Tax 

VAT payers are entitled to higher interest due to lengthy reviews of excessive deductions

The Supreme Administrative Court rendered a judgement in mid-July, which has a significant impact on the amount of compensation pertaining to VAT payers whose excessive deduction refund was withheld by the tax administration.

Tax administration practice

Until the end of 2014, tax administration refused to compensate VAT payers for unreasonably extended reviews of VAT deduction claims, resulting in excessive deductions being refunded only after several months or even years in some cases. The Supreme Administrative Court rejected this practice in its well-known judgement in the Kordárna case as being in conflict with EU law. In the then effective Tax Code, the Court found a mechanism of awarding fair compensation amounting to 14% plus the Czech National Bank’s repo rate. Consequently, a new legal regulation was adopted. On 1 January 2015, a new provision providing for interest on tax deduction came into effect, which only entitled VAT payers to receive compensation amounting to 1% plus the CNB’s repo rate.

Assessment by the Supreme Administrative Court

In its latest judgement, the Supreme Administrative Court dealt with the issue of whether the legal regulation of tax deduction interest effective from 1 January 2015 to 31 June 2017 complied with EU law. In the reasoning of its judgement, the Court stated that it was obvious at first sight without the need to review the matter in more detail that the amount of interest defined as stated above did not correspond to the interest rate that a VAT payer that is not a credit institution would have paid for a loan. The law regulating tax deduction interest from 1 January 2015 to 31 June 2017 is thus in conflict with the VAT Directive and as such it should not be applied.

If this legal regulation is not applicable, the rules defined in the judgement of the Kordárna case apply instead according to the Supreme Administrative Court. VAT payers are thus entitled to interest on withheld excessive deduction of 14% plus the Czech National Bank’s repo rate for the period from the beginning of the fourth month following the end of the relevant taxation period to the date of settlement.

Impacts of the Supreme Administrative Court’s conclusions

The conclusions of the Supreme Administrative Court are applicable to a large amount of cases where entitlement to VAT deduction was reviewed as part of both the procedure to eliminate doubts and the tax audit. We thus recommend performing a careful review to find out whether your company is entitled to claim interest on withheld excessive deduction from the tax administration higher than the one granted to our company so far.

Furthermore, with respect to the judgement reasoning, we may expect that the legal regulation governing tax deduction of 2% plus the Czech National Bank’s repo rate effective from 1 July 2017 be contrary to EU law as well. In these cases, we also recommend claiming compensation from the tax administration in accordance with the judgement in the Kordárna case.

If you have any questions or are interested in consultation without making any commitment, please do not hesitate to contact us.

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