In its recent judgment No. 8 Afs 274/2022-48 of 25 April 2024 in the case ČERNOHORSKÁ DEVELOPERSKÁ, the Supreme Administrative Court (SAC) ruled that the statutory rate of interest on the tax deduction corresponding to 2% + the CNB repo rate was in accordance with European law.

Development of legislation and case law

• The Tax Code did not originally treat the interest on tax deductions.
• In its judgment in the case Kordárna[1], the SAC found that its absence in the law to be in conflict with EU law and filled the gap in the law with interest on the refundable overpayment in the amount of 14% + CNB repo rate.
• Although the tax administration initially firmly rejected the legal opinion of the SAC expressed in this judgment, following subsequent case law of regional courts and the SAC[2] it was forced to reconsider its opinion and accept the case law.
• Interest on the tax deduction was introduced into the Tax Code with effect from 1 January 2015 (Section 254a).[3]
• In the period from 1 January 2015 to 30 June 2017, the interest rate was 1% + CNB repo rate. This legislation was again dealt with by the SAC, which in its judgment in the EP Energy Trading case[4] found that this legislation was also not compatible with EU law. The Court of Justice of the EU requires that the rate of interest corresponds to the interest that the taxpayer would have to pay in order to borrow the same amount. The interest rate of the CNB repo rate + 1% was thus insufficient at first sight; instead of this rate, the SAC again awarded interest on the refundable overpayment at 14% + the CNB repo rate.
• In response to the case law of the Supreme Administrative Court, the interest rate was increased to 2% + repo rate with effect from 1 July 2017.
• This rate was valid until the end of 2020, when, with effect from 1 January 2021[5], the mechanism for calculating interest was changed, which is currently set at half the late payment interest, i.e. half of 8% + the CNB repo rate.

Factual circumstances

The plaintiff reported an over-deduction of CZK 185,201 in the regular VAT return for January 2018. The tax office carried out a tax audit and assessed the excessive deduction in the amount reported by the plaintiff. Subsequently, the plaintiff was awarded interest on the tax deduction under section 254a of the Tax Code in the amount of CZK 13,271, against which the plaintiff appealed. The plaintiff argued that this rate did not cover the costs she would have had to incur for a loan corresponding to the unrecovered VAT deduction.

In the judgment in question, the SAC considered the amount of interest applicable for the period from 1 July 2017 to 31 December 2020, corresponding to 2% + CNB repo rate, and found that the amount of interest complied with EU law.

The SAC used the CNB public database ARAD with aggregated financial market data and compared the rates of loans granted to non-financial entities with the statutory interest rate. The resulting rate followed the trend of rates on “ordinary” business loans and was also close to the rates on overdrafts, revolving loan facilities and credit card receivables, which the SAC considered relevant, as these are the types of loan products that businesses can use to bridge cash flow problems caused by withholding excessive deductions.

The SAC stated that EU law does not require complete precision in the amount of interest determined, as the interest determined is lump-sum and may therefore be higher or lower than the actual loss in specific cases. The important thing is that the set rate covers the cost of the loan in principle (subject to some minor variations). From this perspective, the statutory interest rate of the repo rate + 2% therefore meets the requirements of efficiency and tax neutrality.

In relation to the interest rate of 1% + the CNB repo rate (from 1 January 2015 to 30 June 2017), which was found by the court to be inadequate, it stated that although the difference between the original rate increased by 1% and the new rate increased by 2% may seem relatively small, the low value of the CNB repo rate meant that the rate (1.05%) fell short of the rates on the loans (2 to 2.5%). Conversely, interest rates on loans between 1 July 2017 and 31 December 2020 were at the statutory rate of 2% + repo.

The SAC also considered other types of interest in the Tax Code, but did not find them similar. It differs from tax deduction interest primarily by the penalty component and a different objective. In the case of interest on the deduction, the aim is to lump the damages together. 

Therefore, the SAC concluded that the rate chosen by the legislator for the period from 1 July 2017 to 31 December 2020, corresponding to 2% + the CNB repo rate, was sufficient.

[1] of 25 September 2014, Case No 7 Aps 3/2013-34

[2] At least 19 judgments affirming the judgment of the Court of Chancery, for example::

• Judgment of the Supreme Administrative Court of 6 October 2016, No 9 Afs 225/2015-72 in the HAMAGA case
• Judgment of the Supreme Administrative Court of 12 January 2017, No. 4 Afs 206/2016-32 in the PCV Computer case
• Judgment of the Supreme Administrative Court of 28 February 2017, No 2 Afs 15/2017-23 in the ALLIED GROCERS case
• Judgment of the Supreme Administrative Court of 16 August 2017, No 3 Afs 227/2016-41 in the ARMEX GLOBAL case

[3] by amendment to the Tax Code by Act No. 267/2014 Coll. effective from 1 January 2015

[4] of 16 July 2020, No. 1 Afs 445/2019-47, No. 4055/2020 Coll.

[5] by amendment to the Tax Code by Act No. 283/2020 Coll. effective from 1 January 2021