Polish constitutional court held MDR legislation to be unconstitutional. Yet reportable arrangements must still be reported.

Michał Wykurz

MDR legislation: what is it and why has it been challenged before constitutional court?

MDR legislation requires the disclosure of what Polish law calls “tax schemes”, i.e. business arrangements that satisfy the applicable reporting criteria. Interestingly, these mandatory disclosure rules (MDRs) apply even to certain situations that existed before the effective date of the MDR regulations (retroactive reporting of arrangements from before 1 January 2019).

MDR legislation has attracted plenty of controversy from the start. Its language is difficult, it leaves a broad margin for interpretation, and it requires sharing extensive transaction details with tax authorities. In certain situations, the duty to disclose tax schemes applies also to tax advisors, whether these are their own arrangements or those of their clients, as MDR legislation may override their statutory professional confidentiality obligations.

A few years ago the tax advisors’ self-regulatory body challenged these regulations before the Polish constitutional court, claiming that they are unconstitutional to the extent that:

• the disclosures they require of tax advisors violate their statutory professional confidentiality obligations, or
• they require the promoter or service provider that is a tax advisor to report arrangements implemented before 1 January 2019.

Constitutional court has ruled

In its judgment of 23 July 2024 (case number K 13/20), the court sided with tax advisors, holding that MDR legislation prevents them from protecting the public interest and promoting the safety and interests of their clients, which is a violation of Article 17(1) of the Polish Constitution. The relevant provisions of the MDR law are not sufficient to precisely prescribe the criteria, procedure and conditions in or under which professional confidentiality obligations may be disapplied. This is unacceptable, given that the confidentiality obligations imposed on the tax consulting profession by the Tax Advisory Act and the tax advisors’ code of conduct are absolute. It is unacceptable also due to the fact that tax advisors’ clients enjoy an assurance of confidentiality in relation to the information they share and this assurance is not limited in time.

The court further ruled that the retroactive reporting duty is also unconstitutional as it applies to arrangements from before 1 January 2019 and requires that they be reported by tax advisors acting as promoters or service providers. This particular requirement cannot be justified by EU law or by the need to protect the interests of the State Treasury.

The case was discontinued as to the other claims raised by the tax advisors profession.

What are the practical implications?

First of all, despite the judgment, MDR legislation continues to be in effect and taxpayers must still report their tax schemes to tax authorities. Unconstitutionality has been found only in relation to regulations requiring disclosure by tax advisors acting in the MDR roles of promoters or service providers.

It seems one result of the judgment would be that, in situations where a non-marketable arrangement would otherwise have to be reported by the tax advisor acting as promoter or service provider, the arrangement should now be reported by the client (as user/beneficiary) based on information from the advisor.

The lawmakers can be expected to respond to the judgment by amending the impugned law in accordance with the Constitutional Court’s guidelines. Perhaps the amendments will follow a more in-depth reflection and seek to make a larger reform of the MDR framework (resulting in, for example, a total abolition of the retroactive reporting obligation or a repeal of the provisions allowing for the disapplication of statutory confidentiality obligations of other professional advisors).

In our opinion, the judgment does not lead to fundamental changes in the MDR reporting framework from the perspective of taxpayers. However, you might still wish to review your internal MDR procedures to make sure they capture the conclusions of the court’s reasoning (e.g. you may want to change the MDR reporting process where it involves a tax advisor acting as promoter or service provider).