This article is dedicated to a legal opinion expressed by the case law of the Supreme Administrative Court regarding the question if entitlement on interest from unjustified action of the tax administrator under the stipulation of article 254 of act no. 280/2009 Coll., Code of Tax Procedure, in the version effective until 31 December 2020 (hereinafter the “Code of Tax Procedure”) incurs on the amount of the principal, which is itself an interest.

Treatment in the Code of Tax Procedure

According to the stipulation of article 254 of the Code of Tax Procedure: “If a decision on assessing tax is cancelled, changed or its nullity is declared due to its illegality or due to incorrect administrative practice of the tax administrator, the taxpayer is entitled to interest on the amount, which was paid by the taxpayer based on this decision or in connection to this decision, which corresponds annually to the amount of the repo rate set by the Czech National Bank, raised by 14 percentage points, applicable for the first day of the respective calendar half-year, from the day following the due date of the incorrectly assessed tax, or if payment of incorrectly assessed tax occurred later, from the day of its payment.”

Conclusion of previous case law

In a judgment from 14 December 2017 file no. 2 Afs 148/2017-3, the Supreme Administrative Court concluded that formation of entitlement to “interest on interest” is possible. In the given matter, first the adjustment notices prescribing the payment of a penalty for the plaintiff were cancelled by court and the paid amount became a returnable overpayment. The plaintiff subsequently asked the tax administrator for payment of interest under article 254 of the Code of Tax Procedure from the amount of paid penalty. The interest was not granted to him at first, and only after submitting an appeal did the plaintiff partly succeed and the interest was assigned to the plaintiff by the tax administrator to his personal tax account. The object of the dispute before the Supreme Administrative Court was the entitlement of the plaintiff to the granting of a second interest on unjustified action of the tax administrator, from the amount of this (first) interest. The Supreme Administrative Court first dealt in detail with the fulfilment of the conditions under the stipulation of article 254 paragraph 1 of the Code of Tax Procedure, based on which he concluded that there is no doubt that in the assessed case, the tax administrator unjustifiably delayed the payment of the first interest by nine months. According to the Supreme Administrative Court, though, the taxpayer must then be entitled to the (second) interest, which, to a certain extent, is a flat-rate compensation of the damage the taxpayer incurred due to the delay of the tax administrator, the granting of interest under article 254 of the Code of Tax Procedure has its undisputable economic purpose: to compensate to the taxpayer “the price of the money” that he was not able to dispose of.

Confirming opinion from a recent judgment

This opinion of the Supreme Administrative Court was confirmed by a recent judgment from 6 May 2021 file no. 10 Afs 382/2020-51, in which a similar question was discussed, if the amount, which incurred as an interest on unjustified action of the tax administrator under article 254 of the Code of Tax Procedure, if the tax administrator did not assign it to the personal tax account in time (see the stipulation of article 254 paragraph 3 of the Code of Tax Procedure), need to be subject to interest again as a “newly formed principal”. In the given matter, the plaintiff argued using the above-mentioned judgment of the Supreme Administrative Court file no. 2 Afs 148/2017-36, nevertheless the regional court rejected his compliant and did not follow the mentioned case law of the Supreme Administrative Court, stating that it is a deviation from the generally accepted ban on interest on interests in the tax law. The Supreme Administrative Court did not identify with the opinion of the regional court, though, and on the contrary, it confirmed the conclusions of judgment file no. 2 Afs 148/2017-36 and cancelled the judgment of the regional court. In Judgment file no. 10 Afs 382/2020-51, the Supreme Administrative Court reached a clear legal opinion: “If the tax administrator, in contradiction with the law, delays assignment of interest on unjustified action under article 254 paragraph 1 of act no. 280/2009 Coll., Code of Tax Procedure, in the version effective until 31 December 2020, i.e. if he does not assign this interest to the personal tax account of the taxpayer within 15 days (article 254 paragraph 3 of this act), he will burden the tax proceeding with another unjustified action. As a result of this, the taxpayer is also entitled to further interest under article 254 paragraph 1 of the same act, on the amount of the original interest according to this stipulation, which the tax administrator did not assign duly and timely, while he should have done so.”

Conclusion: entitlement to interest from interest incurs

Based on the mentioned case law of the Supreme Administrative Court, it may therefore be deemed that entitlement to interest on interest under the stipulation of article 254 of the Code of Tax Procedure incurs for the taxpayer. It is, nevertheless, necessary to reckon with the fact that the Supreme Administrative Court made an interpretation of the stipulation of article 254 of the Code of Tax Procedure effective until 31 December 2020.

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