Legislative developments and current situation

With effect from 1 January 2021, we welcomed the amendment to Act No. 280/2009 Coll., the Tax Code, which reduced interest on late payment of tax arrears. 

Until the end of 2020, the following applied: “The tax subject shall be obliged to pay late-payment interest for each day of delay, starting from the fifth working day following the due date up to and including the day of payment. The amount of the late payment interest corresponds annually to the repo rate set by the Czech National Bank, increased by 14 percentage points, and is due on the first day of the respective calendar half-year.”

With effect from 1 January 2021, the amount of late-payment interest has been aligned with civil law, i.e. the CNB repo rate increased by 8%, with late-payment interest accruing from the fourth day following the original due date. 

The method of calculating late-payment interest has not changed, i.e. the construction of the interest rate implies that its amount changes every calendar half-year depending on the repo rate, not only with respect to the due date of a particular tax, but also in the course of the delay in payment of one tax underpayment, which is confirmed by the instruction of the Ministry of Finance (MF-18). It is in this method of calculation that late-payment interest under the Tax Code differs from late-payment interest under the Civil Code, where the rate is determined by the date, on which the delay occurred.

In the case of late payment of tax due by the end of 2020, interest on late payment according to the old legislation will apply only until 31 December 2020, i.e. until the day preceding the effective date of the amendment, and from 1 January 2021 the amount of such interest will be governed by the new legislation until the date of payment of the respective tax.

However, the significantly increasing repo rate of the CNB, which now stands at 7% per annum, means that the late-payment interest rate from 1 July 2022 is currently 15%. From 1 January 2022 to 30 June 2022, the rate reached 11.75%. 

Example of calculation of late-payment interest

The payment of the additional income tax for the taxable period of 2019 (the original due date is 1 July 2020) is not be made until 30 September 2022. Late-payment interest will be calculated at the following interest rate: 

Until 31 December 2020 – 14.25% – tolerance 4 working days, then: repo rate of the CNB 0.25 + 14%.

From 1 January 2021 to 30 June 2021 – 8.25% (in compliance with transitional provisions, the new rate will apply from 1 January 2021 regardless of the original due date of the interest-bearing tax) – CNB repo rate 0.25 + 8%.

From 1 July 2021 to 31 December 2021 – 8.5% – CNB repo rate 0.5 + 8%.

From 1 January 2022 to 30 June 2022 – 11.75% – CNB repo rate 3.75% + 8%.

From 1 July 2022 until the date of payment – 15% – CNB repo rate 7 + 8%.

What can be done about it?

The above example shows how, despite the reduction in the fixed interest rate, the amount of late-payment interest rises steeply. The rate of late-payment interest currently exceeds the rate before the amendment, despite the reduction of its fixed part. It is therefore necessary to take care to pay tax on time and, if necessary, to use the legal possibilities to reduce the interest on late payment.
Such a possibility is brought for example by: 

• The request for remission of interest on late payment, for which it is necessary to take into account Guideline D-47 of the General Financial Directorate on the remission of tax accessories, which regulates examples of when and in what percentage interest on late payment can be waived. 
• However, allowing the underpayment to be deferred or paid in instalments, where half the CNB repo rate is applied, must take into account that the legal grounds for postponing the tax must be proven. 
• It may also be considered if, even in a situation, when the taxpayer disagrees with the assessment and lodges an appeal, the tax assessed should not be paid before the substitute due date expires. However, on the other hand, it must be taken into account that if there are other due underpayments, the payment will be used to settle them and, if successful on appeal, the taxpayer will not be entitled to interest on the incorrectly assessed tax as it will be a “voluntary” payment.

If you are currently dealing with late-payment interest, please do not hesitate to contact us, we will be happy to help you.

Author: Jaroslava Půtová