Court of Justice will assess whether the exemption of rail infrastructure from property tax is state aid | In Principle

Rail infrastructure and the land on which it is located are exempt from property tax in Poland. Is that unauthorised state aid? The answer from the Court of Justice could have far-reaching consequences.

On 19 April 2023, the Supreme Administrative Court of Poland (in case no. III FSK 3/22) sought a preliminary ruling from the Court of Justice of the European Union regarding the exemption of rail infrastructure from property tax. Polish communes alleged that this exemption constitutes state aid, which should have been notified to the European Commission and, in the absence of notification, constitutes unauthorised aid.

The ruling by the Court of Justice could have significant implications for both communes and taxpayers owning infrastructure, especially regarding the amount of property tax.

Taxpayers who have paid property tax can file applications for determination and refund of an overpayment, to suspend the running of the limitations period, and potentially to be able to benefit from a positive ruling by the court. But the ruling may have even further-reaching effects.

Historical background

The request for preliminary ruling was submitted against the background of Art. 7(1)(1) of the Local Taxes and Fees Act, in the wording in force in 2017–2021.

Until the end of 2016, structures forming part of rail infrastructure within the meaning of the provisions on rail transport and the land occupied for them were exempt from property tax if:

• The infrastructure manager was obliged to make them available to licensed rail carriers
• They were intended exclusively for passenger transport, carried out by a rail carrier that also manages the infrastructure without making it available to other carriers, or
• Formed rail lines with a track gauge greater than 1435 mm.

From 2017 to 2021, the property tax exemption for rail infrastructure and the land on which it is located was expanded to include land, buildings and structures which were part of rail infrastructure, as defined in the provisions on rail transport, and which:

• Were made available to rail carriers
• Were used for passenger transport, or
• Formed rail lines with a track gauge greater than 1435 mm.

With regard to such land, the exemption applied to the entire registered plot on which the rail infrastructure is located, regardless of whether the taxpayer actually carried out rail operations on the entire area of the plot or only part of the plot (as held for example in the Supreme Administrative Court judgment of 31 January 2019, case no. II FSK 3032/18).

Initially, against this legal background, the tax authorities confirmed for taxpayers that they had a right to exemption of their rail infrastructure from property tax. After some time, however, the tax authorities began refusing to apply this exemption, citing the risk of granting impermissible state aid due to Poland’s failure to notify the European Commission of the exemption.

At the same time, the compatibility of the exemption with EU law and the absence of a notification requirement were expressly confirmed in the explanatory memorandum to the amendment to the Local Taxes and Fees Act, introducing the new wording of Art. 7(1)(1) of the act from 2017, despite doubts raised by the Office of Competition and Consumer Protection in the course of legislative work.

It should be pointed out that as of 1 January 2022, the exemption only covers parts of the land, buildings and structures occupied for performance of the infrastructure manager’s tasks or provision of services by the operator of a service facility. In other words, this exemption can be applied exclusively by entities conducting activity in the rail market. And as of 2024, the property tax exemption is to be extended to rail terminals.

Preliminary questions of the Supreme Administrative Court

The Supreme Administrative Court sought a preliminary ruling from the Court of Justice in a dispute over an individual interpretation sought from the mayor of Mielec by a company owning land on which rail sidings are located. The Supreme Administrative Court raised two issues—whether the exemption of rail sidings distorts competition in the European Union, and if so, whether taxpayers must pay the outstanding tax with interest. The questions are worded as follows:

• Whether, in light of Art. 107(1) of the Treaty on the Functioning of the European Union, it distorts or threatens to distort competition for a member state to grant tax relief addressed to all undertakings as in Art. 7(1)(1)(a) of the Local Taxes and Fees Act, consisting of an exemption from property tax on land, buildings and structures that are part of rail infrastructure within the meaning of provisions on rail transport, which is made available to rail carriers
• Whether, in the case of a positive answer to the first question, an undertaking that has benefited from a tax exemption based on a national provision introduced without observing the required procedure set forth in Art. 108(3) TFEU in conjunction with Art. 2 of Council Regulation (EU) 2015/1589 of 13 July 2015 is obliged to pay the outstanding tax with interest.

Effects of the Court of Justice ruling

The Court of Justice ruling will affect the grounds for the exemption of rail infrastructure from property tax itself. In the first place, it may affect pending tax proceedings, whether for assessment of tax or for refund of an overpayment. They may be suspended by the tax authority at its own initiative pursuant to Art. 201 §1c(2)(b) of the Tax Ordinance (if the party consents, under Art. 201 §1d(1) of the Tax Ordinance).

If the Court of Justice judgment is favourable to taxpayers, they will gain a basis for seeking a determination and refund of any overpayment of the tax. However, the tax liability cannot become time-barred (which can be secured by submission of applications by the interested taxpayers for confirmation and refund of overpayment—while, as indicated above, the overpayment proceedings themselves should be suspended).

If the Court of Justice rules against the taxpayers, this could allow communes to recover the property tax from taxpayers who took advantage of the exemption. In this case, the limitations period on tax liabilities may also be relevant. At the same time, it should be borne in mind that the limitations period for claims for repayment of state aid is generally 10 years, which is longer than the limitations period for tax liabilities.

It cannot be ruled out that the court will interpret the provisions on state aid and protection of competition in the EU so that taxpayers will ultimately be forced to repay the aid received, even if they were the addressees of final decisions on the determination and refund of overpayments (it would also be interesting to determine the mode of such repayment). For this reason, the importance of the court’s ruling may go far beyond the issue of property taxation on rail infrastructure. First of all, generally, it may shed light on the relationship between tax law and state aid law in general, as well as the rights and obligations of tax authorities and taxpayers, in particular the position of taxpayers when tax laws are adopted in violation of state aid rules.

Finally, the ruling by the Court of Justice may affect the wording of Art. 7(1)(1) of the Local Taxes and Fees Act, including not only between 2017 and 2021 (at issue in the dispute pending before the Supreme Administrative Court), but also its current and future wording, as the request for a preliminary ruling submitted by the Supreme Administrative Court is not limited to a specific state of the law.

Joanna Prokurat, attorney-at-law, tax adviser, Tax practice, Wardyński & Partners