Tax department powerless to appeal costly rulings

Cyprus’ Tax Department is unable to appeal decisions of the Tax Tribunal before the courts, effectively tying its hands in cases where the state could potentially lose millions of euros in unpaid taxes.

According to a report by Philenews, a recent decision by the Tax Tribunal highlights the issue vividly.

In April 2024, the Tax Commissioner imposed taxes amounting to approximately €3 million on a specific taxpayer, including income tax, VAT, interest, and surcharges.

The commissioner had ruled that a transaction involving the sale of a 20 per cent shareholding by a particular company was fictitious, in violation of the Assessment and Collection Law.

The ruling also determined that the €4.5 million received by the taxpayer did not represent genuine proceeds from the sale of shares but rather payment for services provided to companies associated with a specific individual.

However, the Tax Tribunal overturned this decision, finding that the transaction in question was a genuine commercial deal, and that the Tax Department’s conclusion of a simulated service provision was not substantiated.

Despite disagreeing with the ruling, the Tax Department has no legal right to appeal the decision, effectively rendering it final.

Tax Commissioner Sotiris Markides recently addressed the issue before Parliament, warning that the lack of a mechanism for the Tax Department to challenge Tax Tribunal decisions before the courts is detrimental to the Republic.

“This situation means the state could potentially lose millions in tax revenue if a court would have ruled in favour of the department,” he said.

Markides also warned that decisions of the Tax Tribunal, particularly those concerning VAT cases, create precedents and established facts, both domestically and within the European Union.

The Tax Tribunal functions as an independent, quasi-judicial body and is hierarchically superior to the Tax Department.

It examines hierarchical appeals submitted by taxpayers who believe that the department’s decisions are incorrect or unfair.

If no agreement is reached between the taxpayer and the commissioner, the taxpayer may take the case before the Tax Tribunal.

Before the tribunal was established, taxpayers could only appeal the commissioner’s decisions to the Supreme Court, which, however, did not have the authority to examine the substance of the matter.

When a taxpayer brings a case to the Tax Tribunal, it reviews the merits of the Tax Department’s decision.

Unlike the Supreme Court, the tribunal can not only cancel or uphold the decision but also modify it, issue a new one, or refer the case back to the commissioner with instructions for specific action.

To address the current impasse, Markides proposed the establishment of a Special Tax Court, which would specialise exclusively in tax disputes.

He explained that judges appointed to this court would focus solely on tax-related cases, ensuring consistency and expertise in adjudicating complex financial matters.

According to the commissioner, the creation of such a court would give the state a second opportunity to recover taxes, since the Tax Department would then have the right to appeal decisions of the Tax Tribunal.

Markides also suggested that this tax court could be introduced as part of the upcoming tax reform, which may come into effect on January 1, 2026.

Parliament is set to begin debating the relevant legislative package on Friday.