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As part of the measures to combat the economic impact of the coronavirus crisis, the rate of both tax interest and collection interest has been temporarily set at 0,01% (on an annual basis)[1] set[2]. This temporary reduction in rates applies (for the time being):
- with regard to tax interest: up to and including 30 September 2020;
- with regard to recovery interest: up to and including 31 December 2021.
This note deals solely with the tax and collection interest payable to the government. After all, the nature of the schemes is such that the government will only reimburse interest in exceptional circumstances.
This note focuses on income tax and corporation tax. However, tax and/or collection interest may also be payable in respect of other taxes.
Tariff reduction
The measure takes the form of a rate reduction. As a result, it applies to all tax assessments on which tax and/or collection interest is calculated (including assessments relating to tax years prior to 2019).
Before the temporary rate reduction, the rate (on an annual basis) for the:
- recovery interest: 4%;
- tax interest: 4% (for the purposes of corporation tax: 8%).
With effect from 1 October 2020, the tax interest rate will return to 4%. This also applies to corporation tax (the rate of 8% will not be reinstated – for the time being).
Given that these interest rates are generally perceived as very high, it is vital to ensure that no unnecessary (and unexpected) tax or collection interest is payable.
It is of great importance that the reduction in the interest rate is temporary. Tax interest on tax liabilities arising during the coronavirus crisis will also be calculated again after 30 September 2020 on the basis of the rates and interest periods mentioned above (on the understanding that, for the time being, the rate for corporation tax is not set at 8%, but at 4%).
Tax interest can be avoided by submitting a correct and complete tax return on time (the return must then be received by the Tax and Customs Administration before 1 May).
Or by requesting the Tax and Customs Administration in good time to issue a (further) provisional assessment (such that this assessment is dated before the interest period begins)[3]).
Late payment interest can, of course, be avoided by paying the tax due within the payment deadline.
Entrance
The tariff reduction has come into effect:
- for recovery interest: 23 March 2020;
- for tax interest: 1 June 2020, except in the context of income tax, for which the rate reduction takes effect on 1 July 2020.
Interest on arrears
Collection interest is payable where tax is paid late. The period for which collection interest is charged therefore begins on the first day following the expiry of the payment deadline. The payment deadline is stated on the tax assessment notice.
Interest on arrears is (naturally) not shown on the tax assessment notice, but is determined by the tax authority by means of a separate decision.
Even when the Tax and Customs Administration grants a deferral of payment, collection interest is charged. In a number of specific situations, it is possible to obtain a deferral of payment without interest.
Tax interest
Tax interest is payable where tax is due under a tax assessment. The tax interest is included in the assessment and shown separately on the tax assessment notice.
The period for the calculation of tax interest begins:
- for income tax purposes: six months after the end of the tax year;
- for corporation tax purposes: six months after the end of the financial year.
The interest period for tax interest ends on the last day of the payment period specified in the tax assessment (PLEASE NOTE: the interest period therefore does not end on the date the tax assessment is issued, even if payment is made within the payment period, but generally 2 to 6 weeks thereafter).
Example
If the 2019 income tax assessment is issued with an issue date of 1 November 2020, the six-week payment period ends on 14 December 2020.
Tax interest is calculated from 1 July 2020 to 14 December 2020 inclusive.
The amount due for the period from 1 July 2020 to 30 September 2020 inclusive is: 0.01%.
The amount due for the period from 1 October 2020 to 14 December 2020 inclusive is: 4%.
If and to the extent that the tax assessment has not been paid by 14 December 2020, the interest period for collection interest (rate: 0.01%) will commence on 15 December 2020. This period ends on the day of payment.
Payment discount
The rate of collection interest is also relevant to the calculation of the payment discount, which the Tax and Customs Administration grants when a provisional assessment issued during the tax year is paid in full within the first payment deadline.
The temporary reduction in the rate of recovery interest means that a lower payment discount is calculated (for provisional assessments for 2021, the payment discount is generally only €1).
The payment discount is to be abolished for the purposes of corporation tax. This was due to come into effect on 1 January 2021, but this date has been postponed due to IT problems at the Tax and Customs Administration. The new effective date has not yet been announced.
The purpose of this note is to outline a scheme. For the sake of readability, matters have therefore been simplified. VWG is therefore not liable for the consequences of actions taken or not taken as a result of this memorandum.
[1] As it is not technically possible to set the interest rate to 0%, the rate has been set as low as possible: 0.01% (on an annual basis).
[2] This reduction in rates has been formalised in the COVID-19 Emergency Measures Act (35 457).
[3] For income tax and corporation tax assessments, the interest period begins six months after the end of the tax year.