On the 21st September 2020, the Administrative Court of the Republic of Cyprus issued a decision in Case No.334/2017 (OCEAN AQUARIUM LTD -v- THE REPUBLIC OF CYPRUS), annulling the decision of Commissioner of Income Tax to impose Defense Tax Contribution to a Company.
Α)The facts of the case are the following:
- The Commissioner of Income Tax (hereinafter referred to as “The Commissioner”) had imposed income tax for the year 2003 to the Company, to which the Company objected, requesting a change of the proceeds for the tax. The Commissioner examined the objections and rejected it. The rejection of the Commissioner was annulled by a Court Decision dated 30.06.2009.
- The Republic proceeded with an appeal against the above Court Decision, but the Supreme Court rejected the appeal on the basis that the Company was exempt from income tax for a period of ten years based on Income Tax Law (the “Appeal Decision”).
- In 2013, the Director of Internal Revenue Department applied a tax imposition in relation to Defense Tax Contributions for dividend distributions for tax years 2003- 2007 relating to this Company. The Company objected, but the Commissioner rejected the Company’s objection, insisting on imposing said tax. The Company then proceeded with Court measures in the Administrative Court, seeking to overturn the Commissioner’s decision, however, in 2017 the imposition of said tax was cancelled by the Tax Department due to the reappointment of the Commissioner with retrospective effect, and the above tax imposition was cancelled.
- Upon the reappointment of the Commissioner and cancellation of previous tax impositions, new tax impositions were issued and a new decision on the above objection
was issued, which was identical to the previous one with retrospective effect (hereinafter referred to as the “Second Rejection”).
Β) Case No.334/2017 – Administrative Court – The Arguments of the Parties
- The Company then proceeded with filing the above-mentioned Case No.334/2017 with the Administrative Court aiming to annul the Second Rejection. The Company’s advocates arguments were the following:
- a) The decision for Second Rejection was taken by a body appointed by a legislative provision that is contrary to the Constitution. Article 125 of the Constitution provides that it is the Public Service Committee that appoints the Commissioner, and not the Council of Ministers, as per Article 4 of Tax Department Laws.
- b) No legitimate decision from the Competent Body was presented as:
- There was no authorization from the Commissioner to the official whoissued the Second Rejection.
- Additionally, since the previous taxation was not cancelled but wasrevoked, the retrospective effect given to the Second Rejection was against the law, and it violated the precedent set by the Appeal Decision, that the Company was exempt from taxation for a period of ten years.
- c) The principles of good faith and the legitimate trust of the citizen towards the Republic were violated.
- d) There was lack of proper investigation and lack of reasons given in the Second Rejection.
- The learned advocates of the Republic rejected the above arguments, insisting that the issue raised in relation to the unconstitutionality of the appointment of the Commissioner was not pleaded. The Court rejected their argument since the matter was indeed included in the pleadings. The learned advocates of the Republic also supported that, if the appointment of an administrative body is unsubstantiated (that is, not all the provisions of the law had been properly followed in regards to their appointment) it is
still considered as a de facto administrative body and their decisions are in full effect until they are cancelled or revoked and they are not affected in the meantime. The Court was also presented with the written authorization of the official who issued the Second Rejection and also supported that the rest of the above-mentioned arguments should be rejected as unsubstantiated.
It is noted that the appointment of the Commissioner was deemed unconstitutional by a decision of the Administrative Court dated 16.3.2020.
C) The Court Decision in above mentioned case
The Administrative Court mentioned, inter alia, the following:
- The annulment of a decision of an administrative body (such as the Commissioner) renders the decision extinct ex tunc, that is, from the moment of its issuance and produces an absolute precedent towards everyone. Such annulment brings the parties in the same position that they were before the issuance of the decision in dispute (status quo ante).
- De facto administrative body theory does not apply when the provisions of the Constitution are violated and no legislation or administrative decision or act of any body can be contrary to the Constitution. Therefore, the appointment of the Commissioner, being contrary to the Constitution, renders the Second Rejection void and cannot produce any legal effect.
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