Over the past years, we have repeatedly informed you about the development in the SAC’s decision-making practice regarding financial compensation for excessively long examination of VAT deduction.

Let us briefly state that until 2015, there has been no the interest on tax deduction in the Czech law. Thus, this gap was bridged by the SAC’s interpretation in its memorable judgment in the Kordárna case. In the judgment, despite the non-existence of respective legal regulation, the SAC specified rules under which financial compensation for an excessively long withholding of tax deductions was awarded using an interest, which, in its nature, corresponded the most to the interest on tax deduction, i. e. interest on refundable overpayment. Thus, taxable entities gained claim to an interest in the amount of the repo rate of the Czech National Bank (CNB) increased by 14%.

In a legislative way, this gap in law was filled on 1 January 2015, when the amendment to the Tax Code comprising a new interest on tax deduction came into force. However, according to this legal regulation, taxable entities were entitled to financial compensation in the amount of the repo rate of the CNB increased by a mere 1%. With effect from 1 July 2017, the respective regulation was amended and, apart from other partial changes, the interest rate was increased as well, now amounting to the repo rate of the CNB increased by 2%.

The fact that the financial compensation in the amount of the repo rate increased by 1% contravened the EU law, was confirmed by the SAC in the EP ENERGY TRADING judgment. In this judgment, the SAC followed the conclusions of the Court of Justice of the European Union and stated that, at first sight, the respective regulation on the tax deduction interest does not correspond to the interest rate, which the taxable entity would be obliged to pay if it wanted to be reimbursed for withheld financial resources using a bank loan, therefore the rate cannot be applied.

Due to the interpretation of interim provisions by tax authorities, many legal disputes followed regarding the issue of to what amount of financial compensation and for what period are taxable entities actually entitled. This issue was also resolved by the SAC; in its judgment in the Cartec Ostrava case, the SAC stated that taxable entities are entitled to financial compensation in the amount of the repo rate plus 14% according to the rules specified in the Kordárna case for the whole interest-bearing period (i. e. also for the period subsequent the date on which the amendment increasing the legal interest rate to the amount of the repo rate plus 2% came into force), under the assumption that there was an excessively long review of VAT deductions applied in tax returns that should have been filed before 1 July 2017.

Thus, the last issue was to be solved: Can interest on tax deductions in the legal amount, i. e. the repo rate of the CNB increased by 2% be used with VAT deductions applied once this amendment came into force? In other words, it was to be determined whether this legal regulation complies with the requirements of the Court of Justice of the European Union.

What was the judgment of the Supreme Administrative Court?

This issue was resolved by the Supreme Administrative Court at the end of April in the ČERNOHORSKÁ DEVELOPERSKÁ judgment, in which the Court concluded that the interest in the amount of the repo rate of the CNB increased by 2% (unlike the former legal regulation) complies with the requirements of the Court of Justice.

Specifically, the SAC stated that, in comparison to the data published by the CNB, it is obvious that the interest in the amount of the repo rate of the CNB exceeded the interest rates on loans provided to non-financial entities for almost the whole period in question, and thus it complies with the requirements set out by the Court of Justice of the European Union.

The SAC also stated that the interest on tax deduction can neither be compared to other interests nor their interest rates, as none of those interests is in its nature similar to the interest on tax deduction. Unlike other interests, the interest on tax deduction does not include any aspect of a sanction (i. e. the interest on tax deduction is not a sanction for unlawful procedures of taxation offices, but it represents compensation for taxable entities who were unable to handle their financial resources due to legitimate procedures of the tax authorities).

For the sake of completeness, we may add that, with effect from 1 January 2021, another amendment to the Tax Code came into force, which set a completely different calculation of the interest on tax deduction (the tax rate newly corresponds to half of the late payment interest). Thus, it is obvious that the issue of the interest on tax deduction is a comprehensive theme. The interest on tax deduction itself, however, represents a mere fraction of the issue of compensation for withholding of financial resources by the tax authorities.

Should you have any doubts as to whether you are entitled to financial compensation and to what amount, or if you doubt the amount of financial compensation already awarded by the tax authorities, do not hesitate to contact us.