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CJEU: interest on retained excess VAT deduction not to equal REPO rate

The Court of Justice of the EU (CJEU) answered a prejudicial question concerning a Hungarian company claiming interest on a retained excess VAT deduction from its local tax administrators. The CJEU held that the calculation and amount of such interest should reflect the costs incurred by the taxpayer to secure the respective amount, for instance by borrowing it, for the time the excess deduction had been retained.

In this case, Sole-Mizo, a Hungarian company, claimed interest on an excess VAT deduction that had arisen under the Hungarian VAT Act, which was then held by the CJEU as contrary to the VAT Directive. Sole-Mizo requested the Hungarian tax administration pay default interest on the retained VAT deduction in the amount of twice the Hungarian central bank’s base rate.

The Hungarian tax administration only granted the request in part, and paid interest equal to the current REPO rate, stating that they had applied another provision of the law to the case. The CJEU held that it was contrary to EU law to calculate the interest on a retained excess VAT deduction using a rate equal to the given state’s central bank’s base rate, as it is the rate at which banking intuitions borrow funds in the market, and not available to common consumers in the market.

The CJEU also held that EU law precludes setting interest at the level that would not compensate the devaluation of money in time (inflation effect) for the period from the moment the entitlement to default interest on an excess deduction arose to the moment it was paid.