Undeclared Income Loans and Personal Income Tax Disputes (Part II)

The tax dispute between the parties concerned the legality and validity of the tax administrator's instructions to the Applicant to pay income tax and income tax penalties to the state budget. 

After conducting a repeat tax audit of the correctness of the Applicant's income tax calculation, declaration and payment in accordance with Article 70 of the Tax Administration Act, applying the expenditure method, the tax administrator determined that the Applicant covered the expenses incurred for granting the loan with income from sources unknown to the tax administrator, which he did not declare in accordance with the procedure laid down in Articles 25 and 27(1) of the Income Tax Act, and did not calculate and pay income tax on them to the budget. 

During the audit, the tax administrator also did not recognize the purchase price of the UAB shares sold and the amount of expenses related to the transfer of ownership declared in the Applicant's annual income tax return. 

Thus, in the tax dispute, the situation was such that, in the court's opinion, it was clear from the data collected that during the period when the natural person allegedly returned the funds to the appellant in cash, the appellant did not deposit any cash into his bank accounts, but borrowed significant amounts of money from credit institutions, paying bank interest accordingly, i.e. incurring additional expenses. Therefore, in the opinion of the Supreme Administrative Court of Lithuania, borrowing from a credit institution and paying interest, even though a large amount of cash is available, is contrary to common sense and is unconvincing. 

Meanwhile, the appellant explained that the US dollars received from a natural person were not used because they had to be converted into litas, which would have resulted in financial losses, i.e., it was not beneficial for the appellant to exchange US dollars. The court agreed with the appellant's assertion that certain losses are incurred when converting currency, but this does not mean that it is more advantageous to borrow significant amounts of money from credit institutions and pay bank interest than to use the funds available in another currency. 

Furthermore, when comparing the signature of the natural person in the explanation and the formal agreements signed by the natural person , the signature of the same person is clearly visually different. Not only is the signature different, but so is the writing style, and the natural person's surname is misspelled in the agreements, even though these documents were allegedly signed by the natural person himself.

Therefore, in the court's opinion, it is unconvincing that the person would make a mistake when writing his surname in all three agreements signed on different dates. In the court's opinion, doubts about the authenticity of the agreements are also raised by the fact that the details (document date) indicated in the aforementioned agreements are earlier in all three cases than the dates indicated in the international payment orders.

In the opinion of the Supreme Administrative Court of Lithuania, it is not realistic that on three occasions, without having received the money through the bank, or having received it on the same day (according to the US time zone), agreements were already being formalized in the name of a natural person, under which the natural person undertook to return the money no later than five working days from the date of receipt of the money. 

Therefore, in the court's opinion, it is not understandable how the dates of the funds allegedly transferred by the natural person to the appellant and the dates of receipt of the appellant's funds could coincide in the aforementioned agreements, because a natural person physically residing in another country and the appellant living in Lithuania could not have signed the aforementioned agreements on the same day.

It should be noted that the appellant claimed that the practice established by courts of general jurisdiction states that a loan agreement is real, i.e. it is considered to be concluded from the moment of transfer of money or items, therefore, the rule on the distribution of the burden of proof in disputes arising from loan agreements is that the creditor must prove that the loan was granted, and the debtor must prove that the loan was repaid. 

In view of these arguments, the court noted that the subject matter of the dispute in question is not civil loan relations in accordance with general court practice, but the reality of the income received, which is proven in accordance with administrative court practice. and therefore the practice of the Supreme Court of Lithuania referred to in the appeal is irrelevant to this case. 

Regarding the appellant's argument that similar evidence of the repayment of his money from other natural persons is acceptable to the tax administrator, otherwise a different standard of proof applies, the court noted that the aforementioned case and the case of a natural person do not coincide in terms of time or other evidence, and the case mentioned by the appellant does not refute the tax administrator's position with regard to a natural person.

The Supreme Administrative Court of Lithuania disagreed with the appellant's claims that the tax administrator did not take active measures to establish or refute the authenticity of the agreements submitted by the appellant or to determine the financial situation of the natural person during the period relevant to the dispute. As can be seen from the case file, during the repeat inspection, the agreements with the natural person submitted by the appellant to the State Tax Inspectorate with the complaint, which the appellant had not submitted during the first inspection, were assessed. 

During the re-examination, the Inspectorate contacted the individual in order to establish the actual fact of the repayment of money and received explanations. Thus, in summary, the Supreme Administrative Court of Lithuania found that the case proved that the amounts specified in the agreements submitted by the appellant had not been repaid to the appellant and that the documents had been drawn up formally in order to justify the missing sources of income to the tax administrator.

The appellant also disagreed with the part of the first instance court's decision according to which the appellant did not incur any costs for the acquisition of securities under the share purchase agreements. In the appellant's opinion, the court of first instance did not take into account the evidence and circumstances that other persons signed confirmations in which these persons confirmed that the purchase and sale agreements for the sold shares of UAB had been fully settled, that they had no claims and would have no claims in the future, copies of which were submitted; made a joint statement on the withdrawal of the claim in the civil case before the regional court; the decision of the district prosecutor's office to terminate the pre-trial investigation; responses from the foreign tax administrator. 

The Supreme Administrative Court of Lithuania emphasized that, in assessing the evidence presented by the appellant, it is important that the courts of general jurisdiction have ruled that the disputed share purchase and sale transactions are invalid from the date of their conclusion. Neither the Lithuanian Court of Appeal in its decision in the civil case nor the Supreme Court of Lithuania in its ruling in the civil case established any circumstances on the basis of which it could be claimed that the appellant had made actual payments for the shares in accordance with the formalized share purchase agreements, which specified the value of the shares and which the appellant indicated in the submitted annual income declaration. 

In the opinion of the Supreme Administrative Court of Lithuania, the case file shows that the defendant (appellant) argued in the Lithuanian Court of Appeal that he had settled with the plaintiffs. In the opinion of the panel of judges of the Lithuanian Court of Appeal, the fact of settlement with the plaintiffs under the disputed agreements could indirectly confirm the plaintiffs' intention to transfer the disputed shares to the defendant. However, the evidence in the case is insufficient to conclude that the defendant settled with the plaintiffs under the disputed share purchase agreements. 

The provision in the disputed contracts themselves, which the plaintiffs claim not to have signed, stating that the plaintiffs received a certain amount for the shares under the disputed contracts, cannot be regarded as sufficient evidence confirming that the defendant settled with the plaintiffs, since, as stated above, in this case, copies of the agreements do not confirm the existence of these agreements. No other written evidence confirming that the defendant paid the plaintiffs money under the disputed agreements has been submitted. 

The explanations of a person related to the defendant, who was questioned as a witness, that he brought the defendant (which the defendant claimed to have paid to the plaintiffs under the disputed contracts) and saw the plaintiffs in the defendant's office, with the plaintiffs claiming the opposite and no other evidence to support the explanations, are not sufficient to conclude that the plaintiffs signed the disputed contracts or that the defendant settled with the plaintiffs under the disputed contracts. 

The Supreme Administrative Court of Lithuania notes that although the appellant correctly states that the facts established in the decision of the Lithuanian Court of Appeal do not have prejudicial effect in the tax case under consideration, this decision of the general jurisdiction court is significant evidence in this case, which is not refuted by the evidence presented by the appellant. 

The appellant emphasized the signed confirmations in which these persons confirmed that the purchase and sale agreements for the sold UAB shares had been fully settled, but during the tax administrator's repeat inspection, the foreign tax administrator was contacted regarding the citizens from whom, according to the appellant, had purchased UAB shares under the share purchase agreements. 

These circumstances are detailed in order to properly understand the entire context of the dispute and why the court's decision is appropriate and how the tax administrator's position is formed.

Thus, as  revealed by the court, it is clear from the tax dispute case that foreign  citizens explained that they did not sell UAB shares to the appellant under the share purchase agreement, no payment (settlement) was made by the appellant, and no confirmations were signed by natural persons.

Therefore, the Supreme Administrative Court of Lithuania consistently noted that the court had insufficient grounds to doubt the official explanations given by these persons to the tax administrator. In addition, the decision of the district prosecutor's office to terminate the pre-trial investigation has no significant impact on the appellant's tax obligations, as tax obligations are governed by tax law rather than criminal law, and the circumstances to be proven and the rules of evidence in criminal proceedings and tax relations do not coincide. The Supreme Administrative Court also noted that, according to the provisions of Article 19(1) of the Income Tax Law, the purchase price of the property, the commission paid and the taxes and fees related to the sale of the property may be deducted from the income received. 

Article 19(3) of the Income Tax Law stipulates that only those amounts may be deducted which are substantiated by documents containing all the mandatory accounting document details provided for in the Accounting Law of the Republic of Lithuania and other legal acts, and/or valid transactions, and/or documents drawn up by foreign entities and residents, if the content of the economic operation can be determined from these documents. The obligation to have documents from which the content of the economic operation can be determined, as established in Article 19(3) of the Income Tax Law, is aimed at combating the shadow economy, smuggling, illegal work, tax evasion and tax fraud. The appellant does not have such documents.

In summary, the court of appeal ruled that the contested court decision was justified in not recognizing the value specified in the disputed share purchase agreements as the cost of acquiring the shares.  The parties to the proceedings presented further arguments, but, in the opinion of the panel of judges, the circumstances referred to are not material to the resolution of the administrative case and do not alter the conclusion reached in this decision. 

In this context, the Supreme Administrative Court of Lithuania noted that the European Court of Human Rights and the Supreme Administrative Court of Lithuania have repeatedly pointed out that the court's duty to justify its decision should not be understood as a requirement to respond in detail to every argument.