SAC upholds entitlement to higher compensation for withholding VAT deductions

Deloitte Legal’s tax litigation team has succeeded in obtaining a landmark ruling in the area of compensatory interest on tax deductions, ending a period of uncertainty over the amount of compensation to which taxpayers are entitled.

We have been keeping you informed about the gradual development in the practice of granting financial compensation for unreasonably long examination of value-added tax deductions. The first milestone in this area was the judgment in the Kordárna case, in which the Supreme Administrative Court bridged a gap in the then wording of the Tax Code and made it possible to compensate for the withholding of VAT deductions with interest at 14 % plus the CNB repo rate, as of the beginning of the fourth month following the end of the relevant tax period until the date of the VAT deduction refund.

Following the judgment in the Kordárna case, the provision regarding the interest on tax deductions was included in the Tax Code with effect from 1 January 2015. However, according to this provision, taxpayers were entitled to financial compensation of only 1 % plus CNB repo rate, and after the amendment effective from 1 July 2017, 2 % plus CNB repo rate. The interest rate and the ambiguity in the interpretation and amendments of the provision have thus become the subject of a number of disputes.

The Supreme Administrative Court ended this period of uncertainty with the EP ENERGY TRADING judgment, which became the second case-law milestone in this area, wherein the Supreme Administrative Court held that the amount of interest on the tax deduction effective from 1 January 2015 to 31 June 2017 (i.e. at 1 % plus the CNB repo rate) did not, at first glance, correspond to the interest rate that the taxpayer would have had to pay if they had wanted to replace the funds withheld by way of a bank loan. It is thus contrary to EU law and cannot be applied as such. The taxpayers were therefore still entitled to compensation under the rules laid down in the Kordárna judgment (i.e. 14 % plus the CNB repo rate) for that period.

Subsequent to the EP ENERGY TRADING judgment, the tax administration started to grant taxpayers compensation at 14 % plus CNB repo rate, but only for the period until 30 June 2017. For the remaining period of examination and withholding of deductions, it granted compensation at 2 % plus CNB repo rate pursuant to the legislation effective as of 1 July 2017, which again led to another wave of disputes over the amount of compensation granted.

The third and last milestone in this area was reached by Deloitte Legal tax litigation team, which successfully defended the client’s claim for higher compensation also for the period after 1 July 2017. In the judgment 1 Afs 80/2021-45, the Supreme Administrative Court agreed that, in accordance with the transitional provisions of the amendment to the Tax Code, the rules defined in the Kordárna judgment continue to apply in the case of disproportionately long examination of any VAT deductions claimed in tax returns with a filing deadline before the amendment came into force on 1 July 2017. Hence, in practice, taxpayers are entitled to financial compensation at the rate of 14 % plus the CNB repo rate for the entire period of interest, i.e. until the date the VAT deduction is refunded.

As in the case of the EP ENERGY TRADING judgment, it is also possible to claim higher compensation retroactively in cases of finally terminated proceedings ‒ up to 6 years from the end of the year in which the overpayment occurred.

Please contact us if you think you may be entitled to compensatory interest.

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