Article:

The default interest limit that nobody knew about

12 May 2022

Vít Křivánek, Senior Manager, Head of Tax Litigation |

Interest on late payment, accessory tax, a legal penalty affecting all those who fail to meet their tax obligations on time. Interest on late payment also plays an undeniable role in the case of an additional tax assessment by the tax administrator. The period of delay is calculated from the original due date of the tax, i.e. from the date on which the deadline for filing the tax return for the tax period for which the tax administrator is assessing the tax expired. As an illustration, the taxpayer will be in default in the assessment of value added tax for the January 2013 tax period from 25 February 2013 until the moment when the taxpayer pays the outstanding tax.

The period of delay can exceed six or seven years in a normal situation. This is determined by when and for how long the tax authority conducts the tax audit. As a rule, the tax inspector will start the tax inspection before three years have elapsed from the end of the tax year in question, and the inspection will be conducted for two to three years. The taxpayer then goes on to appeal against the assessment decision and only then, in most cases, does the payment of the tax due come into play.

The amount of interest on late payment, which is also linked to the development of the repo rate, has undergone only one parametric change since 2011, i.e. since the Tax Code came into force. From 2021 onwards, the amount of interest has been reduced from 14% to 8%.

Until recently, the tax administrator based its calculation of interest on late payment on the above assumptions, i.e. it determined the length of the delay and applied the appropriate interest percentage. As it turned out, however, for taxes whose original due date fell within the period until 31 December 2014, the tax administrator should have considered another parameter: the limitation of the maximum length of delay.

In its judgment under case No. 7 Afs 351/2019 in 2021, the Supreme Administrative Court dealt with whether the interest on late payment of taxes where the deadline for filing returns expired before the end of 2014 (e.g. income tax for 2013 and earlier, VAT for November 2014 and earlier) should be "capped" according to the then applicable law (Section 252 (2) of the Tax Code) at a maximum of five years. In doing so, the Court concluded that there was no legal reason why interest on late payment in respect of these taxes should not be subject to the limit in question.

As a minor historical note, it may be added that the same delay limit was also contained in the Tax Administration Act effective and in force until 31 December 2010 (the predecessor of the Tax Code).

It is almost surprising that the statutory "capping" of interest on late payment was not "discovered" until 2021. If the Supreme Administrative Court had not addressed this issue, it is likely that no one would have ever known about this limit, which was in force only until 31 December 2014 (the amendment of 1 January 2015 deleted this part of the Act).

Does the Supreme Administrative Court's conclusion have any positive impact for us, since these are such old tax periods? It may. There are still proceedings pending today on these taxes, albeit at the administrative court stage, for example. The period during which it is still possible to do something about the amount of interest is quite long (six years).

If you have been assessed tax by the tax administrator for one of the above-mentioned tax periods and the length of the delay was more than five years, there is still a real chance to reduce the resulting amount of interest, even by hundreds of thousands of crowns.