The Constitutional Court of the Republic of Slovenia has decided to repeal provisions of the third and fourth paragraph of Article 68.a the Slovenian Tax Procedure Act, which provide for taxation of undeclared income at 70% tax rate, which exceeds regular maximum 50% personal income tax rate and enable the taxation of undeclared income originating from the periods before 1 January 2009.

The Constitutional Court assessed that by legislating such taxation, the legislator did not pursue aim of financing public spending or any other permissible aim of taxation according to the constitutional definition of taxes, so the said surcharge was not a tax in the constitutional sense.

In the constitutional review procedure, the Slovenian Government argued that the surcharge was, by its nature, a restitution measure intended to compensate for the loss of funds from compulsory social security contributions, however this argument was not accepted by the Constitutional Court. Given that the restitution aspect of the 70% tax rate was not demonstrated, the Constitutional Court ruled that the tax which exceeds the taxpayer’s maximum regular income tax rate, is a surcharge, which is at least partially punitive in character.

The Court clarified that procedures in which measures of a punitive character are imposed must be regulated in such a way as to ensure the constitutional rights that fundamentally apply to proceedings in all punitive matters, not only with regard to criminal offenses. However, the regulation of the tax procedure, in which the said surcharge may be imposed, does not provide for these constitutional rights, as it among other applies probability as the standard of proof as well as the reverse burden of proof, which are incompatible with such guarantees. Therefore, the challenged provisions, insofar as they enable the imposition of a surcharge in tax proceedings, was declared inconsistent with Article 29 of the Slovenian Constitution.

The European Court of Human Rights similarly decided as early as in 1978 in its decision in Engel and others v. the Netherlands (and later on in Västberga Taxi Aktiebolag and Vulic v. Sweden and in Jussila v. Finland), that such cases represent procedures of a punitive character (and not tax collection procedures), which means that the fundamental rights that come into play in criminal proceedings must be applied.

The Constitutional Court also ruled that the impugned provisions, insofar as they enable the introduction of a tax assessment procedure for income from the year 2008 and prior years, have the effect of interfering retroactively with the legal position of a taxpayer. The previous rules allowed the tax to be levied for a maximum of the past five years and not for the past ten years, as extended by the disputed rules. Such retroactive effect of the law is permissible only exceptionally and under certain conditions, if this is required in the public interest, which was not demonstrated in the present case.