Sanctions for poor bookkeeping and their lapse time limits

If an entity does not fulfil its obligations arising from the Accounting Act, it faces a fine for such administrative delict. Sanctions are usually based on the value of assets, they may amount up to 3% or 6% of the assets, depending on the type of the administrative delict. As seen in our practice, the most frequent type of the delict is for example a failure of an entity to publish its financial statements in the collection of deeds maintained by the court holding the Register of Companies. In any case, if a taxation authority reveals such an error, the above mentioned amount of the fine calculated from the value of assets is the maximum possible limit and the tax administrator may impose, and frequently imposes, a lower fine.

However, the issue that was a frequent source of disputes in the past is the fact until when the tax administrator may impose such fine on an entity, or what its lapse time limit is. The Supreme Administrative Court of the Czech Republic has repeatedly addressed this issue, most recently in its ruling ref. no. 2 Afs 268/2019-27.

In this particular case, the Supreme Administrative Court examined the issue of the assessment of sanctions for poorly kept accounts, specifically stock records lacking clear supportability, a failure to account for all accounting transactions and an inventory count of assets and inventory lacking clear supportability. The company was to have made these errors in the 2014 reporting period. The ruling addressed, among other things, the application and lapse time limit of sanctions for administrative delicts under the Accounting Act, as effective before 31 December 2015.

Ruling of the Supreme Administrative Court

The Supreme Administrative Court of the Czech Republic confirmed that the lapse time limit of sanctions for administrative delicts under the Accounting Act is governed by the Act on Liability for Administrative Delicts. This act stipulates a limitation period of one year for fines calculated as a percentage of assets. However, the key fact is that the limitation period starts running on the day following the day when the delict was committed rather than at the moment when the tax administrator learned about the error. According to the court, this also applies to administrative delicts under the Accounting Act effective before 31 December 2015 when the legislation regarding this matter was stricter. The court additionally explained that the day when the delict was committed was the day when the activities through which the delict was committed were completed. For this reason, the court concluded in the addressed case that the start of the limitation period is the day following the end of the 2014 reporting period,  i.e. 1 January 2015, which indicates that the one-year limitation period expired on 1 January 2016. As such, it means that a taxation authority was not able to assess a sanction for the errors of the 2014 reporting period after that date.

Such interpretation is undoubtedly very favourable for entities as the tax administrator has
a limited possibility to impose a fine on taxpayers for administrative delicts under the Accounting Act. However, the Ministry of Finance concurrently declares that it has been preparing a new Accounting Act and it remains to be seen how the new legislation will address the sanctions for administrative delicts. It can be assumed that their limitation periods will be stricter in the future.

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