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On the retrospective validity of legal norms which regulate taxation relations

Case No. 11/05

THE CONSTITUTIONAL COURT OF THE REPUBLIC OF LITHUANIA
RULING

ON THE COMPLIANCE OF PARAGRAPH 2 OF ARTICLE 12 OF THE REPUBLIC OF LITHUANIA’S LAW ON THE AMENDMENT AND SUPPLEMENT OF ARTICLES 1, 2, 3, 4, 5, 6, 7, 11, 14, 20, AND 21 OF THE LAW ON TAXES ON PROFITS OF LEGAL PERSONS WITH THE CONSTITUTION OF THE REPUBLIC OF LITHUANIA

29 November 2007

Vilnius

 

The Constitutional Court of the Republic of Lithuania, composed of the Justices of the Constitutional Court: Armanas Abramavičius, Toma Birmontienė, Zenonas Namavičius, Ramutė Ruškytė, Vytautas Sinkevičius, Stasys Stačiokas, and Romualdas Kęstutis Urbaitis

The court reporter—Daiva Pitrėnaitė

Sigita Krutkevičienė, senior advisor of the Public Law Unit of the Law Department of the Office of the Seimas of the Republic of Lithuania, acting as the representative of the Seimas of the Republic of Lithuania, the party concerned

The Constitutional Court of the Republic of Lithuania, pursuant to Articles 102 and 105 of the Constitution of the Republic of Lithuania and Article 1 of the Law on the Constitutional Court of the Republic of Lithuania, in its public hearing, on 28 November 2007, considered constitutional justice case No. 11/05 subsequent to the petition of the Vilnius Regional Administrative Court, the petitioner, requesting an investigation into whether the provision “the provisions of Articles 1 <...> of this Law shall apply for the computation of the taxable profit of the year 2000 and the following years” of the Republic of Lithuania’s Law on the Amendment and Supplement of Articles 1, 2, 3, 4, 5, 6, 7, 11, 14, 20, and 21 of the Law on Taxes on Profits of Legal Persons was not in conflict with Paragraph 2 of Article 7 of the Constitution of the Republic of Lithuania and the constitutional principles of justice and a state under the rule of law.

The Constitutional Court

has established:

I

The Vilnius Regional Administrative Court, the petitioner, considered an administrative case. By its ruling, the said court suspended the consideration of the case and applied to the Constitutional Court with the petition requesting an investigation into whether the provision “the provisions of Articles 1 <...> of this Law shall apply for the computation of the taxable profit of the year 2000 and the following years” of the Law on the Amendment and Supplement of Articles 1, 2, 3, 4, 5, 6, 7, 11, 14, 20, and 21 of the Law on Taxes on Profits of Legal Persons was not in conflict with Paragraph 2 of Article 7 of the Constitution and the constitutional principles of justice and a state under the rule of law.

II

The petition of the Vilnius Regional Administrative Court, the petitioner, is grounded on the following arguments.

1. Permanent establishments (defined in Article 1 of the Law on Taxes on Profits of Legal Persons (wording of 11 July 2000, set forth in the Law on the Amendment and Supplement of Articles 1, 2, 3, 4, 5, 6, 7, 11, 14, 20, and 21 of the Law on Taxes on Profits of Legal Persons)), permanently performing commercial-economic activities through a representative (an agent) were imposed the profit tax retroactively. However, under Paragraph 2 of Article 7 of the Constitution, once published, laws are valid prospectively and have no retroactive force (lex retro non agit), therefore, it is not allowed to demand from participants of legal relations to observe rules of conduct, which did not exist during their involvement in respective activities, since the knowledge of the future requirements was impossible; according to the petitioner, if the priority of rights in comparison to legislation is recognised “on the grounds of the civic right concept”, the law may not be valid retroactively even when this is provided for in the law itself, since the willpower of the legislature is limited not by the law adopted the legislature, but by the values higher than laws—the basic human rights. Therefore, the duty of paying the profit tax under the Law on the Amendment and Supplement of Articles 1, 2, 3, 4, 5, 6, 7, 11, 14, 20, and 21 of the Law on Taxes on Profits of Legal Persons, which took effect on 31 July 2000, may not cover the period prior to the entry of this law into effect, i.e. prior to 31 July 2000.

2. As stated by the petitioner, Item d of Article 1 of the Law on Taxes on Profits of Legal Persons (wording of 11 July 2000) could not be applied also since 31 July 2000, before the issuance of the respective substatutory legal acts (orders of the Minister of Finance, establishing the definition of the permanency of commercial-economic activities, the criteria of whether a representative (agent) is an employee of the corresponding enterprise or whether such a representative (agent) is independent), which took effect on 11 January 2001. In the opinion of the petitioner, the criteria of whether a representative (agent) is an employee of the corresponding enterprise or whether such a representative (agent) is independent confirmed by the 28 December 2000 order (No. 347) of the Minister of Finance defined the notion of an independent representative (an agent) in a broad manner, and it was impossible for tax payers “to derive those criteria from provisions of the law” either directly or indirectly.

3. The petitioner doubts whether the tax administrator under the Law on the Amendment and Supplement of Articles 1, 2, 3, 4, 5, 6, 7, 11, 14, 20, and 21 of the Law on Taxes on Profits of Legal Persons, which took effect on 31 July 2000, could, under Item d of Article 1 of the Law on Taxes on Profits of Legal Persons, demand the payment of the legal persons profit tax for the period from 1 January 2000 till 31 July 2000, and whether the tax administrator could demand the payment of the profit tax of legal persons for the period from 1 January 2000 to 11 January 2001, since at that time no substatutory acts necessary for the implementation of provisions of this law were valid.

III

In the course of the preparation of the case for the Constitutional Court’s hearing written explanations were received from the representatives of the Seimas, the party concerned, who were Seimas member A. Butkevičius and S. Krutkevičienė, wherein it is stated that the impugned provision of the Law on the Amendment and Supplement of Articles 1, 2, 3, 4, 5, 6, 7, 11, 14, 20, and 21 of the Law on Taxes on Profits of Legal Persons was not in conflict with the Constitution. The representatives of the Seimas, the party concerned, provide the following grounds for their arguments.

1. Those changes of the law on taxes, which were adopted before the end of the tax period and which essentially changed the legal situation of tax payers (such as, the establishment of the tax subject and of a new tax tariff) are applicable only as from the date of the entry of a respective law into effect. In tax administration such changes of the law on taxes should be applied for the entire tax period (although the tax period is a calendar year, some tax obligations are executed upon the start of the other tax period).

However, upon the entry of the Law on the Amendment and Supplement of Articles 1, 2, 3, 4, 5, 6, 7, 11, 14, 20, and 21 of the Law on Taxes on Profits of Legal Persons into effect, the legal regulation establishing the tax payers obligations related with the execution of their activities through a permanent establishment, in comparison to the legal regulation, which existed before the entry of this law into effect, virtually remained intact, however, it became more detailed (upon elimination of certain contradictions and ambiguities of national and international law), it became clearer and better defined, which is particularly important for the establishment of taxes and the procedure of computation thereof. The definition of a permanent establishment was presented as far back as in the Republic of Lithuania’s Law on the Amendment and Supplement of Articles 1, 2, 3, 4, 41, 5, 6, 7, 8, 11, 12, 13, 14, and 15 of the Law on Taxes on Profits of Legal Persons and on Supplementing It with Articles 21 and 22, adopted by the Seimas on 2 July 1998, while the notion of a permanent establishment was specified in the Law on the Amendment and Supplement of Articles 1, 2, 3, 4, 5, 6, 7, 11, 14, 20, and 21 of the Law on Taxes on Profits of Legal Persons adopted by the Seimas on 11 July 2000.

Under the Law on Taxes on Profits of Legal Persons (wording of 2 July 1998) and the Resolution of the Government of the Republic of Lithuania (No. 877) “On the Approval of the Procedure for Establishment of Taxable Profit of Permanent Establishments” of 30 July 1999 the character of activities of subsidiary subdivisions of foreign enterprises was related with their holding any place of activities and performing activities through an authorised or another person, but the said law (wording of 2 July 1998) did not establish the criterion of the performance duration (permanency), therefore, a permanent establishment was in fact related only with a relative place of the performance of particular activities, with an authorised representative and with the sum of the total income received over the tax period or the percentage expression thereof, the overrun of which results in the tax payment liability by that person. The concept of a permanent establishment consolidated in the Law on the Amendment and Supplement of Articles 1, 2, 3, 4, 5, 6, 7, 11, 14, 20, and 21 of the Law on Taxes on Profits of Legal Persons established the conditions for origination of tax payment obligation rather than essentially expanded the circle of tax payers: the establishment of permanency as a new criterion of the economic-commercial activities provided for an easier identification of a permanent establishment as a tax payer; in fact, the circle of tax payers was even narrowed from a certain point of view. Thus, one attempted to harmonise the provisions of the Law on Taxes on Profits of Legal Persons with general international taxation principles, by following which the tax system model of the Republic of Lithuania was being created. The concept of a permanent establishment as the expression of activities of a foreign enterprise in another state was formed and developed on the grounds of international treaties, therefore, the area of application of this notion was rather broad and enhances both national laws on taxes and international legal acts. The provisions defining a permanent establishment were harmonised with the provisions of international treaties on income and/or avoidance of double taxation on capital.

2. The substatutory legal acts, upon the obligation by the legislature, only concretised the legal status of tax payers established by law, therefore, the absence of the respective substatutory legal acts in itself should not be related with the validity of the law on taxes.

IV

In the course of the preparation of the case for the Constitutional Court’s hearing written explanations were received from Z. Balčytis, Acting Minister of Finance of the Republic of Lithuania, P. Koverovas, State Secretary of the Ministry of Justice of the Republic of Lithuania, A. Juozulynas, Deputy Auditor General of the Republic of Lithuania, M. Kaseliauskas, Head of the Republic of Lithuania State Tax Inspectorate under the Ministry of Finance of the Republic of Lithuania, I. Jarukaitis, Deputy Director General of the European Law Department under the Ministry of Justice of the Republic of Lithuania, and A. Čepas, Director of the Institute of Law.

V

At the Constitutional Court’s hearing, additional explanations were also provided by the representative of the Seimas, the party concerned, who was S. Krutkevičienė, who virtually repeated the arguments set forth in her written explanations as well as presented additional explanations.

The Constitutional Court

holds that:

1. The Vilnius Regional Administrative Court, the petitioner, requests an investigation into whether the provision “the provisions of Articles 1 <...> of this law shall apply for the computation of taxable profits of the year 2000 and of the following years” of Paragraph 2 of Article 12 of the Law on the Amendment and Supplement of Articles 1, 2, 3, 4, 5, 6, 7, 11, 14, 20, and 21 of the Law on Taxes on Profits of Legal Persons was not in conflict with Paragraph 2 of Article 7 of the Constitution and the constitutional principles of justice and a state under the rule of law.

2. The petition of the Vilnius Regional Administrative Court, the petitioner, provides the arguments regarding the compliance of the provision that Article 1 of the Law on the Amendment and Supplement of Articles 1, 2, 3, 4, 5, 6, 7, 11, 14, 20, and 21 of the Law on Taxes on Profits of Legal Persons must be applied for the computation of taxable profit for the year 2000, with the Constitution, however, no arguments are provided regarding the compliance of the provision that this article must be applied for the computation of taxable profit for the years following the year 2000 with the Constitution.

Therefore, this petition of Vilnius Regional Administrative Court, the petitioner, should be treated as a petition requesting an investigation into whether the provision “the provisions of Articles 1 <...> of this Law shall apply for the computation of the taxable profit of the year 2000 <…>” of Paragraph 2 of Article 12 of the Law on the Amendment and Supplement of Articles 1, 2, 3, 4, 5, 6, 7, 11, 14, 20, and 21 of the Law on Taxes on Profits of Legal Persons was not in conflict with Paragraph 2 of Article 7 of the Constitution and the constitutional principles of justice and a state under the rule of law.

3. By Article 1 of the Law on the Amendment and Supplement of Articles 1, 2, 3, 4, 41, 5, 6, 7, 8, 11, 12, 13, 14, and 15 of the Law on Taxes on Profits of Legal Persons and on Supplementing It with Articles 21 and 22 adopted by the Seimas on 2 July 1998 that took effect on 31 July 1998 (with certain exceptions) Article 1 of the Law on Taxes on Profits of Legal Persons was amended and supplemented (wording of 27 March 1997).

Article 1 of the Law on Taxes on Profits of Legal Persons (wording of 2 July 1998), inter alia, prescribed:

A profit tax of legal persons shall be imposed on: <...> (d) permanent establishments—subsidiary subdivisions of enterprises of foreign states, including affiliates thereof (hereinafter referred to as permanent establishments), which in the Republic of Lithuania: have a place of activity, where they conduct their activity or a certain part thereof; or which conduct their activity through an authorised natural, legal or other person, provided the person has the authorisation of the enterprise of the foreign state to conclude contracts on its behalf and acts on the authorisation; or who use the building site, the building, assembly or equipment facility; or who are using equipment or structure, including drilling equipment or ships, for mineral resources prospecting or extraction. Permanent establishments must register as taxpayers with the territorial tax inspectorate of the territory where their place of business is located.”

For the purpose of the construction of these provisions, while considering travaux préparatoires, it should be held that: a new tax payer was established—subsidiary subdivisions of foreign enterprises—which were named as permanent establishments in the Law on Taxes on Profits of Legal Persons (wording of 2 July 1998); a permanent establishment had to have a place of activities (with a certain exception); this place of activities could be various—not only the territory, but also equipment, a structure, etc.; the activities or a part of activities of a permanent establishment had to be performed through this place of activities; a permanent establishment also existed, when the activities of a foreign enterprise was performed through an authorised person, a legal person or another person, if this person had an authorisation and made use thereof, in which case the place of activities was optional; permanent establishments had to be registered as tax payers in the territorial tax inspection, on the territory of which the place of activities was available.

It should be mentioned that the provisions of Article 1 of the Law on the Amendment and Supplement of Articles 1, 2, 3, 4, 41, 5, 6, 7, 8, 11, 12, 13, 14, and 15 of the Law on Taxes on Profits of Legal Persons and on Supplementing It with Articles 21 and 22 adopted by the Seimas on 2 July 1998 had to be applied for the computation of the taxable profit of 1998 (Paragraph 1 of Article 17). The Law on Taxes on Profits of Legal Persons (wording of 2 July 1998) prescribed, inter alia, that the advance amount of the profit tax payable by a taxpayer according to a submitted advance financial report shall be calculated in accordance with the procedure established in this article; the advance payment of the profit tax shall be computed by the taxpayer (Paragraph 1 of Article 12); for the first four months of the taxable period the advance payment of the profit tax shall be computed based on the profit tax amount actually estimated for the taxable period prior to the preceding taxable period; the advance payment of the profit tax for the fifth to twelfth months of the taxable period shall be computed according to the amount of the profit tax actually estimated for the preceding taxable period; each month’s advance payment of the profit tax shall amount to 1/12 of the amount of the profit tax actually computed over the said period (Paragraph 2 of Article 12); for the first taxable year the registered new enterprises shall be exempt from advance payments of the profit tax; said enterprises shall commence paying advance payments of the profit tax from May (the fifth month of the taxable period) of the following year (Paragraph 3 of Article 12); profit tax advance financial report for the first four months of the taxable period shall be submitted on or before the last day of the first month (January) of the taxable period; profit tax advance financial report for the fifth to twelfth months of the taxable period shall be submitted on or before the last day of the fifth month (May) of the taxable period (Paragraph 1 of Article 13); at the close of the calendar year (taxable period), before May 1 of the following year (by the 1st day of the fifth month of the following taxable period) the taxpayers shall submit to the territorial state tax inspectorates the financial statement and profit tax report prescribed by the Law on the Principles of Accounting (Paragraph 1 of Article 14); if the amount of the profit tax computed in the profit tax report exceeds the amount of the tax paid over the taxable period, the taxpayer must pay into the budget the underpaid amount of the profit tax the next working day following the expiry of the period prescribed for the submission of the profit tax report; the overpaid amount of tax shall be refunded under the procedure established by the Law on Tax Administration (Paragraph 2 of Article 14).

Summing up this legal regulation, it should be noted that the obligation was established for the profit tax advance payment; the payment of the profit tax of legal persons was completed on the next business day after 1 May on the following calendar year; for the first tax year newly registered enterprises were exempt from the advance payment of the profit tax; those enterprises had to start the advance payment of the profit tax on the month of May of the following year.

The taxable profit earned by permanent establishments had to be established under the procedure stipulated by the Government or an institution authorised by it (Paragraph 4 of Article 4).

The procedure for the establishment of taxable profit of permanent establishments was approved by the Government Resolution (No. 877) “On the Approval of the Procedure for the Establishment of Taxable Profits of Permanent Establishments” of 30 July 1999 that took effect on 5 August 1999.

In the context of the constitutional justice case at issue it should be noted that the necessity of levying taxes on a permanent establishment was also determined by international practice and the corresponding international obligations of the Republic of Lithuania. At that time the Republic of Lithuania had already signed with other states various international bilateral treaties on the avoidance of double taxation on income and/or capital and/or fiscal violations (the majority of such treaties were ratified).

4. By Article 1 of the Republic of Lithuania’s Law on the Amendment and Supplement of Articles 1, 2, 3, 4, 5, 6, 7, 11, 14, 20, and 21 of the Law on Taxes on Profits of Legal Persons adopted by the Seimas on 11 July 2000 that took effect on 31 July 2000, Item d of Article 1 of the Law on Taxes on Profits of Legal Persons was amended and set forth in its new wording (wording of 2 July 1998). It is clear from the explanatory note presented by the Minister of Finance to the Seimas on 24 May 2000 together with the draft Law on the Amendment and Supplement of Articles 1, 2, 3, 4, 5, 6, 7, 11, 14, 20, and 21 of the Law on Taxes on Profits of Legal Persons that one attempted to specify and harmonise the definition of permanent establishments with the provisions of international treaties of the Republic of Lithuania on prevention of double taxation on income and/or capital and/or fiscal violations, also with the provisions of the model Convention on the Organisation for Economic Co-operation and Development.

Article 1 (wording of 11 July 2000) on the Law on Taxes on Profits of Legal Persons, inter alia, prescribed:

A profit tax of legal persons shall be imposed on <...> (d) permanent establishments. A foreign state enterprise shall be considered having a permanent establishment if, in Lithuania, it: is permanently engaged in the conduct of business activities or part thereof; or is engaged in its business activities through a representative (agent) who is its employee; or uses a building site, or construction, assembly or equipment facility; or equipment or structure used for natural resources prospecting or extraction, including the wells or vessels used for the purpose. The definition of the permanency of business activities, the criteria of whether a representative (agent) is an employee of such a foreign enterprise or whether such a representative (agent) is independent shall be established by the Government <…> or a body authorised by it.”

Article 14 of the Law on Taxes on Profits of Legal Persons (wording of 11 July 2000) prescribed that “At the close of the calendar year (taxable period), before May 1 of the following year (by the 1st day of the fifth month of the following taxable period) the taxpayers shall submit to the territorial state tax inspectorates the financial statement and profit tax report prescribed by the Law on the Principles of Accounting. <...> If the amount of profit tax calculated in the profit tax report exceeds the amount of tax paid under profit tax advance reports over the taxable period, the taxpayer must pay into the budget the underpaid amount of profit tax the next working day following the expiry of the time period prescribed for the submission of profit tax report. The overpaid amount of tax shall be refunded under the procedure established by the Law on Tax Administration”.

The comparison of this legal regulation of Article 14 (wording of 11 July 2000) of the Law on Taxes on Profits of Legal Persons with that established by Article 14 (wording of 2 July 1998) of the Law on Taxes on Profits of Legal Persons shows that it did not change essentially, and the formulation “the amount of tax over the taxable period” was replaced by the formulation “the amount of tax paid under profit tax advance reports over the taxable period”.

Thus, the obligation of payment of the advance profit tax was also maintained according to the new regulation. Upon close of the tax period on the next business day after 1 May of the following year a tax payer had to make the payment of the additionally estimated tax amount into the budget, if it was larger according to the profit tax reports; the overpaid amount of tax was refunded.

It should be mentioned that the provision of exempting newly registered enterprises from the advance profit tax in the first taxation year was maintained in the Law on Taxes on Profits of Legal Persons (wording of 11 July 2000), and the payment of profit taxes had to be started by these enterprises in May of the following year (Paragraph 3 of Article 12).

Paragraph 2 of Article 12 of the Law on the Republic of Lithuania’s Law on the Amendment and Supplement of Articles 1, 2, 3, 4, 5, 6, 7, 11, 14, 20, and 21 of the Law on Taxes on Profits of Legal Persons prescribed:

The provisions of Articles 1, 3, 4, 5, 6, 9, 10 and 11 of this Law shall apply in the computation of the taxable profit of the year 2000 and subsequent years. If the established tax period does not coincide with the tax year, the provisions of Articles 1, 3, 4, 5, 6, 9, 10 and 11 of this Law shall apply for the computation of the taxable profit of the tax period commenced in the year 2000 and for the following years.”

It has been mentioned that the compliance of the provision “the provisions of Articles 1 <...> of this Law shall apply for the computation of the taxable profit of the year 2000 <…>” with the Constitution is impugned in this constitutional justice case.

5. In this context, it should be mentioned that Article 1 of the Law on Taxes on Profits of Legal Persons (wording of 11 July 2000), the provision whereof had to be applied, inter alia, for the computation of the taxable profit of the year 2000, was changed and set forth in its new wording by Article 1 of the Law on the Republic of Lithuania’s Law on the Amendment to Articles 1, 2, 3, 5, 7, 8, 9, 11, 12, 21 and 22 of the Law on Taxes on Profits of Legal Persons adopted by the Seimas on 10 July 2001 that took effect on 18 July 2001. On 20 December 2001, the Seimas adopted the Republic of Lithuania’s Law on Income Tax, which took effect (with certain exceptions) on 1 January 2002. Under Item 1 of Article 60 of the Law on Income Tax, the Law on Taxes on Profits of Legal Persons (wording of 31 July 1990 with subsequent amendments and/or supplements) became no longer valid as of 1 January 2003. At present, the taxation on income from activities of a foreign subject through a permanent establishment in the Republic of Lithuania is performed under the Law on Income Tax (wording of 20 December 2001 with subsequent amendments and/or supplements).

6. The comparison of Item d of Article 1 of the Law on Taxes on Profits of Legal Persons in its wording of 11 July 2000 with the same item in its wording of 2 July 1998 makes it clear that no attributes of a permanent establishment in Lithuania were changed.

In this context, it should also be noted that the impugned legal regulation established neither a single new tax object, nor a new tax subject, that it made no changes to the previously established sizes (tariffs) of the profit tax of legal persons, nor did it establish new obligations to tax payers (to the permanent establishments in the case under consideration) in comparison to those which were established in the Law on Taxes on Profits of Legal Persons previously adopted by the Seimas (wording of 2 July 1998).

7. It has been mentioned that, by Item d of Article 1 of the Law of Profit Tax of Legal Persons (wording of 11 July 2000) the legislature entitled the Government or an institution authorised by it to establish the definition of permanency of economic-commercial activities and the criteria of whether a representative (agent) is an employee of the corresponding enterprise or whether such a representative (agent) is independent. By Item 1 of the Resolution (No. 1062) “On the Authorisation for the Implementation of the Republic of Lithuania’s Law on Taxes on Profits of Legal Persons and the Republic of Lithuania’s Provisional Law on Taxes on Income of Natural Persons” of 7 September 2000, the Government, inter alia, authorised the Ministry of Finance, upon coordination with the Ministry of Economy, to prepare and approve the definition of permanency of economic-commercial activities and the criteria of whether a representative (agent) is an employee of the corresponding enterprise or whether such a representative (agent) is independent. In his turn, by the Order (No. 347) “On the Approval of the Criteria of Whether a Representative (Agent) is an Employee of the Corresponding Enterprise or Whether Such a Representative (Agent) is Independent” of 28 December 2000 which took effect on 11 January 2001, the Minister of Finance approved the criteria of whether a representative (agent) is an employee of the corresponding enterprise or whether such a representative (agent) is independent, and, on the same day, i.e. by the Order (No. 348) “On the Approval of the Definition of Permanency of Commercial-Economic Activities of Foreign Enterprises in the Republic of Lithuania” of 28 December 2000 approved the definition of permanency of commercial-economic activities of foreign enterprises in the Republic of Lithuania. These orders of the Minister of Finance were recognised as no longer valid by the Order of the Minister of Finance (No. 1K-177) “On the Recognition of the Order of the Minister of Finance of the Republic of Lithuania (No. 347) ‘On the Approval of the Criteria of Whether a Representative (Agent) is an Employee of the Corresponding Enterprise or Whether Such a Representative (Agent) is Independent’ of 28 December 2000 and the Order of the Minister of Finance of the Republic of Lithuania (No. 348) ‘On the Approval of the Definition of Permanency of Commercial-Economic Activities of Foreign Enterprises in the Republic of Lithuania’ of 28 December 2000 as No Longer Valid” of 6 May 2004.

8. All subjects of law-making should heed the hierarchy of legal acts, which stems from the Constitution; the Constitution prohibits the regulation of those legal relations by means of legal acts of lower legal force, which could be regulated only by means of legal acts of higher legal force; it is prohibited to establish any such legal regulation in legal acts of lower legal force, which could compete with that established in legal acts of higher legal force.

The Constitutional Court has held that if the laws provide that certain relations connected with the procedure (procedures) of implementation of requirements of laws are regulated by the Government, then the Government must do so; if it is established in the laws that certain relations connected with the procedure (procedures) of the implementation of laws are regulated by an institution authorised by the Government (e.g., a ministry), then the Government has a duty to establish, by means of a resolution, which state institutions have to do so, while the latter institution (its head) must issue a respective legal act (the Constitutional Court’s decision of 11 February 2004 and its ruling of 8 July 2005). Thus, such an institution (its head), through the issuance of its respective substatutory legal acts, may not change laws, nor establish legal regulation competing with the provisions of laws, since this would result in the violation of the superiority of laws in comparison to substatutory legal acts as established by the Constitution.

In the context of the constitutional justice case at issue, it should also be noted that, as the Constitutional Court has held in its acts a number of times, such essential elements of the tax as the object of the tax, subjects of tax relations, their rights and duties, sizes (tariffs) of the tax, payment terms, exceptions and concessions, penalties and fines must be provided for by law (the Constitutional Court’s rulings of 15 March 2000, 3 June 2002, 17 November 2003, 2 September 2004, 24 January 2006, and 26 September 2006). However, the procedure for implementation of laws on taxes, as well as the procedure of computation of a specific payable tax may be established both by means of laws and by means of substatutory legal acts (the Constitutional Court’s ruling of 17 November 2003).

9. Therefore, the Minister of Finance was authorised in the course of the execution of the assignment of the Government to establish (upon coordination with the Ministry of Economy) the definition of the permanency of commercial-economic activities, and the criteria of whether a representative (agent) is an employee of the corresponding enterprise or whether such a representative (agent) is independent. In the course of the exercise of the specified authorisations, the Minister of Finance could establish the implementation of provisions of Item d of Article 1 of the Law on Profits of Legal Persons (wording of 11 July 2000), which also implies, inter alia, the computation of the tax on profits of legal persons which has to be paid by a permanent establishment. While executing this assignment of the Government, the Minister of Finance could establish only such legal regulation which would not distort the legal regulation established by Item d of Article 1 of the Law on Profits of Legal Persons (wording of 11 July 2000) and which would not compete with that established by law.

10. It should also be noted that both the Government and the Minister of Finance that were subject to the execution of respective assignments were also bound by international treaties of the Republic of Lithuania, since, under Paragraph 3 of Article 138 of the Constitution, international treaties, after their ratification by the Seimas, comprise a constituent part of the legal system of the Republic of Lithuania. It should be noted in this context that under Article 4 of the Republic of Lithuania’s Law on Tax Administration (wording of 28 June 1995 with subsequent amendments and/or supplements), if taxation regulations established by international agreements differ from those in tax laws and these agreements have been ratified in the Republic of Lithuania, international agreement regulations shall apply. Article 18 of the Law on Taxes on Profits of Legal Persons (wording of 11 April 1995 with subsequent amendments and/or supplements) prescribed: “If the provisions of the interstate agreement to which the Republic of Lithuania is a party conflict with the Law on Taxes on Profits of Legal Persons, the provisions of the interstate agreement shall apply for imposing the tax on profits.”

In the context of the constitutional justice case at issue it should be noted that the ruling whereby one has applied to the Constitutional Court was adopted in an administrative case wherein the petitioner was a company of the United States of America that disputed the decisions of tax administrators and of the Tax Disputes Commission under the Government of the Republic of Lithuania whereby this company upon the performance of its activities in Lithuania through a permanent establishment was subjected to the payment of tax on the profits of legal persons of a particular size for the years 2000–2001. At the time of the entry of the Law on the Amendment and Supplement of Articles 1, 2, 3, 4, 5, 6, 7, 11, 14, 20, and 21 of the Law on Taxes on Profits of Legal Persons into effect, the Republic of Lithuania had already signed 27 international bilateral treaties with other states on the prevention of double taxation on income and/or capital and/or fiscal violations (24 of them had been ratified), inter alia, with the United States of America; the agreement between the Government of the Republic of Lithuania and the Government of the United States of America on prevention of double taxation on income and fiscal violations was ratified by the Seimas by the Law on Ratification of the Agreement between the Government of the Republic of Lithuania and the Government of the United States of America on the Prevention of Double Taxation on Income and Fiscal Violations adopted on 23 December 1999; this agreement took effect on 30 December 1999. The said national legal acts of the Republic of Lithuania (the Law on the Amendment and Supplement of Articles 1, 2, 3, 4, 5, 6, 7, 11, 14, 20, and 21 of the Law on Taxes on Profits of Legal Persons, also the substatutory legal acts) established the main criteria defining a permanent establishment, which are virtually the same as those in the agreement between the Government of the Republic of Lithuania and the Government of the United States of America on the prevention of double taxation on income and fiscal violations.

11. Both the Government and the Minister of Finance in charge of the execution of respective assignments, were also bound by the requirements directed to the subjects of law-making arising from the Constitution, inter alia, the principle lex retro non agit related with the constitutional principle of a state under the rule of law, whereby the legal force of legal acts is prospective and the retroactive validity of legal acts is not allowed, unless the situation of legal subjects could be alleviated without prejudice to other legal subjects (lex benignior retro agit). Neither laws nor substatutory legal acts may establish such legal regulation which interferes with the legal relations that are over. The regulation that could change legal norms upon completion of regulated relations would create preconditions for negation of legitimate expectations of persons, legal certainty and legal security, and the constitutional principle of justice.

In this context one is mention the case of the Court of Justice of the European Communities (arrêt de la Cour (grande chambre) du 26 avril 2005, Stichting “Goed Wonen” / Staatssecretaris van Financiën, affaire C-376/02, Rec. p. I-3445) in which it was held that the principles of protection of legitimate expectations and legal certainty, as a part of the legal system of the European Community, consolidate the general rule that the establishment of the validity of a legal act before the publication thereof is prohibited, however, an exemption of this principle may be applied whenever this is required by the general interest and due consideration is given to legitimate expectations of persons concerned.

12. In deciding whether the provision “the provisions of Articles 1 <...> of this Law shall apply for the computation of the taxable profit of the year 2000 <…>” of Paragraph 2 of Article 12 of the Law on the Amendment and Supplement of Articles 1, 2, 3, 4, 5, 6, 7, 11, 14, 20, and 21 of the Law on Taxes on Profits of Legal Persons was not in conflict with Paragraph 2 of Article 7 of the Constitution and the constitutional principles of justice and a state under the rule of law, it should be held that the impugned legal regulation did not establish a new tax object, a new tax subject, any changes to the previously established size (tariff) of the tax on profits of legal persons, as well as no new obligations to tax payers (to permanent establishments in the case at issue), in comparison to those that were previously established (both in national legal acts and in international treaties of the Republic of Lithuania); the impugned provision of the law was intended for the regulation of relations of the tax on profits of legal subjects, which, contrary to the statement of the petitioner, were not over. Therefore, the impugned legal regulation did not interfere with the legal relations that were already over and did not violate the constitutional principle lex retro non agit, it did not negate the legitimate expectations and legal certainty of tax payers (permanent establishments in the case under the hearing); it was not unfair.

13. Taking account of the arguments set forth, the conclusion should be drawn that the provision of Paragraph 2 of Article 12 “the provisions of Articles 1 <...> of this Law shall apply for the computation of the taxable profit of the year 2000 <…>” of the Law on the Amendment and Supplement of Articles 1, 2, 3, 4, 5, 6, 7, 11, 14, 20, and 21 of the Law on Taxes on Profits of Legal Persons was not in conflict with Paragraph 2 of Article 7 of the Constitution and the constitutional principles of justice and a state under the rule of law.

14. It should be noted that an investigation into the compliance of legal acts issued by ministers with legal acts of higher legal force (inter alia, with the Constitution) is assigned to the competence of administrative courts, but not to the competence of the Constitutional Court. Therefore, the said orders of the Minister of Finance establishing the definition of the permanence of commercial-economic activities and the criteria of whether a representative (agent) is an employee of the corresponding enterprise or whether such a representative (agent) is independent may not be and are not a matter of the investigation in this constitutional justice case.

Pursuant to Articles 102 and 105 of the Constitution of the Republic of Lithuania and Articles 1, 53, 54, 55, and 56 of the Law on the Constitutional Court of the Republic of Lithuania, the Constitutional Court of the Republic of Lithuania gives the following

ruling:

To recognise that the provision “the provisions of Articles 1 <...> of this Law shall apply for the computation of the taxable profit of the year 2000 <…>” of Paragraph 2 (Official Gazette Valstybės žinios, 2000, No. 64-1912) of Article 12 of the Republic of Lithuania’s Law on the Amendment and Supplement of Articles 1, 2, 3, 4, 5, 6, 7, 11, 14, 20, and 21 of the Law on Taxes on Profits of Legal Persons was not in conflict with the Constitution of the Republic of Lithuania.

This ruling of the Constitutional Court is final and not subject to appeal.

The ruling is pronounced in the name of the Republic of Lithuania.

Justices of the Constitutional Court: Armanas Abramavičius
                                                                      Toma Birmontienė
                                                                      Zenonas Namavičius
                                                                      Ramutė Ruškytė
                                                                      Vytautas Sinkevičius
                                                                      Stasys Stačiokas
                                                                      Romualdas Kęstutis Urbaitis