The Tax Collector’s Convenience: How Poland Punishes the Innocent in the Name of Fighting Fraud
When Poland’s legislature introduced Article 88, Section 3a, Paragraph 4, Clause a of the VAT Act in 2005, the stated purpose was straightforward: to combat carousel fraud—elaborate schemes in which organized criminal networks siphon billions of złoty from the state treasury by exploiting the mechanisms of value-added tax. The provision was designed to allow tax authorities to deny VAT deductions when an invoice “certifies activities that did not occur.” Two decades later, what began as a surgical instrument for fighting tax crime has evolved into something more troubling: a system that, in practice, resembles collective punishment more than precision law enforcement.
The phenomenon, though rarely named explicitly, represents one of the most controversial aspects of Poland’s tax system in recent years. Its essence is simple: instead of pursuing elusive tax criminals—the so-called “missing traders,” who possess no assets and quickly vanish from the market—tax authorities increasingly direct proceedings against entities that have something to lose. These are typically honest entrepreneurs who have conducted business for years, settled accounts with the tax authority on time, possess real assets, and employ workers.
In its own way, this is ordinary logic. Governor-General Hans Frank discovered that it’s harder to locate partisans, but the same effect can be achieved by pacifying villages near which they hide. It is known that if partisans are hiding near a village, there must be some connection—however difficult to establish precisely—between certain villagers and the partisans.
Why waste time sorting all that out? It’s faster and easier to shoot everyone who doesn’t manage to escape to the forest.
The Anatomy of the Problem: How Collective Responsibility Works
Article 88, Section 3a, Paragraph 4, Clause a of the VAT Act was introduced after Poland’s accession to the European Union—specifically, on June 1, 2005, more than a year after joining. This detail matters from the perspective of E.U. law, because under the so-called standstill clause contained in Article 176 of the VAT Directive, member states may maintain restrictions on the right to deduct VAT only those which existed on the date of accession. Introducing new restrictions requires a special consultation procedure and the consent of the E.U. Council. Poland did not conduct this procedure, which raises fundamental questions about the provision’s compatibility with European law.
The provision itself sounds deceptively simple: invoices and customs documents do not constitute grounds for reducing the tax due or refunding the difference or refund of input tax in cases where the issued invoices, corrective invoices, or customs documents “certify activities that did not occur—with respect to those activities.”
In theory, this was meant to eliminate from tax settlements the so-called empty invoices—documents issued without any actual flow of goods or services. The problem emerged in practice. The concept of “activities that did not occur” proved capacious enough that tax authorities began applying it not only to classic empty invoices but also to transactions in which goods were actually delivered and used in business operations, payment was made, all formal requirements were met, and the taxpayer acted in good faith.
It was enough that somewhere in the distant supply chain, sometimes several links earlier, there appeared a suspicion of involvement by a missing trader—an entity that failed to remit its VAT. In such cases, tax authorities began to assume that the entire transaction, or rather the entire chain of transactions, was fictitious, even if goods actually physically moved between successive participants in commerce, were used by them, and they themselves had no knowledge or awareness of irregularities at earlier stages.
The Strategy of “Where the Money Is”: The Economic Logic of Improper Law Enforcement
In June, 2024, the head of Poland’s National Revenue Administration, Marcin Łoboda, publicly acknowledged what had been an open secret for years. As the newspaper Rzeczpospolita reported, he stated that the result of the previous policy had been directing audits where there was no need to initiate them, and some heads of offices even formulated recommendations like “we go where the money is.” The head of the N.R.A. announced that there had been a phenomenon of auditors showing results at any cost, auditors who lacked competence and targeted taxpayers who were easy to catch.
This public admission illuminates a mechanism that had been functioning in practice for years. Missing traders, the actual perpetrators of carousel fraud, are by definition difficult to detect and punish. They are typically fictitious entities registered to “strawmen”—stand-ins, often from the margins of society, without assets or permanent residence. They issue invoices documenting sales with twenty-three-per-cent VAT added, fail to remit this tax to the state treasury, then vanish from the market. Conducting proceedings against them is costly, time-consuming, and generally financially ineffective—even if a tax liability is established, enforcement is impossible owing to lack of assets.
From the perspective of fiscal efficiency, it’s far more profitable to direct actions not against the perpetrators of fraud but against participants in subsequent links of the supply chain who conduct real business operations, have funds in bank accounts, own real estate and machinery, actually employ workers. They become easy targets because they’re reachable, possess assets from which enforcement can be conducted, and are interested in maintaining their reputation, so they’ll fight for their rights in lengthy proceedings.
Reports from Poland’s Supreme Audit Office from 2018 and 2019 confirm these practices. In a report on combating VAT fraud for the period from January 1, 2016, to June 30, 2017, the S.A.O. found that what’s necessary to ensure proper VAT collection is rapid identification of entities committing fraud and their removal from the taxpayer registry. Meanwhile, the S.A.O. indicated that in half the audited tax offices, planned audits were initiated on average three to eleven months after receiving information indicating high risk of irregularities, and ad-hoc audits in half the audited offices three to six months later. Despite recommendations directed to tax offices and guidelines for their implementation, it proved impossible to eliminate delays in removing taxpayers from VAT registries of unreliable entities.
In another S.A.O. report from 2019 concerning the Minister of Finance’s supervision over VAT collection, even more significant findings appear. The head of the National Revenue Administration explained that owing to greater possibilities for obtaining evidence outside audits, using criminal-proceeding instruments to conduct activities against strawmen, in 2017 the number of audits conducted against strawmen and the number of decisions issued based on Article 108 of the VAT Act were reduced. Findings based on this article made in previous years during proceedings conducted against such persons did not contribute to increased revenues to the state budget. Therefore, in 2017, actions were undertaken that offered greater possibility of securing and enforcing tax liabilities, such as detecting the beneficiaries of carousel fraud and conducting audits against them.
The Director of the Department of Audit Supervision indicated in a letter dated February 6, 2019, that in the recommendations of the head of the N.R.A. regarding the conduct of activities by organizational units of the National Revenue Administration in the area of preventing and combating tax irregularities, it was pointed out that preparatory proceedings can play an independent role in detecting and combating tax irregularities. It was also indicated to consider for each case conducting only preparatory proceedings, without conducting tax proceedings or customs-tax audits in cases where there is no possibility of enforcing public-law liability, particularly with respect to strawmen or missing traders.
These documents reveal a strategy that in practice means shifting the burden of combating VAT fraud from the actual perpetrators to entities that committed no fraud, whose only “offense” was finding themselves in a supply chain where irregularities occurred at distant stages.
A Terminological Note: What Is This “Collective Responsibility”?
The term “collective responsibility” or “collective liability” used in this piece is not a technical legal term. It’s a journalistic metaphor meant to illustrate the actual economic effect of the mechanism being applied. In legal terms, we’re dealing with denial of the right to deduct input tax under Article 88, Section 3a, Paragraph 4, Clause a of the VAT Act, when an invoice “certifies activities that did not occur.”
This is fundamentally different from the joint and several liability regulated in Articles 105a-105d of the VAT Act. Joint and several liability means that a purchaser is liable for another’s tax debt—specifically, for the arrears of their supplier—but only for strictly defined sensitive goods (fuels, metals, steel), after exceeding monetary thresholds, and with the possibility of excluding this liability by paying a guarantee deposit or demonstrating due diligence.
The mechanism described in this article works differently: the entrepreneur is not liable for another’s debt but loses their own right to deduct input VAT. As a result, their own tax obligation is higher, because they cannot reduce VAT due by the input VAT resulting from questioned invoices. Moreover, this mechanism is not limited to specific categories of goods, has no monetary thresholds, and no statutorily defined exculpatory measures such as a deposit. It can be applied in any industry, to any transaction, if the authority determines that somewhere in the supply chain a fiction occurred.
It is precisely this universality of application, the lack of clear criteria for due diligence, and the practice of transferring consequences from elusive perpetrators to reachable participants in commerce that justify using the metaphor of “collective responsibility”—punishing the available for the acts of the unavailable, regardless of the guilt and awareness of those punished.
The Anatomy of a Typical Case: How the System of Collective Responsibility Works in Practice
Analysis of actual cases allows us to understand how the described mechanism functions in practice. A typical scenario looks like this: an entrepreneur who has conducted business for many years, say, in the wholesale trade of certain goods, establishes cooperation with a new supplier. This supplier is a registered entity, appearing in VAT registries, possessing a registered office, issuing invoices with correct data. The entrepreneur verifies the contractor’s data in available databases, such as the VIES system for intra-Community transactions or the VAT taxpayer registry maintained by the Ministry of Finance.
Goods are actually delivered; their physical movement occurs; they are used in further business operations or resold. The entrepreneur issues their own invoices, settles accounts with the tax office, remits due VAT, files declarations on time. From their perspective, everything proceeds properly and in accordance with applicable regulations. Often such cooperation lasts many months, sometimes even years, and transactions are repetitive and standardized.
After some time—often a period from several months to several years after the end of cooperation—the entrepreneur receives notice of the initiation of a tax audit or customs-tax inspection. In the course of this inspection, tax authorities inform them that their supplier, or more often their supplier’s supplier, or an entity appearing even earlier in the supply chain, has been identified as a missing trader. This means that this entity issued invoices with VAT added but did not remit this tax to the state treasury.
At this moment, a mechanism that might be called the domino of responsibility is triggered. Tax authorities assume that if a missing trader appeared at the beginning of the supply chain, the entire chain is fraudulent, and all transactions in this chain are fictitious. Significantly, authorities often assume this fictionality even when they don’t question the fact of the physical flow of goods. As they indicate in their decisions, the fictitious nature of transactions need not mean that no trade in goods occurs—the fiction consists in the fact that transactions are not conducted in normal commercial trade but such trade was merely simulated in order to achieve undue benefits resulting from the VAT settlement mechanism.
The entrepreneur learns that they have been classified as a so-called buffer or broker in a tax carousel. A buffer is an entity whose task is to obscure traces leading to the missing trader by conducting several successive transactions of the same goods, while a broker is an entity that finally exports goods outside the country, often as part of an intra-Community supply of goods taxed at zero per cent, and obtains a refund of the excess of input VAT over output VAT. This classification doesn’t result from any objective criteria or from analysis of the entity’s actual role in the alleged fraud but from the position it occupies in the supply chain reconstructed by the authorities.
What’s key is that tax authorities don’t have to prove that the specific entrepreneur knew about the fraud, was its accomplice, consciously participated in the criminal scheme. It’s enough to demonstrate that they should have known or that they failed to exercise due diligence in choosing a contractor. And here another problem appears: there are no clear, defined criteria for due diligence. In practice, tax authorities formulate requirements post factum, pointing to circumstances that in their assessment should have aroused the entrepreneur’s suspicions.
Typical charges made in such cases sound like this: the entrepreneur didn’t investigate the source of the goods’ origin, didn’t establish the entire supply chain, didn’t verify whether their supplier actually possessed warehouses and means of transport, didn’t verify whether the supplier filed declarations on time and remitted due VAT, didn’t check the contractor’s financial condition, accepted a price deviating from the market price, or conversely—a price precisely corresponding to the market price, which is also supposed to testify to the artificiality of the transaction. Didn’t establish who actually was the producer or importer of the goods, didn’t conduct a site inspection at the contractor’s premises, or if they conducted one, did so superficially, didn’t demand that the contractor present their own contracts with suppliers and purchase invoices.
These requirements go far beyond anything resulting from legal provisions. Moreover, some of them are simply impossible to fulfill without violating the business secrets of contractors and their contractors. The entrepreneur has no legal instruments to force their supplier to disclose from whom they purchase goods, on what terms, at what price. Nor do they have access to data covered by tax secrecy, such as information on whether a given entity settles accounts with the tax office on time. Systems such as the white list of VAT taxpayers were introduced only in 2019, so with respect to earlier periods entrepreneurs had no possibility of verifying the tax status of contractors.
The Burden of Proof and the Presumption of Dishonesty: Reversing Fundamental Legal Principles
In a normal tax proceeding, in accordance with principles resulting from the Tax Ordinance, the burden of proof regarding factual circumstances rests with the tax authority. The authority must prove that the taxpayer violated tax-law provisions, understated the tax obligation, overstated the amount for refund. The taxpayer enjoys the presumption of acting in good faith and in accordance with the law.
In cases concerning alleged participation in tax carousels, this principle is effectively reversed. It’s enough for the tax authority to demonstrate the existence somewhere in the supply chain of a missing trader and that the goods that ultimately reached the audited entrepreneur could theoretically have originated from this chain. From that moment on, the burden rests with the entrepreneur to demonstrate that they didn’t know and couldn’t have known about the irregularities, that they exercised due diligence, that they acted in good faith. Moreover, they must prove a negative fact, which in the legal system is generally not required, because proving negative facts is by nature extremely difficult or even impossible.
The result is a situation in which the entrepreneur finds themselves in the procedural position of a hostage. They must prove their innocence, while tax authorities confine themselves to demonstrating that somewhere in an unspecified place and time someone committed fraud. They don’t have to demonstrate a direct connection between this fraud and the actions of the audited taxpayer, don’t have to prove that specifically these goods that the audited taxpayer acquired were covered by fraud, don’t have to demonstrate the amount of actual damage to the state budget.
The practice of tax authorities has evolved toward increasingly elaborate chains of presumption. If an entrepreneur cooperated with entity X, and entity X cooperated with entity Y, which in turn purchased goods from entity Z, and this last turned out to be a missing trader, the authorities assume that all participants in this chain must have known about it or at least should have known. This logic is all the more absurd because in the case of mass goods such as fuels, metals, grain, oil, the same batches of goods can flow through dozens of entities, and reconstructing the complete supply chain is practically impossible.
Documentation That Doesn’t Protect: The Illusion of Legal Security
One of the most frustrating aspects of current practice is that possessing complete transaction documentation does not constitute effective protection against charges by tax authorities. Entrepreneurs, aware of the risks associated with conducting business operations, especially in sectors considered sensitive, accumulate extensive documentation of each transaction. This includes not only VAT invoices but also trade contracts, orders, order-acceptance confirmations, CMR transport documents, proof of payment, goods-receipt protocols, e-mail correspondence with the contractor, printouts from databases confirming the contractor’s VAT status.
In theory, such documentation should constitute sufficient proof of the real nature of the transaction and acting in good faith. In practice, tax authorities assume that the mere fact of possessing formally correct documentation does not determine the reality of the transaction. They argue that since the entire supply chain was fraudulent, the documentation was also produced merely for appearance, to lend credibility to fictitious transactions.
This argumentation leads to a paradoxical situation: if an entrepreneur doesn’t have documentation, this is proof of their unreliability and lack of due diligence. If they have complete documentation, this is proof of the sophistication of the fraudulent scheme and conscious participation in it. In other words, regardless of how hard the entrepreneur tries to act in accordance with the law and secure their interests, this can be used against them.
This is particularly painfully felt by entrepreneurs who in good faith implemented internal compliance procedures, hired specialists in tax-risk management, invested in contractor-verification systems. All these actions, which were meant to minimize risk, in the interpretation of tax authorities become proof that the entrepreneur was perfectly aware of the risks associated with the industry, and therefore must have known or at least should have known about irregularities involving their contractors.
Second-Generation Sanctions: The Automaticity of Punishment Without Examining Fault
Until 2017, the sanctions system in Polish VAT was relatively predictable. If a tax authority questioned the right to deduct input VAT, the entrepreneur had to pay the tax arrears along with interest for late payment, but incurred no additional penalties of a penal nature. The situation changed radically as of January 1, 2017, when the institution of additional tax liability, colloquially called the VAT sanction, was reintroduced into the VAT Act.
Under Article 112b, Section 1, Paragraph 1, Clauses b and d of the VAT Act, if a taxpayer in a filed declaration showed a VAT refund amount higher than due or a refund amount instead of showing a tax obligation, the tax authority establishes an additional tax liability in an amount corresponding to thirty per cent of the amount of overstatement or understatement. Moreover, under Article 112c, Paragraph 2 of the Act, to the extent that the irregularity results from reducing the amount of tax due by amounts of input tax resulting from invoices that certify activities that did not occur, the amount of additional tax liability is one hundred per cent.
In practice, this means that an entrepreneur whose right to deduct VAT has been questioned in connection with alleged participation in a tax carousel must pay not only the amount of questioned tax along with interest but also an additional sanction amounting to one hundred per cent of that amount. If the authority questioned the deduction of VAT in the amount of five hundred thousand złoty, the total burden will be one million złoty plus interest, which can mean the complete financial ruin of the enterprise.
The key problem with this regulation lies in its automaticity. Provisions in force until June, 2023, provided no possibility of mitigating the sanction depending on the circumstances of the case, the degree of the taxpayer’s fault, the nature of the irregularity. The sanction was applied in identical amount both to an entrepreneur who consciously participated in fraud and derived benefits from it and to an entrepreneur who fell victim to dishonest practices of their contractors, about which they didn’t know and couldn’t have known.
Such automaticity was unequivocally challenged by the Court of Justice of the European Union in a judgment of April 15, 2021, in case C-935/19, Grupa Warzywna. The C.J.E.U. ruled that Article 273 of the VAT Directive and the principle of proportionality preclude national provisions that impose a sanction on a taxpayer without distinction both in a situation where the irregularity results from an error in assessment made by the parties to the transaction regarding the taxability of the supply, which error is characterized by the absence of indications pointing to fraud and depletion of revenues to the state treasury, and in a situation where such special circumstances do not occur.
This judgment, though formally concerning a sanction of twenty per cent, had direct relevance also to the hundred-per-cent sanction under Article 112c of the VAT Act, which was constructed in an identical manner and was characterized by the same automaticity. This meant that in the period from the publication of the C.J.E.U. judgment in the Official Journal of the E.U., which occurred on June 7, 2021, to the moment the amendment to VAT Act provisions adapting Polish law to this judgment entered into force, which occurred only on June 6, 2023, tax authorities could not effectively impose VAT sanctions under Articles 112b and 112c of the Act.
Unfortunately, in practice many tax authorities ignored this judgment and continued to impose sanctions according to the old rules, recognized as inconsistent with European law. Moreover, some administrative courts also failed to draw proper consequences from this ruling, dismissing entrepreneurs’ complaints and accepting decisions by authorities imposing automatic sanctions. Only gradually, as time passed and criticism from legal doctrine and some administrative-court judges mounted, did this practice begin to change.
Foreign Materials as the Basis for Decisions: Procedural Requirements According to C.J.E.U. Case Law
One of the most controversial aspects of the practice of tax authorities in carousel cases is the manner of gathering and using evidentiary material originating from proceedings conducted against other entities. Decisions assessing tax obligations to entrepreneurs allegedly participating in carousels are based to a significant, often predominant extent on so-called foreign materials—that is, evidence gathered in proceedings conducted against other taxpayers.
A typical tax decision in such a case contains several hundred, sometimes even over a thousand pages. Of this material, actual analysis of the audited entrepreneur’s activity may concern only a few dozen pages. The rest consists of citations from decisions issued against other entities, transcripts of interrogations conducted in other proceedings, excerpts from criminal analyses concerning the activities of criminal groups.
The C.J.E.U. Position in the Glencore Agriculture Hungary Case
This issue was the subject of detailed analysis by the Court of Justice of the European Union in a judgment of October 16, 2019, in case C-189/18, Glencore Agriculture Hungary. This judgment established a legal framework for using materials from related proceedings.
The principle of admissibility: The C.J.E.U. in paragraph 69 of the judgment stated that E.U. law does not in principle preclude a regulation or practice of a member state according to which a tax authority is bound by factual findings and legal qualifications made within the framework of related administrative proceedings initiated against the taxpayer’s suppliers. The Court found that such a principle can serve the objective of legal certainty and equality between taxpayers by ensuring consistency in the legal qualification of the same factual circumstances.
Procedural requirements: However, this admissibility is contingent on fulfilling three cumulative conditions:
First—the tax authority cannot be exempt from the obligation to acquaint the taxpayer with evidence, including evidence originating from related administrative proceedings, on the basis of which it intends to issue a decision. The taxpayer cannot be deprived of the right to effectively challenge during proceedings conducted against them the factual findings and legal qualifications made within the framework of foreign proceedings (paragraphs 47-50 of the judgment).
Second—the taxpayer must have the possibility of obtaining during proceedings access to all evidence collected during related administrative proceedings or in any other proceedings on which the authority intends to base its decision or which can be used in exercising the right of defense. An exception is situations when objectives in the public interest—such as protection of confidentiality, professional secrecy, the private life of third parties, or the effectiveness of repressive action—justify limiting this access (paragraphs 53-58 of the judgment).
Third—the court hearing a complaint against a tax-authority decision must have the possibility of verifying the legality of obtaining and using evidence and findings that have decisive significance for resolving the complaint, made in administrative decisions issued against other taxpayers (paragraphs 63-68 of the judgment).
Polish Practice in Light of European Requirements
The problem is that Polish practice systematically violates all three mentioned requirements.
Materials from foreign proceedings are incorporated into case files in a selective manner, often without maintaining completeness of case files they concern, without the possibility of verification by the audited entrepreneur on what factual and legal basis the findings contained in them were based. Authorities often incorporate into case files decisions issued against third parties, not informing simultaneously whether these decisions are final, whether they have been appealed to administrative court, whether perhaps they have already been overturned by a court.
The entrepreneur is deprived of the possibility of effectively challenging findings contained in these decisions, because they were not a party to the proceedings in which they were issued, had no access to evidentiary material on which they were based, couldn’t exercise the right to question witnesses or submit their own evidentiary motions.
The key difference between theory and practice: While the C.J.E.U. accepted the system of using foreign materials as consistent with E.U. law on condition of fulfilling specific procedural guarantees, Polish practice does not ensure these guarantees. It’s not therefore that the system itself is illegal—it’s that it’s applied in a manner violating requirements posed by E.U. law.
The C.J.E.U. emphasized in paragraph 67 of the judgment that equality of arms would be violated and the adversarial principle would not be respected if:
- the tax authority were not obligated to present evidence owing to their final character in other proceedings,
- the taxpayer couldn’t become acquainted with them,
- the parties couldn’t conduct adversarial debate on these evidence and findings,
- the court were unable to verify all factual and legal circumstances on which decisions against other taxpayers were based.
It is precisely these conditions that are not met in Polish practice. Tax authorities often confine themselves to stating that “findings from proceedings against the supplier are final and binding,” not making available full documentation, not enabling real adversarial debate, and administrative courts in turn rarely conduct real verification of the legality of obtaining and using foreign materials, confining themselves to stating that since they were gathered in other proceedings conducted by tax authorities, they should be accorded the value of credibility.
Consequences for Taxpayers
The Glencore judgment therefore doesn’t question the very concept of using materials from related proceedings—it establishes, however, clear procedural standards whose violation renders denial of the right to deduct VAT inconsistent with E.U. law. In paragraph 68 of the judgment, the C.J.E.U. stated explicitly that if the court is not authorized to conduct verification of the legality of obtaining and using evidence, evidence collected during related proceedings should be rejected and the invalidity of the challenged decision should be found.
The difference between a system consistent with law and Polish practice therefore doesn’t consist in the very fact of using foreign materials but in the lack of procedural guarantees that the C.J.E.U. deemed indispensable. It is precisely this lack—not the system’s concept itself—that constitutes the essence of the problem and violation of E.U. law.
The Chilling Effect: Self-Censorship and Withdrawal from Legal Activity
The described practices induce a profound chilling effect in the Polish economy. Entrepreneurs, observing the fate of other entities that have been accused of participation in tax carousels despite conducting real business operations and acting in good faith, begin to apply self-censorship in choosing contractors and types of activity.
First of all, this affects sectors considered particularly sensitive from the perspective of carousel-fraud risk. These include trade in fuels, metals, consumer electronics, grain, vegetable oil, scrap. Entrepreneurs either completely abandon activity in these industries or drastically limit the scale of operations. Paradoxically, this leads to a situation in which an honest competitor is displaced from the market not by dishonest competition but by fear of actions by their own state.
Second, entrepreneurs avoid cooperation with new contractors, even if they offer more favorable trade terms. They prefer proven, long-term partners, which limits competition and makes market entry difficult for new entities. The consequences are particularly dramatic for small and medium-sized enterprises, which don’t have the market power of large corporations and can’t dictate terms of cooperation.
Third, Polish entrepreneurs begin to move operations abroad or register companies in other European Union countries where the risk of being deemed a participant in a tax carousel is lower and the standard of protection of taxpayer rights higher. This in turn leads to loss of tax revenues for the Polish budget and erosion of the tax base.
Fourth, entrepreneurs incur increasingly high costs related to compliance procedures. They hire specialists in tax-risk management, legal counsels and tax advisers to verify each transaction, implement costly I.T. systems for monitoring contractors. These costs, which essentially constitute a private levy to compensate for the state’s ineffectiveness in enforcing law against actual criminals, burden honest economic entities and lower their competitiveness.
Fifth, some entities, after years of fighting with tax authorities and exhausting all legal remedies, simply suspend or close business operations. Not because they’re unable to compete in the market but because they’re unable to bear the burden of years-long tax and court proceedings and legal uncertainty associated with the possibility of future questioning of transactions that today seem completely proper.
The European-Law Perspective: Fundamental Inconsistency of Polish Practice with the VAT Directive
From the perspective of European Union law, the described Polish practice violates fundamental principles of the common VAT system. The right to deduct input tax is a key element of this system, ensuring its neutrality. As the Court of Justice of the European Union has repeatedly emphasized, the deduction system aims to completely relieve the entrepreneur of the burden of VAT payable or paid within the framework of their conducted business activity. The common VAT system thus guarantees that all business activity, regardless of its purpose or result, provided that in principle it is itself subject to VAT taxation, is taxed in a completely neutral manner.
The right to deduction can be restricted only in strictly defined cases provided for in the VAT Directive or on the basis of Article 273 of that directive, which permits member states to introduce measures aimed at ensuring correct collection of tax and preventing fraud. These measures cannot, however, exceed what is necessary to achieve these objectives and cannot be used in a manner regularly preventing use of the right to deduction, thereby violating VAT neutrality.
Polish practice extends far beyond these boundaries. The provision of Article 88, Section 3a, Paragraph 4, Clause a of the VAT Act was introduced after Poland’s accession to the European Union, without applying the procedure provided for in Article 177 of the VAT Directive for introducing new restrictions on the right to deduction. The same applies to the sanction specified in Article 112c of the Act, which in the form in force until June, 2023, was inconsistent with the principle of proportionality, as the C.J.E.U. stated expressis verbis in the judgment in case C-935/19.
Moreover, the manner of applying these provisions by Polish tax authorities, consisting in denial of the right to deduction to taxpayers acting in good faith who fulfilled all formal prerequisites of this right, violates the fundamental principle according to which the right to deduction arises at the moment when input tax becomes due, provided that the taxpayer possesses an invoice meeting requirements specified in Article 226 of the VAT Directive.
C.J.E.U. case law consistently indicates that a taxpayer can be denied the right to deduction only when it is demonstrated on the basis of objective prerequisites that the taxpayer knew or should have known that in acquiring goods or services they participated in a transaction connected with a crime in the field of VAT. Moreover, demonstrating this rests with tax authorities, not with the taxpayer. As the C.J.E.U. stated in a judgment of June 21, 2012, in joined cases C-80/11 and C-142/11, Mahagében and Péter Dávid, introducing a system of liability without fault would exceed the scope necessary to protect the interests of the state treasury.
Meanwhile, Polish practice de facto introduces precisely such a system of liability without fault. It’s enough for the authority to demonstrate the existence somewhere in the supply chain of irregularities, and the burden of proof is shifted to the taxpayer, who must demonstrate that they didn’t know and couldn’t have known about these irregularities. Moreover, criteria for assessing whether the taxpayer exercised due diligence are undefined, variable, and established by authorities ex post, after irregularities occurred, not ex ante, at the moment of concluding the transaction.
Social and Economic Costs of the “Easy Target” Strategy
The economic and social costs of the described practice are difficult to estimate precisely, but they are undoubtedly significant. First, instead of pursuing actual criminals who defraud billions of złoty from the state budget, tax authorities concentrate their limited resources on conducting years-long proceedings against honest entrepreneurs. On average, proceedings concerning alleged participation in a tax carousel, counting from the initiation of an audit to the issuance of a final ruling by the Supreme Administrative Court, last from five to eight years. During this time, tax authorities and administrative courts engage hundreds of hours of work by highly qualified officials and judges; entrepreneurs incur costs of legal representation, which can reach hundreds of thousands of złoty.
Second, this practice leads to the actual liquidation of entities conducting legal activity. Even if an entrepreneur ultimately wins the case in court, which with current administrative-court practice is unfortunately rare, years of uncertainty, frozen funds in bank accounts, inability to obtain loans and commercial contracts owing to ongoing tax proceedings, lead to the actual termination of operations. Workers lose jobs, contractors lose proven business partners, the state budget loses tax revenues from the current activity of these entities.
Third, this practice undermines entrepreneurs’ trust in the state and the legal system. If compliance with regulations, timely payment of taxes, maintaining reliable documentation doesn’t protect against arbitrary decisions by tax authorities, the question arises what’s the point of investing in compliance and acting in accordance with law. This in turn can lead to an actual increase in the gray economy and tax evasion, because the economic calculation becomes simple: if either way I can be accused of fraud, I might as well actually commit it and at least profit from it.
Fourth, the judiciary and tax authorities also suffer negative consequences. Administrative courts are flooded with complaints in carousel cases, which extends waiting time for consideration of cases in all categories. Tax authorities in turn, concentrating on easy targets instead of actual criminals, achieve apparent successes in the form of statistics of audits and issued decisions, but this doesn’t translate into actual sealing of the tax system. Missing traders continue to operate, only changing operational schemes and learning from predecessors’ mistakes.
Reform Attempts and Their Insufficiency
In recent years, certain symptoms of a change in approach by tax authorities and the legislature to the issue of carousels can be observed. The most important signal was the aforementioned statement by the head of the N.R.A. from June, 2024, in which he explicitly acknowledged that the previous practice of directing audits where the money is was improper. He announced a change of strategy and focusing on actual organizers of tax fraud.
Earlier, in June, 2023, an amendment to provisions concerning VAT sanctions entered into force, adapting Polish law to the C.J.E.U. judgment in case C-935/19. According to amended provisions, sanction amounts specified in Article 112b of the VAT Act (thirty per cent, twenty per cent, fifteen per cent) are currently maximum values, not absolute ones. The tax authority has an obligation to establish additional tax liability “in an amount up to” respectively thirty, twenty, or fifteen per cent, which means it should take into account circumstances of the case and may reduce the sanction or refrain from it altogether.
Additionally, a catalogue of circumstances was introduced that the tax authority has an obligation to consider when establishing the amount of the sanction. These include in particular: the nature and gravity of the violation, the degree of the taxpayer’s culpability, the taxpayer’s previous fulfillment of obligations resulting from tax-law provisions, previous cooperation with tax authorities, and actions undertaken by the taxpayer after irregularities were discovered.
These are positive changes, but still insufficient. They don’t solve the fundamental problem, which is the very construction of Article 88, Section 3a, Paragraph 4, Clause a of the VAT Act and the practice of its application. This provision still allows authorities to deny the right to deduct VAT in situations when the taxpayer fulfilled all material and formal prerequisites of this right, and the only charge is that somewhere in the distant supply chain irregularities occurred about which the taxpayer didn’t know and couldn’t have known.
Deeper, systemic changes are needed. First, it’s necessary to precisely define in VAT Act provisions the prerequisites whose fulfillment authorizes an authority to deny the right to deduction in connection with alleged participation in a tax carousel. These prerequisites should be consistent with C.J.E.U. case law and require demonstrating by the authority, on the basis of objective evidence, that the taxpayer knew or had justified grounds to know that they were participating in a transaction connected with tax fraud.
Second, it’s indispensable to define in provisions the standard of due diligence that can be required from a taxpayer in choosing contractors and verifying transactions. This standard should be realistic, taking into account tools and information available to the taxpayer, not idealistic and impossible to fulfill from the start. It should also be defined ex ante, so the taxpayer can use it as a guideline in making economic decisions, not constructed ex post by authorities for the needs of a specific case.
Third, effective mechanisms for protecting taxpayers acting in good faith should be introduced. This could include, for example, the institution of a binding protective opinion that a taxpayer could obtain before concluding a transaction, presenting to the tax authority planned actions and obtaining confirmation that in light of available information it raises no objections from the perspective of risk of participation in a carousel. If it subsequently turned out that at an earlier stage of the chain irregularities occurred, but the taxpayer acted in accordance with the obtained opinion, they would be protected against negative consequences.
Fourth, a change in the practice of tax authorities and administrative courts is necessary regarding assessment of evidentiary material. The principle should be consistently enforced that the burden of proof in tax proceedings rests with the authority, not with the taxpayer. The authority must prove not only the existence somewhere in the supply chain of irregularities but also the direct connection of these irregularities with the actions of the audited taxpayer and that the taxpayer knew or had objective grounds to know about these irregularities.
Conclusions: From Collective Repression to Precise Law Enforcement
Analysis of the current practice of Polish tax authorities in combating carousel fraud leads to the conclusion that this system has evolved in a direction that cannot be accepted in a state governed by the rule of law. Instead of precise identification and pursuit of actual perpetrators of tax crimes, we’re dealing with a mechanism of collective responsibility in which repression falls on those entities that are easiest to catch—that is, those honestly conducting business operations, possessing assets and a permanent place of business.
The analogy used at the beginning of this article to the pacification of villages near which partisans hide is not exaggerated. Tax authorities, unable to effectively pursue elusive missing traders who are the actual organizers of fraud, direct repression against those they can reach. The logic is simple and brutal: if we can’t enforce liability from actual perpetrators, we’ll enforce it from those who had the bad luck of finding themselves in a supply chain where somewhere irregularities occurred.
This practice is not only unjust toward specific entrepreneurs who become its victims. It’s also deeply harmful to the entire economy and legal system. It undermines trust in the state and law, discourages conducting business operations in Poland, distorts competition, generates social and economic costs, and ultimately doesn’t lead to actual sealing of the tax system, because actual criminals still remain unpunished.
Changing this state of affairs requires not only modification of legal provisions, though this is indispensable, but above all a fundamental change in the mentality and practice of tax authorities. It’s necessary to depart from the logic of the easy target and success statistics measured by the number of issued decisions determining tax obligations and return to the basic principle that the goal of state authorities is not maximization of short-term revenues to the budget at any cost but ensuring a just and predictable legal system in which each entity is responsible for their own actions, not for the actions of other entities about which they didn’t know and over which they had no control.
Until this fundamental change occurs, the Polish VAT system will remain an area of high risk for honest entrepreneurs, a source of arbitrary and unpredictable decisions by tax authorities, and a field for criticism from European Union institutions, which consistently point to the inconsistency of Polish practice with fundamental principles of the common VAT system. And, above all, it will be a system in which instead of punishing criminals, their victims are punished.
Founder and Managing Partner of Skarbiec Law Firm, recognized by Dziennik Gazeta Prawna as one of the best tax advisory firms in Poland (2023, 2024). Legal advisor with 19 years of experience, serving Forbes-listed entrepreneurs and innovative start-ups. One of the most frequently quoted experts on commercial and tax law in the Polish media, regularly publishing in Rzeczpospolita, Gazeta Wyborcza, and Dziennik Gazeta Prawna. Author of the publication “AI Decoding Satoshi Nakamoto. Artificial Intelligence on the Trail of Bitcoin’s Creator” and co-author of the award-winning book “Bezpieczeństwo współczesnej firmy” (Security of a Modern Company). LinkedIn profile: 18 500 followers, 4 million views per year. Awards: 4-time winner of the European Medal, Golden Statuette of the Polish Business Leader, title of “International Tax Planning Law Firm of the Year in Poland.” He specializes in strategic legal consulting, tax planning, and crisis management for business.
