Zombie tax: Revival of tax obligations on inheritance and gifts
Benjamin Franklin said nothing is certain but death and taxes. For heirs, the latter can be a consequence of the former. Lawmakers have made certain that the passage of time does not discharge tax obligations connected with an inheritance even decades into the past. Tax obligations can be revived as a result of certain events provided by law.
Like many other countries, Poland has an inheritance and gift tax. The obligation to pay the tax rests on the acquirer of title to property (“ownership or property rights”), including heirs, devisees (for ordinary or specific bequests by will), those entitled to receive a forced share of an estate, recipients of gifts, and other persons identified in the Inheritance and Gift Tax Act of 28 July 1983.
What consequences arise out of the accrual of a tax obligation?
From the perspective of taxpayers, it is key to properly determine the time when the tax obligation accrues, i.e. the event that entails a compulsory monetary obligation, although it is still inchoate at this point (and may later be transformed into an individualised tax obligation directed to a specific taxpayer). It is from this point that the one-month period for filing a tax return begins to run. Then, on the basis of the tax return, the tax authority will issue a decision establishing the amount of the tax obligation. Taxpayers who are included in the 1st tax group—spouse, children, parents or siblings—will be exempt from the tax entirely if they notify the tax office of the fact of acquiring the property within 6 months after the date when the tax obligation accrues. In the case of inheritance, this will be 6 months from the date when the ruling of the court confirming the inheritance becomes legally final, or the date when the deed certifying the inheritance or the European Certificate of Succession is registered.
Significantly, the time when the tax obligation accrues is also vital for determining whether claims for unpaid tax have become time-barred. The tax authority has five years (from the date when the tax obligation accrues) to issue and serve a decision setting the amount of the tax obligation. After that deadline the taxpayer is no longer obligated to pay the tax established in the decision.
How to determine the time when the tax obligation accrues?
Art. 6(1) of the Inheritance and Gift Tax Act enumerates various events resulting in accrual of the tax obligation. For example, for heirs the obligation accrues upon acceptance of the inheritance; for those entitled to a forced share, when their claim is satisfied; and for recipients of gifts, when the donor makes a declaration in the form of a notarial deed (then all the tax formalities are performed via the notary). If the gift agreement is not concluded in the form of a notarial deed, the obligation accrues when the promised gift is made by the donor.
But Art. 6(4) of the act provides that if the acquisition was not notified to the competent tax office for taxation but is later confirmed by a document, the tax obligation accrues at the time the document is prepared. Documents confirming acquisition include more specifically legally final rulings by courts confirming acquisition of an inheritance and registered notarial deeds certifying inheritance. They may also include legally final rulings of courts referring, for example, to performance of a gift agreement or satisfaction of a claim to a forced share of an estate.
In other words, this provision may cause the “revival” of a tax obligation even many years after the original tax obligation became time-barred.
Example: Anna acquired the estate left by her husband Jan in 1990, but no inheritance proceeding has ever been conducted. Because of planned development on the inherited real estate and the need to update the land and mortgage register, Anna is considering filing an application for a declaration confirming acquisition of the estate. Even though it has been 26 years since Jan died, a tax obligation will accrue when the order of the court confirming acquisition of the estate becomes legally final. Anna will have to file a tax return within one month after the ruling becomes legally final, and then pay the tax indicated in the decision establishing the amount of the tax obligation.
Significantly, Art. 6(4) of the act, indicated above, provides that in the event of failure to declare the inheritance for taxation, the tax obligation also accrues upon the heir’s reliance on the fact of acquisition by the heir before a tax authority or tax audit authority. This is what occurs in a situation where the heir plans to sell the inherited real estate. Then, to conclude the sale agreement in the form of a notarial deed, it is necessary to present a certificate issued by the head of the tax office confirming that the acquisition is exempt from tax, or the tax that was due was paid, or there was a tax obligation but it expired because it became time-barred. To obtain such a certificate, it is necessary to indicate the basis for acquisition of the property, which automatically results in revival of the tax obligation.
Example: The court issued an order confirming that Ewa acquired an inheritance from Marek and the order became legally final in 2009. At that time Ewa did not declare or pay the inheritance and gift tax. Now Ewa plans to sell the inherited real estate, and consequently has applied to the head of the tax office for the relevant certificate. Even though more than 5 years has passed since the court ruling from 2009 became legally final, and the right of the tax authority to issue a decision setting the amount of the tax has become time-barred, the tax obligation itself is “revived” by Ewa’s reliance on the fact of acquisition. Therefore Ewa will again be required to file a tax return and pay the tax as a result of the issuance of the decision establishing the amount of the tax obligation.
It should be noted that if Ewa had not applied to the tax authority for the certificate, this obligation would probably not have been revived for her (unless a tax audit was conducted). It would pass to her heirs, however, and could give rise to a tax obligation if they wanted to sell the inherited real estate.
Estate inherited before 1 January 2007
The current wording of Art. 6(4) of the Inheritance and Gift Tax Act was adopted under an amendment to the act which entered into force at the beginning of 2007. Under the previous wording, the “revival” of the tax obligation as a result of reliance on the fact of acquisition before a tax authority or tax audit authority applied only to gifts. From 1 January 2007 this provision was extended to any other type of acquisition of property.
In light of this change, the interim regulations included in the act introducing this change (Act of 16 November 2006 Amending the Inheritance and Gift Tax Act and the Civil-Law Transactions Tax Act) are of crucial relevance. Art. 3(1) of the amending act provides that as a rule, acquisition of ownership of property which occurred before the effective date of the amendment is governed by the provisions of the Inheritance and Gift Tax Act in the wording in force prior to the effective date of the amendment.
However, the Inheritance and Gift Tax Act does not define when “acquisition” of property rights occurs; it defines only the time when the tax obligation arises. Under Art. 925 of the Civil Code, an heir acquires an inheritance upon opening of the estate, i.e. upon the decedent’s death. Therefore, if the estate was opened prior to 1 January 2007, the provisions of the Inheritance and Gift Tax Act in the wording in force at that time will apply.
Example: Kazimierz died in 1985 and his estate was inherited by his two sons. They did not report the acquisition of the estate to the tax authorities in 1985 or in 2008 when they conducted the inheritance proceeding. Now they plan to sell the inherited real estate, so they apply to the tax office for issuance of the relevant certificate. The head of the tax office issues a certificate stating that the tax obligation has expired. The tax obligation is not “revived” because the pre-2007 wording of the Inheritance and Gift Tax Act applies.
It should also be borne in mind that in the case of inheritances acquired prior to 1 January 2007, the exemption for family members cannot be exercised because it was only introduced in the amendment that went into effect on that date. The mere fact of acquisition of property is what is relevant for assessing the possibility of applying the exemption. In the case of inheritance, this refers to the date of the decedent’s death. However, in this case the time of accrual of the tax obligation or its revival will be irrelevant. Thus if the decedent died prior to 1 January 2007 but the confirmation of acquisition of the estate occurred after the date, then the heir will be required to pay the tax.
Tomasz Krzywański, Private Client Practice, Wardyński & Partners