Taxpayers entitled to interest on interest
The possibility of charging interest on outstanding interest in tax disputes was subject to several conditions formulated mainly in the Supreme Administrative Court's judgment in the ERAMENT Trading case. However, the recent Constitutional Court’s judgement No. III. ÚS 3082/23 has brought a jurisprudential turnaround. The judgement challenges the recent decision-making practice of the Supreme Administrative Court and supports the conclusions of its previous case law, which were favourable for taxpayers. Thanks to the Constitutional Court’s judgement, the Supreme Administrative Court changed its approach to interest on late interest and opened the way for taxpayers to obtain compensation for the tax administrator's delay.
The issue of interest on interest has undergone considerable development. Significant in this respect was a 2017 judgment (No. 2 Afs 148/2017) in which the Supreme Administrative Court (SAC) admitted that in the event of late payment of interest, second interest shall separate (“crystallise”) and form a separate principal which the tax authorities are obliged to credit to the taxpayer's tax account. However, by a subsequent judgement, the SAC limited this possibility to cases where the tax administrator had acted unlawfully from the outset (No. 9 Afs 52/2021). This followed from the analogous application of the Civil Code allowing the charging of interest on interest arising from unlawful conduct. Thus, according to the SAC, secondary interest could not possibly arise in a lawful examination of VAT deductions.
In its judgement, the Constitutional Court dealt with a situation where a taxpayer was awarded interest on interest, but only for the part of the delay after 2014. The tax administrator refused to award any interest on late payment interest arising before 1 January 2014 because the Civil Code was not yet in force then. This was subsequently confirmed by the administrative courts to which the taxpayer turned.
The Constitutional Court did not agree with these conclusions. The Constitutional Court compared the individual arguments of the SAC’s judgments and concluded that the SAC had not sufficiently dealt with the objection of the original idea of “crystallised interest”, which did not require any analogy with the Civil Code. The Constitutional Court also referred to the earlier conclusions of the SAC according to which charging interest on interest vis-à-vis taxpayers is not prohibited by the Tax Procedure Code, which further weakens the argumentation by the prohibition of interest-on-interest principle. Finally, the Constitutional Court also rejected the SAC’s view that the taxpayer should have claimed the interest from the state via an action for damage compensations. On these grounds, the Constitutional Court vacated the judgments in the taxpayer's case.
The good news is that the Supreme Administrative Court quickly familiarised itself with the Constitutional Court’s opinion and changed its decision-making practice accordingly. This is confirmed by recent judgments in our clients’ cases, where the SAC disagreed with the reasoning of the tax administrator who had based the rejection of the interest on interest on the prohibition of interest-on-interest principle and on the SAC's earlier case law. Thanks to these judgements, the tax administration has now confirmed that they will change their practice and will award interest on interest to taxpayers in similar cases. Please note, however, that the draft amendment to the Tax Procedure Code approved by the government, reported on here, will likely exclude the possibility of interest on interest in the future.