Fairer compensation for withheld VAT

14 September 2020

Vít Křivánek, Partner, Head of Tax Litigation |

In July of this year, the Supreme Administrative Court issued a judgment which, in our opinion, is a turning point in the issue of financial compensation for the withholding of excessive deductions of value added tax. In the case, the Supreme Administrative Court explicitly confirmed that the existing compensation for businesses for whom the tax administrator withholds excessive VAT deductions for months or years is not in line with EU law.

The purpose of the interest for the period of verification of the excessive tax deduction is to compensate for the damage caused to the tax subject by its disproportionately long retention by the tax administrator. Historically (until the end of 2014), its amount was not regulated by law. The courts concluded that in such a case it was necessary to "compensate" the VAT payer with interest at 14% + the repo rate, from the beginning of the fourth month after the end of the relevant tax period until the refund of the excess deduction. The legislator reacted to this judicial creation of the law, and since 2015 it has explicitly enshrined in the law interest of 1% increased by the repo rate set by the Czech National Bank. However, it is precisely this amount of interest that the Supreme Administrative Court has now explicitly declared insufficient in view of the basic principles of the pan-European VAT system.

The verdict of the Supreme Administrative Court sheds hope. However, to what interest is a taxable person now entitled in a situation where the examination by the tax administrator takes an unreasonably long time and the statutory interest is not, according to the court, adequate? The court explicitly identified interest at 14% + the applicable repo rate per annum as adequate interest, i.e. the situation that existed before 2015. The decision thus opens the possibility of obtaining significantly higher financial compensation for the period during which the retained VAT money was not available. In addition, it should be noted that the entitlement to financial compensation can be claimed from the tax administrator up to six years back.

We believe that to obtain fair financial satisfaction, it will be necessary to actively communicate with the tax administrator. We do not expect tax administrators to automatically compensate all VAT payers from whom they have withheld excessive deductions for a long time. Therefore, we recommend that all those to whom the tax office has verified an excessive deduction for at least six months consider taking active steps in this matter.