In the tax periods of 2013 and 2014, many international companies faced significant challenges as tax authorities withheld large VAT refunds in the Czech Republic. They initiated the tax audits and controls over routine transactions and withheld funds for up to two years before completing audits and returning the money. Sometimes the withheld amounts were significant even for major multinational clients. This extended withholding often pushed companies towards financial distress, prompting them to seek compensation.

Development of Czech law
Initially, Czech legislation provided no compensation for these prolonged withholdings. However, many litigations followed as companies protested that if they owed money to the tax authorities, they would have to pay interest. Eventually, the Supreme administrative court acknowledged this argument and subjected the withheld deductions to an interest.

Groundbreaking Court Decision: Interest on Interest
Many court cases followed, during which the basis for calculating interest on the originally withheld funds by the tax authority continued to grow. The situation evolved dramatically in mid-2024 when a groundbreaking decision by the Constitutional Court finally acknowledged the concept of “interest on interest” in tax law. This significantly broadened the scope for claiming interest on withheld VAT deductions and opened the possibility to claim additional levels of interest – “second” and even “third” interest. The Constitutional Court confirmed that the interest, which was disputed and subsequently had to be repaid by the tax authority, “crystallized” into a new principal on the day of repayment, for which the subjects are entitled to compensation in the form of additional interest.

What does it mean for you

This is a specific issue within the Czech Republic, and here at PwC CZ, successfully helped to recover additional amount in interest on interest, originating from unjustified withholding of VAT deductions by the tax authorities. In case you faced this situation you should be exploring this opportunity for claiming additional compensation

For further details please contact : Michaela Vrana; Email: michaela.vrana@pwc.com

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