When can a taxpayer be entitled to “interest on interest”?
In practice, we have recently noticed an increase in claims for the second (or third, etc.) interest in relation to the late repayment of overpayments of first interest from the tax administrator, often referred to as “interest on interest”. In many cases, these claims by taxpayers follow the tax administration´s previous approach of prescribing (or not prescribing) interest on withheld VAT deductions, i.e. interest incurred as a result of the VAT deduction being declared by the first instance tax administrator at an incorrectly lower amount.
In January 2023, two judgments of the Supreme Administrative Court (“SAC”) were published which confirmed the previous case law according to which a taxpayer’s entitlement to “interest on interest” arises in some cases and not in others. Both cases concern interest that accrued under the legislation in force until 31 December 2020.
Judgment in Case No. 8 Afs 94/2021
In this case, interest first accrued on the tax administrator’s unauthorised conduct, but was not repaid within the statutory fifteen-day period. Therefore, the taxpayer also claimed second interest from the tax administrator, from the day following the expiry of the statutory period for the reimbursement of the first interest until the date of its actual reimbursement. The SAC confirmed its earlier conclusions that if the first interest is interest on the tax administrator’s unlawful conduct, a claim for the second interest arises.
Judgment in Case No. 5 Afs 376/2021
In the second case, the tax administrator failed to refund the corporate income tax overpayment within the statutory period of 30 days from the date of the request for the refundable overpayment, for which the taxpayer should have been compensated with interest on the refundable overpayment. The tax administrator did not initially recognise the existence of this interest. Eventually, it was credited to the personal tax account, but only after a delay of two years. For this reason, the taxpayer claimed second interest on the late-refunded interest on the refundable overpayment. The SAC, based on its earlier case law, held that what matters is not the attitude of the debtor (the tax administrator) toward the payment of the first interest, but the nature of the principal amount originally subject to interest. According to the SAC, the second interest will only arise in cases where the original interest-bearing principal (i.e. the original tax) was incurred as a result of the illegality or unlawfulness of the tax administrator’s conduct. In the case concerned, the principal had arisen rightfully through the settlement of duly paid corporate tax prepayments, so the unlawfulness occurred only in the payment of the first interest and thus no entitlement to the second interest arose.
What do the judgments of the SAC imply?
According to the SAC, “interest on interest” does not arise in every case of the late repayment of interest. It can only arise in the event of a double unlawfulness of the tax administrator’s conduct, firstly in the payment of the original principal and secondly in the payment phase. If the first unlawfulness in relation to the original principal did not arise, any unlawfulness in the repayment of interest at the payment level cannot give rise to the second interest. However, the individual circumstances of the case must be taken into account when assessing the individual claims of taxpayers, which makes the issue of “interest on interest” complicated. We therefore recommend that you have your potential claims for further interest verified.