Defense against a disproportionate penalty related to subsidies

What is a Breach of Budgetary Discipline and How It Becomes a Threat

Doing business in the Czech Republic is becoming increasingly complex without subsidies. Whether you are drawing funds for the development of social services, investments in modernization, or employment support, there are almost always subsidies that can support your project. The problem arises when an on-site inspection or audit reveals that you have reported something incorrectly, missed a deadline, or spent the money differently than how the call for proposals was formulated.

The situation then gradually becomes more complicated. First comes an inspection report, which establishes a breach of budgetary discipline. In a legal sense, this is a failure to comply with an obligation set by law (especially Act No. 218/2000 Coll., on Budgetary Rules), by a decision to grant a subsidy, or by a contract. Typically, this involves the unauthorized use of funds, the withholding of money that should have been returned, or the failure to comply with one of the conditions.

An important thing that every subsidy recipient must understand is that a breach of budgetary discipline is not a matter that can be resolved by an informal agreement. As soon as a suspicion of a breach arises, a chain of legal processes is triggered that can lead to a court dispute. In practice, however, there is often room for argumentation, especially in the case of less serious breaches.

How the Matter Reaches the Tax Office and What It Means for You

Over time, a specific breach is identified during the inspection. The inspecting officer (from either the provider or the Tax Office) will draw up an inspection report (or a tax audit report), which contains a description of what is wrong. At this point, you have the right to file objections or a statement – a formal written document in which you defend yourself against the findings.

This is an absolutely critical moment. High-quality and legally substantiated responses can resolve the matter or at least mitigate it from the outset. The problem is that many businesses are unaware of this and let the procedural deadlines pass without an adequate response.

If the matter is referred to the Tax Office (or if the inspection is carried out directly by it), this office is authorized to assess a levy for the breach of budgetary discipline and a penalty for the delay in payment of the levy. The levy is effectively an obligation to return the subsidy (or part of it). The penalty can grow to up to 100% of the levy itself. For subsidies from the state budget, since 2022 the penalty has been calculated as the default interest rate under the Civil Code (CNB repo rate + 8%), which currently represents approximately 15% p.a.

Table of Risks and Defence Options

In the following table, you can see the specific risks you face in the event of a breach of budgetary discipline and what legal services ARROWS law firm can provide:

Phase 1: Proceedings with the Provider, Inspection, and Filing Objections

Once the inspection is complete, you will receive an inspection report (if it is a public administration inspection) or a tax audit report (if the Tax Office is conducting the inspection). The document details all the findings. Now, the law gives you the right to respond. You have a deadline to submit written and reasoned objections or a statement. This is your first and most critical line of defence.

Good objections are not just "I disagree." They must contain specific legal and factual arguments: that the inspecting officer erred in interpreting a legal regulation or the subsidy conditions, that the finding is not supported by evidence, or that procedural defects occurred. In this phase, the ARROWS legal team reviews the reports and prepares well-founded objections that have a real chance of overturning the findings even before a payment assessment is issued.

Phase 2: Tax Proceedings before the Tax Office and Appeal

If a breach is found, the Tax Office will issue a payment assessment for a levy for the breach of budgetary discipline. This process is governed by the Tax Code (Act No. 280/2009 Coll.), which is highly formal.

You have the right to file an appeal against the payment assessment within 30 days of its delivery. ATTENTION: The appeal is filed with the Tax Office that issued the decision, but it is decided by the superior body – the Appellate Financial Directorate (AFD).

In the case of a levy assessment, an appeal has a suspensive effect only in certain specific cases. It is crucial that in the appeal, you state all the reasons why you consider the decision to be unlawful or incorrect.

Here, the principle of proportionality (reasonableness) is key. The tax administrator must consider the severity of the breach and whether the amount of the levy corresponds to the nature of the error. If the purpose of the subsidy was fulfilled and only a formal error occurred, the levy should not be ruinous or amount to the full 100%.

The Principle of Proportionality – Your Strongest Legal Weapon

The principle of proportionality means that the sanction must be in reasonable proportion to the severity of the breach. The Supreme Administrative Court has repeatedly ruled that the tax administrator cannot act mechanically and automatically demand the return of 100% of the subsidy for any breach, unless the law explicitly requires it.

A typical example of a successful defence is a situation where the project is physically complete, operational, and fulfilling its purpose, but the recipient made an administrative error in the tender process that did not affect the price or the choice of supplier. In such a case, a 100% levy would be found to be disproportionate.

Phase 3: Administrative Court – Lawsuit and Cassation Complaint

If the Appellate Financial Directorate rejects your appeal, the judicial phase begins. You have the right to file an administrative lawsuit with the regional court (according to the seat of the appellate body, or depending on specialization). The deadline for filing the lawsuit is 2 months from the delivery of the decision on the appeal. This deadline is strict and cannot be waived.

The lawsuit must meet the requirements of the Code of Administrative Justice. The court reviews the legality of the decision and the procedure of the administrative authorities. It may annul the decision and return the case for further proceedings, or it may (in certain cases) moderate (reduce) the levy.

If you do not succeed at the regional court, there is still an extraordinary remedy – a cassation complaint to the Supreme Administrative Court (NSS). The deadline for filing it is 2 weeks from the delivery of the regional court's judgment. At this stage, representation by a lawyer is mandatory. The ARROWS legal team has experience in litigating cases before both regional courts and the NSS. We know the arguments that work in court.

Special Situation: What if it is an EU Subsidy?

For subsidies co-financed from EU funds, specific rules apply, including Regulation (EC, Euratom) No 2988/95 on the protection of the European Communities' financial interests. The statute of limitations is key here. According to the Czech Act on Budgetary Rules (Section 44 of Act No. 218/2000 Coll.), a levy cannot be assessed after 10 years from the breach.

European regulations set a minimum period of 4 years, but the Czech ten-year period takes precedence. ARROWS law firm examines in detail whether the preclusive period for assessing the levy has expired, which would mean that the levy can no longer be collected.

Secondary Line of Defence: Request for Waiver of the Levy

If the levy is finally assessed, there is still the option to file a request for a waiver of the levy and penalty. According to Section 44a(11) and (12) of Act No. 218/2000 Coll., the General Financial Directorate may, for reasons worthy of special consideration, fully or partially waive the levy or penalty.

The request for a waiver is usually filed within 1 year of the payment assessment becoming final. Success depends on the quality of the justification – e.g., the harshness of the law, a threat to the existence of a public benefit activity, a disproportion between the error and the sanction, or social aspects.

The ARROWS legal team prepares comprehensive waiver requests, combining legal and factual arguments for the maximum chance of success.

Deadlines – What You Must Meet

Time is critical in these matters. Here is an overview of the key deadlines:

• Objections to the inspection report: Usually 15 days (or as instructed in the report).

• Appeal against the Tax Office's payment assessment: 30 days from the delivery of the assessment.

• Administrative lawsuit to the regional court: 2 months from the delivery of the decision on the appeal.

• Cassation complaint to the NSS: 2 weeks from the delivery of the regional court's judgment.

• Request for waiver: Within 1 year of the payment assessment becoming final.

If you are in a situation where one of these deadlines is running, contact us at consultation@arws.cz as soon as possible. If you are facing a penalty (levy) for a breach of budgetary discipline, it is not the end of the world. The legal system gives you a number of ways to defend yourself. It is essential to understand that the levy must be in accordance with the law and the principle of proportionality.

Many subsidy recipients give up without using qualified legal assistance. The ARROWS legal team has experience with dozens of cases where levies were successfully cancelled or significantly reduced.

Remember: deadlines don't wait. If you have an inspection report, a payment assessment, or are heading into a dispute, contact us at consultation@arws.cz. We will assess your case and propose the best defence strategy. ARROWS law firm is insured for liability up to 350 million Czech crowns.