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Interest on retained VAT deduction: SAC verdict closes another chapter

In its recent judgment, the Supreme Administrative Court (SAC) has ruled that the statutory rate of interest on retained VAT deductions for the 2017 to 2020 period was in line with EU law. This dashed the hopes of many taxpayers who following a series of favourable decisions in this area believed they would receive a rate equal to the CNB repo rate increased by 14 percentage points, not just two points, also for the period from 2017 to 2020.

History of interest on retained deduction

The rate of interest on a withheld tax deduction appeared in the Tax Procedure Code only in 2015, after the Supreme Administrative Court (SAC) found in the Kordárna case (7 Aps 3/2013) that its absence was contrary to EU law. The SAC filled the legislative gap by awarding interest on refundable overpayment of 14% + CNB repo rate.

The legislator responded to the threat of lawsuits and high costs for the state treasury by introducing interest to the Tax Procedure Code in 2015: however, not at the rate corresponding to the Kordárna judgment, but at 1% + the CNB repo rate, i. e., lower by 13 percentage points. For taxpayers whose deductions the tax authorities were withholding, this was not sufficient. The assessment of this was yet again up to the Supreme Administrative Court, which held in the EP Energy Trading (1 Afs 445/2019-47) case that this regulation was not compatible with EU law: the new rate was too low to compensate the taxpayer for the costs they would have to incur for a loan to cover the loss of cash flow. Instead of that rate, the SAC again awarded the interest rate on the refundable overpayment at 14% + the CNB repo rate.

In response to case law and numerous public comments, the legislators increased the interest rate to 2% + repo rate as of 1 July 2017. This rate remained in effect until 1 January 2021 when it was changed for the third time. Currently, the interest rate is set at one-half of the default interest rate, i.e., half of 8% + the CNB repo rate.

The last piece of the puzzle?

Many taxpayers did not consider the interest rate of 2% + CNB repo rate applied in the period from

1 July 2017 to the end of 2020 correct and took the tax administration to court. One of these disputes has recently appeared before the Supreme Administrative Court (No. 8 Afs 274/2022). The taxpayer claimed that the interest rate did not cover the costs they would have had to incur for a loan equal to the non-refunded VAT deduction The tax administrator disagreed with this view and, after losing before the Regional Court in Brno, turned to the SAC.

In the case under review, the SAC concluded that the interest rate corresponding to 2% + the CNB repo rate was sufficient in the period between 2017 and 2020 to cover the interest expense for a loan the taxpayer would have to take out. The court compared interest rates on loans to non-financial entities with the statutory interest rate and concluded that they did not differ significantly. The resulting rate followed the development of interest rates on loans, and was also close to the rates on overdrafts, revolving loans, and credit cards. The SAC also concluded that, although the difference between the original rate increased by 1% and the new rate increased by 2% may seem relatively small, the low CNB repo rate meant that the statutory interest rate in the period from January 2015 to June 2017 of 1.05% did not reach the level of interest rates on loans (then averaging 2-2.5%); on the contrary,  the statutory interest rate of 2% + repo matched the interest rates on loans in the period from July 2017 to December 2020.

The SAC also compared the interest on the withheld deductions with other types of interest in the Tax Procedure Code. The SAC, nevertheless, concluded that other types of interest differed from the interest on a withheld deduction, primarily by their penalty component; in the end, the court did not find a similarity even with interest on deferred amount of tax, where the penalty component is insignificant, mainly because of their different objectives: while the aim of interest on (withheld) deduction is to compensate damage, there is no such intention of interest on deferred tax. Therefore, the SAC concluded that the rate chosen by the legislators in 2017 was in order.