Interest on retained excess VAT deductions: SAC clarifies practice
In its current judgment, the Supreme Administrative Court (SAC) revisited the topic of interest on retained excess VAT deductions. This time, the court declared unlawful the practice whereby as of 1 July 2017 the tax administrator reduced the interest rate during the interest period of a long-term retained VAT deduction. Taxpayers are entitled to interest at a rate twelve percentage points higher than the one applied by the tax administrator.
Until 2015, Czech laws did not explicitly regulate interest on retained excess deductions: it was only inferred by the SAC case law, which, in view of the requirements of the EU VAT Directive, granted taxpayers the right to interest at the repo rate plus fourteen percentage points. Subsequently, a legal amendment introduced interest on the deductions in the amount of the repo rate plus one percent. In 2020, the SAC held that this level of interest was contrary to EU rules and declared it inapplicable; the fixed part of the interest rate was to remain at fourteen percent, as before 2015. However, even before this judgment, in response to the development of EU case law, Czech legislators from 1 July 2017 also increased the interest rate to the CNB's repo rate plus two percentage points. According to the transitional provisions, the new rate was to apply only to the interest on deductions based on tax returns filed after the amendment.
Practice: confusion about the rate
The financial administration’s practice also responded to the developments. When deciding on interest on retained VAT deductions, it started awarding interest at the repo rate plus fourteen percentage points for the period from 1 January 2015 to 30 June 2017, but then lowered the interest rate to the repo rate plus 2 percent from 1 July 2017. Thus, for the part of the interest period after 1 July 2017, the financial administration granted taxpayers interest rate twelve percent lower than in previous years. The correctness of this financial administration’s approach was dealt with by the SAC in the current judgment No. 1 Afs 80/2021.
SAC: one interest rate shall apply for the entire period of interest
According to the SAC's judgment, the tax authorities’ approach had no basis in the law, as it is not possible to start applying new regulations without explicit support in the law. Thus, according to the SAC, the retained excess deduction must bear interest at the original interest rate throughout the entire interest period. The first regulation being partly contrary to EU law the court considered irrelevant. Taxpayers are thus entitled to interest calculated using the CNB's repo rate increased by fourteen percentage points for the entire period of interest, as the SAC already inferred in its previous case law, even in the period after 1 July 2017.
We believe that this court decision will help many companies recover interest on money from retained VAT deductions they could not use for many years. However, the story of interest on deductions does not end with this judgment: the SAC has not yet assessed the compliance with EU legislation and CJEU case law of the interest rate after 1 July 2017 (CNB repo rate plus two percentage points). We have yet to wait for the final verdict on this chapter.