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Courts clarify conditions for awarding interest on tax administrator’s wrongful conduct

Winning a dispute with the tax authority may be compensated by interest awarded on the grounds of the tax administrator’s unlawful conduct. Its amount equals the Czech National Bank’s repo rate plus 14 percentage points, which means that it currently amounts to 15.5% per year; in some cases, the amount may even double. Although the interest should be awarded by the tax administrator automatically, in practice, this is not always the case due to various interpretation ambiguities.

The entitlement to interest on unlawful conduct by a tax administrator is subject to meeting two conditions:

  • The decision on assessing the tax must have been reversed or changed due to its unlawfulness or an incorrect procedure.
  • The wrongfully assessed tax must have been due and paid.

Under the current decision-making practice, to meet the first condition, it is not relevant in what particular tax proceeding the tax administrator acted unlawfully. In practice, this condition is most often met when the decision of a tax administration body is reversed by a court.

As to the second precondition, however, some uncertainties prevail. These were addressed by the Supreme Administrative Court (SAC) in ruling 9 Afs 192/2017. The SAC confirmed that although an appeal does not formally have the effect of suspending the legal force of the appealed tax decision, the tax only becomes due on the effective date of the notice on tax assessment – meaning after the appellate procedure ends. In terms of tax payment, the situation is essentially as though filing an appeal did in fact have a suspending effect. When the additionally assessed tax is paid before its due date, interest on the tax administrator’s unlawful conduct cannot be awarded for the period from the actual payment of the tax to its due date, as one of the conditions for the entitlement has not been met. On the other hand, by paying the tax early, the taxpayer prevents interest on late payment being charged should they lose the dispute.

According to SAC case law (8 Afs 85/2018) the conditions giving rise to entitlement to interest on the tax administrator’s unlawful act are also met in more complex situations, involving the concurrence of regularly and additionally filed tax returns. This applies if, e.g., a taxpayer pays tax based on a regular tax return but then files an additional tax return for lower tax. The tax administrator then wrongfully refuses to accept the additional tax return and insists on the original tax amount. In the case in question, the tax had been reduced in line with the additional tax return only after a court interfered. Since the tax (as assessed based on the original tax return) had been paid and remained so over the entire time of the dispute, the court awarded the interest on the tax administrator’s unlawful act.

The rules regulating interest that a taxpayer may be entitled to are rather complex. It is necessary to distinguish carefully between various interest types, such as interest on the tax administrator’s unlawful conduct, interest on retained deductions, etc. To conclude, undoubtedly positive is that in this area as well in others, tax administrators should interpret taxpayers’ filings according to their actual content, and not dismiss them solely because they quote an inappropriate law provision.