Minimising penalties: how to claim a default interest waiver?

The basis for calculating default interest is the current income tax payable or a refund arising as a result of an unlawful tax deduction. The interest itself arises on the fourth day after the date on which the tax was originally due or the date on which a refund arising from an unlawful tax deduction was to be refunded. Taxpayers may claim a reduction of interest through a detailed review of the tax administrator’s calculation, an application for tax deferment, the payment of a tax liability before its substitute due date, or through an application for the waiver of interest, which will be discussed below.

How to apply for a waiver?

According to the Tax Procedure Code, it is possible to apply for a waiver of default interest even if it has already been paid to the tax authority. Applications to waive tax-related charges and interest, through which taxpayers may apply for the waiver of default interest, have no prescribed structure. If the taxpayer applies for a waiver of the amount higher than CZK 3,000, they must pay an administrative fee of CZK 1,000 for each tax to which the application relates. Before filing the application, taxpayers must pay the tax the payment of which was defaulted and resulted in the origination of default interest.

When can default interest not be waived by the tax authority?

Just as for waivers of interest or penalty, the approach to waiving default interest is defined in GFD Instruction D-47, according to which default interest cannot be waived if the taxpayer has seriously violated tax or accounting regulations during the last three years. This may involve, e.g., taxpayers who are unreliable payers, taxpayers who were found guilty by final judgement of having committed some tax crime, or taxpayers who violated their duties in a manner deserving an additional assessment of tax according to whatever information and materials are available.

Violations of duties are assessed at the level of both legal entities and their statutory bodies.

To what extent may the tax authority waive default interest?

When assessing the extent to which default interest may be waived, the tax authority examines the following three criteria: i) justifiable reasons for default, ii) taxpayer’s economic and social conditions, iii) frequency of tax duty breaches.

The basis for calculating the specific amount to be waived, ranging from 20% to 100%, is determined based on a percentage assigned to a specific justifiable ground. Relevant justifiable grounds include, e.g., payment of outstanding tax under a different variable symbol, the taxpayer suffering as a result of a natural disaster, or tax payment default of 15 calendar days or less from the date the tax was originally due. The tax authority may also consider other circumstances not specified in the above instruction to be justifiable grounds. 

The tax authority subsequently considers whether the severity of the interest charged corresponds with the taxpayer’s economic and social background. For legal entities, it evaluates whether any criteria for tax payment deferment have been met, for example, if prompt payment would result in serious damage for the taxpayer or in the cessation of the taxpayer’s business activities. If any such reason exists, the percentage determined during the previous phase is increased. Finally, the tax authority evaluates the frequency of tax administration duty violations. If such specific criteria are met, then default interest amount to be waived is decreased. These involve situations when, e.g., the tax authority reports tax arrears in respect of the taxpayer or when at least two penalties for the late filing of tax assertions were imposed on the taxpayer over the last three years. Continuous and proper fulfilment of one’s tax duties thus helps maximise any reductions of default interest.