The national legal regulation of compensation for the withholding of an excessive VAT deduction during a tax audit does not comply with the requirements arising from European Union law

On July 21^st, 2025, the Supreme Administrative Court of the Slovak Republic, by judgment Case No. 2Sžfk/42/2020, overturned the dismissive judgment of the Regional Court in Bratislava (hereinafter referred to as the “administrative court”) and annulled the decisions of the financial administration authorities concerning the recognition of the claim for compensation for the withholding of an excessive value added tax deduction (also referred to as “interest on excessive deduction”) during a tax audit. The Court concluded that the current legislation of compensation for the withholding of an excessive deduction during a tax audit, as contained in § 79a(1) and (2) of the VAT Act, is inconsistent with EU law in terms of both the determination of the period for which compensation is granted and the amount of interest on the excessive deduction. The Court also established criteria for determining compensation for the withholding of an excessive deduction during a tax audit, based on EU law and the case law of the Court of Justice of the EU, which the financial administration authorities must respect and apply in future proceedings.

The financial administration authorities conducted a tax audit in a commercial company to verify the legitimacy of the claim for the refund of an excessive VAT deduction. The tax audit began in 2013 and was concluded on June 30, 2017. During the audit, the financial administration authorities withheld the payment of the claimed excessive VAT deduction for the tax period of July 2013, and this amount was only paid out after the audit was completed—in July 2017. Subsequently, the financial administration authorities acknowledged the company’s entitlement to compensation for the withholding of the excessive deduction pursuant to § 79a(1) and (2) of the VAT Act. The company considered the recognized entitlement, both in terms of the duration of the compensation and its amount, to be inconsistent with EU law and sought redress by filing an administrative lawsuit. The administrative court dismissed the lawsuit as unfounded.

According to the current legislation contained in § 79a(1) and (2) of the VAT Act, a taxable person is entitled to compensation for an excessive VAT deduction if the deduction was not paid due to a tax audit within six months from the last day of the deadline for its refund. The amount of compensation is set at twice the base interest rate of the European Central Bank (ECB); however, if this rate is lower than 1.5% per annum, a fixed annual interest rate of 1.5% is applied.

In the case at hand, the Supreme Administrative Court was required to address legal questions as to whether the national legislation governing compensation for the withholding of an excessive VAT deduction during a tax audit—specifically regarding the determination of the compensation period and the amount of interest—is compatible with EU law. Furthermore, the Court had to determine whether, in the event of such incompatibility, it is authorized to disregard the national legal provision and establish rules for calculating compensation in a manner consistent with EU law, as interpreted by the Court of Justice of the EU.

With regard to determining the period of withholding an excessive VAT deduction due to a tax audit, after which the taxable person is entitled to compensation, the Supreme Administrative Court conducted a detailed analysis of EU law and the related case law of the Court of Justice of the EU. It concluded that: (i) the deadline for refunding an excessive VAT deduction may, in principle, be extended for the purpose of conducting a tax audit; (ii) however, the extension of the withholding period for verifying the legitimacy of the deduction must be proportionate (a period of 180 days, or six months from the submission of the VAT return for the tax period in which the excessive deduction arose, can no longer be considered proportionate); and (iii) if the refund of the excessive deduction occurs after the expiry of a reasonable period, the principle of tax neutrality requires that the taxable person be compensated for the financial loss incurred due to not being able to dispose of the amount of the excessive VAT deduction during the period in which it was not refunded.

Therefore, the Supreme Administrative Court concluded that the provision of § 79a(2) of the VAT Act, which links the entitlement to compensation for the withholding of an excessive VAT deduction to the expiry of six months from the day following the end of the standard (60/61-day) refund period, is, in this respect, inconsistent with EU law. At the same time, the Court stated that, based on the case law of the Court of Justice of the EU, it is obliged to ensure the full effectiveness of EU law and, in this context, to disapply national provisions that conflict with it. Since no provision could be identified in national law that could be analogously applied (principle of equivalence) to determine the moment from which compensation for the withholding of an excessive deduction due to a tax audit should begin to accrue, the court itself established criteria for defining this moment.

The Supreme Administrative Court holds the view that the withholding of an excessive VAT deduction without compensation under § 79a of the VAT Act for the purpose of conducting a tax audit is consistent with the case law of the Court of Justice of the EU, provided that the period for refunding the excessive VAT deduction—after which the entitlement to compensation under § 79a arises—is not longer than four months from the deadline for submitting the VAT return for the tax period in which the excessive deduction could have been claimed pursuant to § 79(1) of the VAT Act. Specifically, this means a period of five months from the deadline for submitting the VAT return for the tax period in which the excessive deduction arose. The Court also emphasized that the assessment of the proportionality of the withholding period will always depend on the circumstances of the specific case (the procedure and findings of the tax authorities at the relevant time, the cooperation of the party to the proceedings, etc.), with the potential to adjust the duration of the withholding of the excessive VAT deduction without compensation under § 79a of the VAT Act during an ongoing tax audit.

Regarding the amount of compensation for the withholding of an excessive VAT deduction, the Supreme Administrative Court stated that it must meet all the criteria of effectiveness —it must represent compensation for the loss that a taxable person, who is not a credit institution, would incur if they had to borrow an amount equivalent to the withheld deduction. According to the case law of the Court of Justice of the EU, the determination of the amount of interest for the withheld excessive deduction must not result in the taxable person being deprived of adequate compensation for the loss caused by the refund of VAT not being made within a reasonable time.

The national legislation that fixes the amount of compensation to the base interest rate of the European Central Bank is rigid in this respect and may not meet the requirements arising from EU law. According to the opinion of the Supreme Administrative Court, the relevant interest rate for determining appropriate compensation is the rate applied to short-term loans provided to non-financial enterprises.

This means that the provision of § 79a(2) of the VAT Act is not automatically inconsistent with EU law. However, the financial administration authorities are obliged to calculate the interest according to national legislation and, at the same time, determine the applicable interest rate for short-term loans provided to non-financial enterprises during the relevant period. If this short-term loan rate significantly exceeds the interest rate on the excessive VAT deduction as determined under § 79a(2) of the VAT Act for the relevant period, such a situation becomes incompatible with European Union law, and the financial administration authorities may not apply the national provision. The Supreme Administrative Court added that EU law does not require absolute equality or precision in the amount of compensation. If the compensation interest is determined by national legislation as a flat-rate amount, it may, in specific cases, be higher or lower than the actual loss. However, it is essential that the set rate, even with minor deviations, covers the cost of borrowing.

If a conflict with EU law is identified, the financial administration authorities must not apply § 79a(2) of the VAT Act. Instead, they are required to calculate the compensation based on the applicable interest rate for short-term loans provided to non-financial enterprises during the relevant period. The penalty interest under § 79 of the Tax Procedure Code cannot be applied in such cases, not even by analogy, as it serves a different purpose.

After considering the relevant facts, the Supreme Administrative Court found that the differences between the compensation rate determined by the financial administration authorities for the company under § 79a(2) of the VAT Act (1.5% annual interest) and the interest rates on short-term loans provided by banks in the Slovak Republic to non-financial enterprises during the relevant period (1.80%, 2.22%, 2.05%, and 2.06%) were substantial. Therefore, due to its incompatibility with EU law, § 79a(2) of the VAT Act could not be applied to the case of the company.

In the further proceedings, it will therefore be the task of the financial administration authorities to follow the conclusions of the Supreme Administrative Court as defined in this case. The Supreme Administrative Court also drew the attention of the financial administration authorities to the fact that, according to the case law of the Court of Justice of the EU, if compensation for the withholding of an excessive VAT deduction is paid with a time delay (in cases addressed by the CJEU ranging from 5 to 11 years), such compensation must be subject to valorisation.

The Supreme Administrative Court emphasized that an effective solution in this situation – one that fulfills the requirement of legal certainty and predictability – is an amendment to the relevant provision of § 79a of the VAT Act, in line with the current case law of the Court of Justice of the EU. However, such a change lies solely in the hands of the legislator.

This decision was adopted unanimously by the panel of the Supreme Administrative Court, and no appeal is admissible against it.

The decision was made by Panel No. 8 of the Supreme Administrative Court, composed of: the President of the Panel JUDr. Anita Filová and the Judges Mgr. Kristína Babiaková and JUDr. Rastislav Dlugoš, PhD.