negotiated between entities connected economically or in personnel and

prices negotiated between independent entities in ordinary business

relationships under the same or similar conditions. This amendment

narrowed the obligations of the taxpayer, who in future had to pay

attention to satisfactory documentation of the price difference only in

certain legal relationships foreseen by the law, and bore the

consequences for any failure to fulfill this obligation in the form of a

tax base adjustment by the tax administrator. Act No. 316/1996 Coll.,

in effect as of 1 January 1997, provided what was considered to be a

price negotiated between independent persons in ordinary business

relationships in setting the level of interest for loans, which did not

expand the range of legal relationships subject to the law. Thus, until

the amendment passed by Act No. 210/1997 Coll., the taxpayer could

justifiably expect that in creating legal relationships he would have to

document a price difference to the tax administrator and bear the

consequences if he did not do so only with some of them, while with

other legal relationships he would not be subject to this obligation.

The Constitutional Court therefore believes that this case is a case of

the taxpayer’s justified faith in the law, because in the legal

situation at the time to which the retroactive norm applies, the

taxpayer could not presume any flaw in his conduct and could not expect

the possibility of retroactive change. Although social relationships

began to show signals that indicated the need for new legal regulation,

which is the subject of the matter at hand, the legislature, in a

democratic state, did nothing to limit disadvantageous effects earlier,

i.e. by a regulation pro futuro. Thus, in this case conditions do not

exist to accept an exception from the ban on true retroactivity, nor can

the constitutional conflict be overcome through interpretation.

 


CZECH REPUBLIC

CONSTITUTIONAL COURT JUDGMENT
JUDGMENT

 

IN THE NAME OF THE CZECH REPUBLIC

 

 

The

Plenum of the Constitutional Court decided on 12 March 2002 in the

matter of a petition from the Ostrava Regional Court to annul the part

of Art. III point 1 of Act No. 210/1997 Coll., which amends and

supplements Czech National Council Act No. 586/1992 Coll., on Income

Taxes, as amended by later regulations, identified by the number and

punctuation “48,” with the participation of 1) the Chamber of Deputies

of the Parliament of the CR and 2) the Senate of the Parliament of the

CR as parties to the proceedings, with the consent of the parties to the

proceedings without a hearing, as follows:
   

Art.

III point 1 of Act No. 210/1997 Coll., which amends and supplements

Czech National Council Act No. 586/1992 Coll., on Income Taxes, as

amended by later regulations, in the part identified by the number and

punctuation “48,” is annulled as of the day this judgment is published

in the Collection of Laws.
 



REASONING

I.
 

On

11 October 2001 the Constitutional Court received a petition from the

Ostrava Regional Court to annul Art. III point 1 of Act No. 210/1997

Coll., which amends and supplements Czech National Council Act No.

586/1992 Coll., on Income Taxes, as amended by later regulations, in the

part identified by the number and punctuation “48,”.

The

petition states that the Ostrava Regional Court, Panel 22 Ca, (the

“petitioner”), is handling a complaint by P. P. against a decision by

the Ostrava Financial Directorate which denied his appeal against a

supplemental payment assessment by the Český Těšín Financial Office on

additional individual income tax for the tax period 1997. In May 1997

the plaintiff sold securities which were not publicly tradable at a loss

of ca. CZK 10 million, and the tax administrator categorized the case

as the conclusion of a trade between otherwise connected persons for

purposes of lowering the tax bas under § 23 para. 7 of Act No. 586/1992

Coll., on Income Taxes, as amended by of Act No. 210/1997 Coll. The

petitioner believes that the part of Art. III. point 1 of Act No.

210/1997 Coll., identified by the number and punctuation “48,” is in

conflict with Art. 1 of the Constitution of the Czech Republic (the

“Constitution”) because it has retroactive effects.

Point 48 of

Art. I of Act No. 210/1997 Coll. expanded the circle of specific

business cases in which the tax administrator reviews negotiated prices.

If the taxpayer does not satisfactorily document the difference between

the price negotiated in such a case and the price which was negotiated

in ordinary business relationships between independent persons connected

otherwise than economically or by personnel, the tax administrator

adjusts the taxpayer’s tax bases by the difference determined. Here the

lack of a satisfactory explanation from the taxpayer leads to a change

in the tax base and thus to a change in the amount of tax. Under Art. V,

Act No. 210/1997 Coll. went into effect on 1 January 1998, but Art.

III, point 1 of the Act states that Art. I points 33, 34, 48, 51, 52, 62

[applying only to § 24 para. 2 let. zf)], 69, 98 and 114 will already

be applied for the tax period 1997.

According to the petitioner,

the basic principles defining the category of a state based on the rule

of law include the principle of protecting citizens’ confidence in the

law and the related principle of a ban on the retroactivity of legal

norms. Although the ban on retroactivity is expressly regulated in Art.

40 para. 6 of the Charter of Fundamental Rights and Freedoms (the

“Charter”) only for the area of criminal law (under that provision the

question whether an act is punishable is considered and punishment

imposed under the law in effect at the time the act was committed, and a

subsequent law is applied if it is more favorable for the perpetrator),

the application of this ban for other areas of law must be drawn from

Art. 1 of the Constitution. The accent laid on the ban on retroactivity

for legal norms as one of the basic elements of a state based on the

rule of law flows from the requirement for legal certainty. The ban on

retroactivity consists in the principle that it is fundamentally

impossible to judge, under current legal norms, human conduct, legal

facts or legal relationships which occurred before the legal norm went

into effect. The ban on retroactivity of legal norms is based on the

principle that everyone must have an opportunity to know which conduct

is forbidden, so that he can be called to account for violation of the

ban. This ban is also related to the function of legal norms, which

instruct persons subject to them how they are to act after the laws go

into effect, and therefore are fundamentally in effect only in the

future.

With reference to the Constitutional Court’s conclusions

of law expressed in its case law on the question of retroactivity of a

legal norm and the protection of acquired rights, the petitioner points

to the fact that the application of point 48 in Art. I of Act No.

210/1997 Coll. already for the tax period 1997, although the Act went

into effect only as of 1 January 1998, placed the taxpayer in a position

where his previously legally faultless conduct is retroactively viewed

more strictly, because business activities are subject to review by the

tax administrator which, under the previous legal regulation, were not

subject to such review. Thus, under the new legal norm, legal

relationships are evaluated which occurred before the norm went into

effect, and this evaluation may have an unfavorable effect on the

taxpayer’s rights and obligations. In the period before 31 July 1997,

when Act No. 210/1997 Coll. was passed, a person or entity could not

predict, when entering business relationships, which facts would newly

be legal facts decisive for his rights and obligations in the area of

income tax, and thus did not have an opportunity to choose whether to

undertake the possible risks related to these consequences. The new

legal regulation, which changes the consequences of legal relationships

which arose before the day when it went into effect, is thus a case of

true retroactivity of a legal norm. Because this change retroactively

worsens the taxpayer’s legal position, it violates the principle of

protection of acquired rights.

The petitioner states that in

this case the new regulation is worded unambiguously and it can not be

interpreted in a constitutional manner so that its consistency with the

constitutional order can be ensured. Therefore, it proposes that the

Constitutional Court make a judgment to annul Art. III, point 1 of Act

No. 210/1997 Coll., which amends and supplements Act No. 586/1992 Coll.,

on Income Taxes, as amended by later regulations, in the part

identified by the number and punctuation “48”.
 


II.
 

The

Chamber of Deputies and the Senate of the Parliament of the CR, as

parties to the proceedings, stated their positions on the proposal for a

new legal regulation in accordance with § 69 of Act No. 182/1993 Coll.,

on the Constitutional Court.
 


III.
 

The

Constitutional Court, under § 68 para. 2 of Act No. 182/1993 Coll., on

the Constitutional Court, proceeded to review whether Act No. 210/1997

Coll., which amended Act No. 586/1992 Coll., on Income Taxes, as amended

by later regulations, was passed within the bounds of constitutionally

prescribed jurisdiction and in a constitutionally prescribed manner and

to review the contested provision itself. The Constitutional Court

stated that the act was passed within the bounds of constitutionally

prescribed jurisdiction and in a constitutionally prescribed manner.
 


IV.
 

Provision

of § 23 para. 7 of Act No. 586/1992 Coll., on Income Taxes was amended

by Act No. 259/1994 Coll. and Act No. 316/1996 Coll., and before passage

of the amendment in Act No. 210/1997 Coll. read: “If prices negotiated

between persons connected economically or by personnel differ from

prices which were negotiated between independent persons in ordinary

business relationships under the same or similar conditions, and if this

difference is not satisfactorily document, the tax administrator will

adjust the taxpayer’s tax base by the difference determined. For

purposes of this provision, the price negotiated between independent

persons in ordinary business relationships when setting the interest

rate on loans is considered to be interest of 140 % of the Czech

National bank discount rate in effect at the time a contract is

concluded. Persons are considered to be connected economically or by

personnel if one person takes part directly or indirectly in the

management, inspection or equity of the other person, or if the same

legal entities or natural persons directly or indirectly take part in

the management, inspection or equity of both persons or a related

natural person. Taking part in inspection or equity means ownership of

more than 25 % of the basic capital or holdings with voting rights. This

provision does not apply to the provision by an employer, for

compensation, of a room with necessary furnishings to a union

organization for necessary operating activity.”
    
Point 48

Art. I of Act No. 210/1997 Coll. of 31 July 1997 added § 23 para. 7 of

the Act on Income Taxes as follows: In § 23 para. 7, first sentence,

after the words “by personnel” the words “or otherwise” are inserted.

After the second sentence the following sentence is inserted: “This does

not apply to cases where the creditor is a person with a registered

address or home address abroad and the negotiated interest rate for a

loan is less than 140 % of the Czech National Bank discount rate in

effect at the time the contract is concluded.” After the words “a

related person.” the following sentence is inserted: “Otherwise

connected persons means persons who formed a business relationship

primarily for the purpose of lowering a tax base or increasing a tax

loss.” Subsequent amendments to the Act on Income Taxes did not affect §

23 para. 7.

Art. III Closing Provisions, point 1 of Act No.

210/1997 Coll. reads: “Art. I points 33, 34, 48, 51, 52, 62 [applying

only to § 24 para. 2 let. zf)], 69, 98 and 114 shall apply for the tax

period 1997.”

As stated above, the petitioner’s petition and

arguments are not directed against amending the Act, but against the

retroactivity of the closing provision, which causes a situation in

which legal relationships arising before the day the Act becomes valid

and in effect are subject to legal consequences established in a new

legal regulation.

Under § 23 para. 7 of the Act on Income Taxes

in the version before the amendment by Act No. 210/1997 Coll. the tax

administrator could adjust the taxpayer’s tax base by the difference

determined, if the prices negotiated between persons connected

economically or by personnel differed from prices which were negotiated

between independent persons in ordinary business relationships under the

same or similar conditions, and if this difference was not

satisfactorily documented. Under the new legal regulation, the tax

administrator may also investigate a difference determined in prices

which were negotiated not only between persons connected economically or

by personnel, but also persons connected otherwise, and person

connected otherwise are considered to include persons who formed a

business relationship primarily for the purpose of reducing a tax base

or increasing a tax loss. In the interest of limiting artificial tax

reduction as a result of purpose-made business relationships, the tax

advisor’s authority to retroactively inspect, investigate and punish

this form of the taxpayer’s “commercial” conduct was expanded.
 

In

its case law, the Constitutional Court of the CSFR discussed the ban on

retroactivity in its judgment file no. Pl. US 78/92 (Collection of

Decisions [and Judgments] of the Constitutional Court, 1992, no. 15), in

which it stated that the principles of a state based on the rule of law

require, in each possible case of retroactivity that it be expressly

stated in the Constitution or in a statute, with the aim of ruling out

the possibility of retroactive interpretation of a statue, and also

require that consequences tied to retroactivity be resolved in a statute

so that acquired rights are properly protected. The Constitutional

Court of the CR, in its judgment file no. IV. US 215/94 (US, vol. 3, no.

30) stated that the characteristics of a state governed by the rule of

law inseparably include the principle of legal certainty and protection

of the citizen’s confidence in the law, and that this process includes

the ban on the retroactivity of legal norms or their retroactive

interpretation. The inadmissibility of retroactive effect of legal norms

in the field of criminal law is expressly regulated in Art. 40 para. 6

of the Charter and Art. 7 of the Convention for the Protection of Human

Rights and Fundamental Freedoms (the “Convention”); their application in

other areas of law is derived from Art. 1 of the Constitution.
 

Legal

theory and practice distinguish between true and apparent

retroactivity. The substance of true retroactive effect is that it is

possible, under a particular current legal norm, to judge legal facts or

legal relationships which occurred before the legal norm went into

effect, or the fact that the new legal norm can change the legal

consequences which arose lawfully before the day when it went into

effect. In apparent retroactivity, legal relationships which were valid

when the old law was valid are governed by that law until the time when a

new law goes into effect, but are then governed by that new law. The

creation of legal relationships existing before a new legal regulation

goes into effect and legal entitlements arising under them are governed

by the original, annulled legal norm. Generally, in cases of overlap

between the old and new legal norms, apparent retroactivity is applied.
 

Analysis

of the principle of retroactivity is also contained in Constitutional

Court judgment file no. Pl. US 21/96, published under no. 63/1997 Coll.,

in which the Constitutional Court considered the question of possible

exception to the inadmissibility of retroactivity of legal norms. The

judgment states that while apparent retroactivity is generally

admissible, and is inadmissible only in exceptional cases, true

retroactivity is, on the contrary, generally inadmissible, but there are

strictly limited exceptions where it is admissible. To shed light on

the question of when these exceptions to the ban on true retroactivity

can be admitted, the Constitutional Court, with supporting citations

from previous and current legal theory, stated: True retroactivity “can

be justified at most in situations where the past legal obligation was

previously already felt at least as a moral obligation” (A. Procházka,

The Retroactivity of Laws. In: Dictionary of Public Law. Vol. III, Brno

1934, p. 800). This situation is also addressed and foreseen by the

already cited article 7 of the Convention, which provides in paragraph 2

that ruling out the retroactive effect of criminal law norms “… does

not prevent the conviction and punishment of a person for an action or

failure to act which, at the time when it was committed, was punishable

under general legal principles recognized by civilized nations.” The

cited judgment further states that we also find a similar opinion in

current legal theory: “Generally, one can diverge from the ban on

retroactivity only exceptionally, by an express positive provision. As

is obvious from history, the reason for such steps was a situation where

legal certainty would come into sharp conflict with social certainty

and with legal consciousness, as was the case in the CSR in the case of

retributive decrees. The retroactive effect of a law on civil law

relationships could also be justified by public order (ordre public),

primarily if absolutely mandatory regulations would be affected which

had been issued as a result of a particular marginal situation of the

transformation of valued in society.” (L. Tichý, On the Application in

Time of the Amendment of the Civil Code, Lawyer, no. 12, 1984, p. 1102).

The criterion for admissibility of exceptions to the principle of a ban

on true retroactivity is the legislative principle of “protection of

justified confidence in the permanence of the legal order” (A.

Procházka, Principles of Intertemporal Law, Brno 1928, p. 111).

Justified confidence can come into consideration if a subject of law

must, or had to, expect retroactive regulation. An example of such a

situation is the application of a legal norm which is in sharp conflict

with fundamental, generally recognized principles of humanity and

morals: “In our legal order we can justify, by reference to the

previously dominant moral conviction, e.g. the retroactive effect of

usury laws (see § 13 of Act No. 47/1881 Imperial Laws, § 10 Imperial

Order no. 275/1914 Imperial Laws , § 105 III. partial amendment to the

Civil Code)." (A. Procházka, Retroactivity of Laws. In: Dictionary of

Public Law. Vol. III, Brno 1934, p. 800.)
 

For

the sake of completeness, the Constitutional Court adds to the

foregoing that the cited “principles recognized by civilized nations”

can, in their aggregate, scarcely be understood to mean anything other

than a system of values established in society. Values are of

fundamental importance in society, and play an irreplaceable role,

because it is only thanks to them that human society can not only exist,

but communicate historically and socially. Without them, social

development would fall apart into a mosaic of unrelated social events

and social structures into non-communication social units. In the

aggregate of all their individual forms, values thus create “the rules

of the game”, the observance of which, although they always were and

probably will be violated, always reveals itself again to human society

as a basic condition for its existence and social development.

It is to this system of values that the legal system, containing ethical

and legal norms, is connected. If values can be defined to mean models

of social thought and action, characteristics, social conditions and

events, and institutional forms whose common feature is their being

applicable, subject to consent, for a certain aim and purpose, norms can

be defined as rules, orders, prescriptions for a certain manner of

social conduct, subject to and secured by sanctions, which is recognized

or established to attain such an aim or purpose. Values share a common

base with norms insofar as together with them they form a society’s

value system and legal order, as its constituent, establishing and

organizing principle. Within this value system and legal order, however,

values and norms fulfill particular, often closely related but

nevertheless mutually non-substitutable functions. Both, values and

norms, are marked by a relationship to a particular goal or purpose, but

it is only values which indicate a general historical and social

direction, constitute the envisioned aim and the basic method of

achieving it, while the direct implementation of the form of values is a

matter for norms. However, despite this executive nature and the

dependence on a given value system, the social function of norms can not

be underestimated and connected only with the technical aspect of

social events. It is norms that represent the instrument that makes

possible not only the implementation of values, but also their

verification; norms help to bring a value system to life, and the

success or failure of this effort indicate its social utility and

applicability. Because values are primarily models for social behavior,

and as such appear as idealized types, they can hardly be translated

into legal norms in their full breadth. A society which tried to enact

everything in law would ultimately create an extensive vacuum between

the claimed conduct and its possibilities, which would in the end be

composed of simulative and fictitious elements.

The foregoing

excursion about the system of values and legal order may help us to

better understand issues relating to true retroactivity, whose

admissibility, in view of the breadth of values, is projected into all

areas of social relationships, particularly legal relationships. Thus,

if a certain model and manner of social thought and conduct has been

consensually established in the value system and consciousness of

society, which, for various reasons, e.g. as a result of the pressure

from a certain political system, could not find normative expression,

then the legal regulation of that conduct, containing retroactivity,

remains fully in accordance with the principles of a democratic state

based on the rule of law. In other words, it would, on the contrary, be

inconsistent with the principles of justice if, in such cases, true

retroactivity did not have its say. However, all this should all the

more distinctively indicate that true retroactivity has no place in a

state governed by the rule of law in situations where the legislature

already could have had its “say” but did not do so.
 

Starting

with these theoretical foundations in evaluation the present matter the

Constitutional Court concluded that point 1 Art. III, referring to

point 48 Art. I of Act No. 210/1997 Coll. has the effects of true

retroactive effect.

Because, from a constitutional law

standpoint, the legislature’s decision on the manner of resolving the

overlapping in time of old and new legal regulations is not a matter of

chance or arbitrariness, but is a matter of consideration of conflicting

constitutional law principles, the Constitutional Court considered

whether conditions exist for allowing an exception from the principle of

forbidding true retroactivity, which would permit the constitutional

admissibility of this legal norm. The framing of tax policy is a matter

for the state, which determines what the tax burden on the taxpayer of a

particular tax will be and how it will regulate his obligations in

connection with verifying the correct assessment of tax. The Act on

Income Taxes, in its original version of 1992, established the use of

usual market prices in the event that negotiated prices differ from them

and the difference is not satisfactorily documented, with this

procedure to be used whenever there was interconnection by personal or

economic interconnection between the same legal entities or natural

persons. Act No. 259/1994 Coll., in effect as of 1 January 1995, added

to the Act on Income Taxes the obligation to satisfactorily document the

difference between prices negotiated between entities connected

economically or in personnel and prices negotiated between independent

entities in ordinary business relationships under the same or similar

conditions. This amendment narrowed the obligations of the taxpayer, who

in future had to pay attention to satisfactory documentation of the

price difference only in certain legal relationships foreseen by the

law, and bore the consequences for any failure to fulfill this

obligation in the form of a tax base adjustment by the tax

administrator. Act No. 316/1996 Coll., in effect as of 1 January 1997,

provided what was considered to be a price negotiated between

independent persons in ordinary business relationships in setting the

level of interest for loans, which did not expand the range of legal

relationships subject to the law. Thus, until the amendment passed by

Act No. 210/1997 Coll., the taxpayer could justifiably expect that in

creating legal relationships he would have to document a price

difference to the tax administrator and bear the consequences if he did

not do so only with some of them, while with other legal relationships

he would not be subject to this obligation. The Constitutional Court

therefore believes that this case is a case of the taxpayer’s justified

faith in the law, because in the legal situation at the time to which

the retroactive norm applies, the taxpayer could not presume any flaw in

his conduct and could not expect the possibility of retroactive change.

Although social relationships began to show signals that indicated the

need for new legal regulation, which is the subject of the matter at

hand, the legislature, in a democratic state, did nothing to limit

disadvantageous effects earlier, i.e. by a regulation pro futuro. Thus,

in this case conditions do not exist to accept an exception from the ban

on true retroactivity, nor can the constitutional conflict be overcome

through interpretation. The argument of the Chamber of Deputies, that in

this case the tax administrator surely also relied on § 23 para. 10 of

the Act on Income Taxes, changes nothing about the above mentioned

conclusion. Under this provision “The tax base is determined on the

basis of accounting maintained according to a separate regulation 20),

unless a separate regulation or this Act provides otherwise or unless

the tax obligation is reduced by another method.” According to the

footnote, the separate regulation means Act No. 563/1991 Coll., on

Accounting, the Directive on the Chart of Accounts and Principles of

Single Entry Accounting published in the Collection of Laws. The

Constitutional Court considers § 23 para. 10 of the Act on Income Taxes

to be incapable of justifying an exception to the ban on true

retroactive effect of point 1 Art. III, referring to point 48 Art. I of

Act No. 210/1997 Coll., and it found no other grounds for doing so.
 

For

the above mentioned reasons the Constitutional Court granted the

petition of the Ostrava Regional Court and, under § 70 para. 1 of Act

No. 182/1993 Coll., on the Constitutional Court, annulled Art. III point

1 of Act No. 210/1997 Coll., which amends and supplements Czech

National Council Act No. 586/1992 Coll., on Income Taxes, as amended by

later regulations, in the part identified by the number and punctuation

“48,” as of the day this judgment is published in the Collection of

Laws.
 

Decisions of the Constitutional Court can not be appealed.

Brno, 12 March 2002