Preclusion or statute of limitation in tax law, or when will your tax liability be precluded?
There are many terms in legal theory, which intersect to a certain extent in legal practice, and yet diametrically different legal effects are connected to each of them. In such cases, it is important to know their precise delimitations and principles, on which they function in practice. Only in this way is the taxpayer able to use the strength of legal concepts in his favour and their negative effects cannot surprise him. These concepts, often confused in practice, include the statute of limitation and preclusion as well. What is their connection and their significance in tax law?
Statute of limitation is connected to a weakening of the creditor's subjective right in general legal theory. In the case when the creditor claims his title at court or another authority, in whose jurisdiction the case belongs, the fate of his title depends on whether or not the debtor raises the objection of limitation or not. The legal position of the debtor thus increases due to the limitation, because by raising the objection of limitation, he divests himself of the obligation to provide performance. If the court decides in favour of the creditor and the debtor does not apply the objection in the course of the trial, the creditor still has a change to achieve performance by the debtor, due to the fact that the court does not take into account the limitation periods ex officio (by virtue of official duty). The court is even not allowed to point out the expiration of the limitation period to the debtor.
If the debtor pays his debt voluntarily to the creditor, despite the fact that the limitation period has expired, no unjust enrichment arises on the part of the creditor and the debtor is not entitled to reclaim his performance in the future. In case the debtor defends himself with the objection of limitation, that is he asserts that his debt is time-barred, the court must take this procedural act into account and dismiss the action. Subjective right is not extinguished thereby, but it continues to exist in the form of natural right and the debt existing as a natural obligation (that is from the legal perspective, the debtor's obligation exists, but the creditor cannot enforce its performance at court or at another authority).
In general, all property rights are subject to the statute of limitations, unless the law stipulates otherwise; and all rights, for which the law stipulates so, are also subject to statute of limitations. A contrary principle applies to personal rights, i.e. in principle they are not subject to the statute of limitations, unless the law stipulates exceptionally that they are subject to limitations. The subjective limitation period runs from the day, when the right could first be exercised, and generally this is the day, on which the authorized person found out about the vesting circumstances for the limitation period to begin, or on which it could have and should have found out about them, but did not actually find out due to its negligence. The limitation period generally reaches three years, although the law provides an enumerative list of obstacles, under which the limitation period is suspended, or legal facts, to which an interruption (stopping) of the limitation period applies. Being time-barred or not is an important quality of a claim in tax law, which is mainly assessed during statutory provisioning. According to the act on reserves, an adjusting entry can only be created for receivables that are not time-barred.
In case of preclusion, on the other hand, complete extinguishment of the creditor's claim occurs, regardless of whether or not the debtor has raised the objection. The court takes extinguishment of the preclusion period into account under the law and terminates the trial by virtue of official duty. If the debtor continues to voluntarily provide performance even after the preclusion, the creditor engages in unjust enrichment and is obliged to return the respective performance upon request from the debtor.
The procedural-law questions and the running of the periods are governed by the code of tax procedures (hereinafter “CTP”) in the tax law as of 1 January 2011, which replaced the tax and fee administration act. In the tax area, it is more precise to speak of extinguishment of the power of the public authority to exercise the right rather than extinguishment of right. Within the tax proceeding, the tax administrator thus only has the power to assess tax within a time limit specified by article 148 of CTP. After the three years, which the tax administrator has for additional assessment of the tax, its power to determine tax for the taxpayer is extinguishment, as is the option to change an already determined tax liability by lowering or increasing it. The last known tax liability thus becomes final as the preclusion period ends, regardless of whether or not adequate doubts arise in the future and later findings prove a different result compared to the declared one. The objective period ends 10 years after the day, on which the period for submitting a regular tax declaration ended or on which the tax became due. This ten-year period can only be prolonged in case of a final decision by court that a tax crime has been committed or in case of so-called active repentance on the part of the taxpayer, so that he could express it.
Prolongation of preclusion period for tax determination:
CTP provides an enumerative list of legal facts (acts), with the existence of which in the last 12 months before the end of the current three-year period for tax determination the period is prolonged by one year. These legal facts (acts) include:
- submitting an additional tax statement or announcement of summons with an additionally assessed tax to a submitted additional tax statement;
- announcement of a decision on tax determination, in the matter of an appeal or supervisory measure or declaration of nullity of a decision on tax determination;
- beginning of a proceeding of extraordinary appeal or supervisory measure.
The deadline for tax determination is also prolonged in keeping with the income tax act in case of applying tax losses. If tax loss can be applied as an entry deductible from the tax base in the taxable periods following after the taxable period, in which tax loss emerged, the period for determination of the tax for the taxable period, in which loss emerged, as well as for all other periods, in which it can be used, ends together with the period for determining tax for the last taxable period, in which the tax loss could still be applied.
Renewal of the period for tax determination:
The three-year period for determining tax is renewed:
- by beginning of tax audit;
- submission of a regular tax declaration;
- announcement of summons to submit a regular tax statement,
which have been performed before the initial period has ended.
On the day the act was performed, a new preclusive period begins to run and the power of the tax administrator to additionally assess tax liability for the taxpayer is re-established for another three years.
Suspension of the period for tax determination:
From the perspective of the taxpayer, it is important to recognize legal facts, based on which the running of a preclusion period is suspended according to CTP. The period for tax determination does not run during the time of:
- a trial relating to tax determination, a proceeding about an issue necessary for correct tax determination;
- prosecution due to a tax crime relating to this tax;
- from missing a deadline for appeal against a decision on tax determination until its return to previous state is announced;
- from expiry to no effect of collection time until the time that a decision is delivered, with which ineffectiveness of the delivery of a decision issued in the first instance trial is announced;
- from the day of sending a request for international cooperation on tax administration until the day an answer is received.
The period for paying tax:
An important preclusion period that can be found in tax law is also the period for paying taxes according to article 160 of CTP, which reaches 6 years and the law also connects legal facts for renewal, interruption or suspension of the period with it. In the past, the period for collecting underpayment was subject to limitation according to the act of tax and fee collection. The conception of limitation was subsequently altered in the CTP due to the fact that it did not appear suitable for public law and by means of this change, unnecessary uncertainty of taxpayers was to be removed.
It is very important for the taxpayer to check the running of periods and to record significant facts that can influence their course. In this way, the taxpayer can be sufficiently prepared in advance for a “celebration” after the duration of the three-year period for assessment and determination of tax has ended.
 The subjective period generally runs from the moment that the given entity has found out about a certain legal fact.
 The objective period begins to run from the moment a certain legal fact occurred, for example a tax declaration was submitted.