Interest on withheld deductions: another breach of the statutory regulation by the case law of the administrative courts?
If companies request a refund of the excess VAT deduction, the state (Tax Office) will retain the amount for them in the long term. Since 2015, the tax authorities have granted VAT payers a right to interest under the new provisions of the Tax Code (Section 254a), for which they have examined the justification for the excess VAT deduction (by tax audit or to remove doubts) 1% p.a. plus the CNB repo rate. The amount of this interest was adjusted (increased) in 2017 and 2021. However, as will be explained below, neither interest of 1% (from 2015) nor 2% (from 2017) is regarded by domestic courts as adequate financial compensation for long-term unjustified withholding of VAT deductions.
In July 2020, the vast majority of the professional and lay public in this area took note of a ground-breaking judgment of the Supreme Administrative Court (in the case of EP ENERGY TRADING - file no. 1 Afs 445/2019), in which the First Chamber, with reference to the current case law of the Court of Justice of the European Union, declared the domestic legislation enshrining interest on tax deductions (Section 254a of the Tax Code) incompatible with EU law. According to the Supreme Administrative Court, Czech law does not provide sufficient financial compensation to tax subjects for the fact that these businesses could not dispose of the excessive VAT deduction they reported in their tax returns for an unreasonably long time. The Court states that in accordance with the principle of the neutrality of value added tax, in such a case it is necessary to compensate VAT payers for the economic burden. This represents the interest that a non-credit institution would pay on a loan, typically interest on a business loan. In the present case, the Supreme Administrative Court assessed the amount of interest on the tax deduction pursuant to Section 254a of the Tax Code, as amended from 1 January 2015 to 30 June 2017, in which the Act awarded interest at the CNB repo rate increased by one percentage point. In the judgment, it stated that without much examination, it is obvious at first sight that the current interest paid by non-credit institutions (businesses) far exceeds the statutory interest on the tax deduction under Section 254a. It added that where the domestic legislation is in conflict with EU law, it is necessary to apply the conclusions set out in the "Kordárna" judgment (judgment of the Supreme Court file no. 7 Aps 3/2013), i.e. to award the tax subject interest of 14 percentage points plus the CNB repo rate.
Given that the legislation in question has undergone legislative changes during its existence (since 1 July 2017 and 1 January 2021), primarily with regard to the gradual increase in interest and certain modifications to the interest period, and whereas in the EP ENERGY TRADING judgment the Supreme Administrative Court explicitly dealt only with the wording of this provision from 1 January 2015 to 30 June 2017 (i.e. the said interest of one percentage point), a question arose among professionals as to whether the amended provision of Section 254a of the Tax Code from 1 July 2017 is already a regulation consistent with EU law.
We have always been convinced that even the increase in interest from one percentage point to two percentage points from 1 July 2017 did not remedy the fundamental shortcomings of the Czech legislation in relation to the requirements of European legislation. That is why we entered into a dispute with the financial administration together with clients who shared our belief, with similar arguments and support in the existing case law of domestic as well as European administrative courts.
On 28 April 2021, a decision was made in our joint case by the Regional Court in Brno, which identified with our legal view of interest on tax deductions as amended on 1 July 2017, and declared this interest to be clearly contrary to EU law (specifically Article 183 of the VAT Directive). The Regional Court based its legal conclusion, as did the Supreme Administrative Court in the EP ENERGY TRADING case, on the recent judgments of the Court of Justice of the European Union (primarily the judgment of 23 April 2020 in Joined Cases C-13/18 and C-126/18 Sole- Mizo and Dalmandi Mezogazdasági). It reiterated that the interest on the withholding deduction must correspond to the amount of interest paid by the non-lending institution. Simultaneously with the reference to the part of the explanatory memorandum to the amendment to Section 254a of the Tax Code, the legislator conceived interest on the tax deduction from 1 July 2017 as financial compensation ranging between interest on deposits and interest on loans. This notion alone suggests that such interest cannot meet EU requirements. At the same time, the court added that in the given period such a low level (repo rate + 2 percentage points) did not correspond to the amount of interest on mortgage loans, i.e. long-term and secured loans.
With its opinion, which can be considered one of the first – if not the first – in this field, the Regional Court ignited a glimmer of hope for truly adequate financial compensation for all businesses that were excessively and unjustifiably withheld excessive tax deductions, even in the period after 30 June 2017 (i.e. after the judgment of the Supreme Administrative Court in the EP ENERGY TRADING case). However, the final conclusion will be reached by the Supreme Administrative Court, which will certainly deal with this issue sooner or later. We are convinced that even interest of two percentage points cannot stand before the Supreme Administrative Court in terms of its compliance with EU law and current case law.
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