Defending subsidy repayment and budgetary discipline penalties in Czech law Court case against MoLSA and budgetary discipline

When does a subsidy audit lead to the loss of millions and a minor mistake become an existential threat? If you are facing a request to repay funds or a penalty for breaching budgetary discipline under Czech law, you will find specific answers here. You will learn how legal defence works, what your rights are, and what to do to ensure the amount assessed is fair and proportionate to the actual error.

Quick summary

• The levy for a breach of budgetary discipline is punitive in nature, but courts adjust its amount – if disproportionality can be demonstrated, the court may annul the decision, applying the principle of proportionality under Czech law.
• A three-tier defence provides more opportunities to resolve the matter – first, the issue is addressed with the grant provider or the Czech tax office (tax audit), then an appeal follows to the Appellate Financial Directorate (OFŘ), and finally judicial review before Czech administrative courts is possible.
• Deadlines are strict – you have 30 days to file an appeal against the payment assessment, and then 2 months to file an administrative action.
• ARROWS attorneys regularly handle cases where imposed levies have been annulled or significantly reduced – your situation may not be hopeless if you respond quickly and correctly.

What a breach of budgetary discipline is and how it becomes a threat

Doing business in the Czech Republic without subsidies is becoming increasingly complex. Whether you draw funds for the development of social services, investments in modernisation, 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 reported something incorrectly, missed a deadline, or spent the funds differently than the call for proposals specified.

The situation then gradually becomes more complicated. First, an inspection report is issued stating that a breach of budgetary discipline has occurred. 

In legal terms, this is a failure to comply with an obligation set by law (in particular Act No. 218/2000 Coll., on Budgetary Rules), by the decision granting the subsidy, or by contract. Typically, this involves unauthorised use of funds, retention of money that should have been returned, or failure to comply with one of the conditions.

An important point every subsidy recipient must understand is that a breach of budgetary discipline is not something that can be resolved by an informal agreement. Once suspicion of a breach arises, a chain of legal processes is triggered in the Czech legal system, which may ultimately lead to a court dispute. In practice, however, there is often room for argument, especially where the breach is less serious.

Related questions on breaches of budgetary discipline

1. What exactly does a breach of budgetary discipline mean?
It is a breach of any obligation set when the subsidy was granted – from failing to comply with the purpose, through breaches of the Czech Public Procurement Act, to late submission of the final settlement. It does not always have to be intentional fraud; even a minor error may qualify as a breach.

2. Is a breach of budgetary discipline a criminal offence?
A breach of budgetary discipline itself is an administrative offence under Czech law, resulting in an obligation to return the funds (the so-called levy) and to pay a penalty. However, if it involved intentionally obtaining a subsidy based on false information or misusing it for another purpose, it may constitute the criminal offence of subsidy fraud (Section 212 of the Czech Criminal Code) or damage to the EU’s financial interests.

3. Who decides whether a breach of budgetary discipline occurred?
Primarily, the locally competent Czech tax office (as the tax administrator) decides this; it conducts a tax audit and issues a payment assessment. The grant provider may submit an initiative, but the authoritative decision is issued by the Czech Financial Administration. Subsequently, the appellate authority (OFŘ) and the administrative courts decide.

How the matter reaches the Czech tax office and what it means for you

Over time, the inspection identifies specific breaches. The inspector (whether from the grant provider or the Czech tax office) prepares an inspection report (or, as applicable, a tax audit report) describing what is wrong. At this point, you have the right to submit objections or a statement – a formal written document in which you defend yourself against the findings.

This is an absolutely critical moment. A high-quality, legally reasoned response can resolve the matter or at least mitigate it at an early stage. The problem is that many businesses do not realise this and let procedural deadlines lapse without an adequate response.

If the matter is referred to the Czech tax office (or if the audit is carried out directly by it), the office is authorised to assess a levy for a breach of budgetary discipline and a penalty for late payment of the levy.

The levy is, in effect, an obligation to return the subsidy (or part of it). The penalty may increase up to 100% of the levy itself. 

For subsidies from the state budget, since 2022 the penalty has been calculated at the default interest rate under the Czech Civil Code (CNB repo rate + 8%), which currently amounts to approximately 15% p.a.

What you face: Risk table and defence options

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

Phase 1: Proceedings with the provider, inspection, and filing objections

Once the inspection is completed, you will receive an inspection report (in the case of an administrative inspection) or a tax audit report (if the inspection is carried out by the tax authority). The document describes all findings in detail.

At this point, Czech 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 critical line of defence.

Good objections are not just “I disagree”. They must contain specific legal and factual arguments: that the inspector made an error in interpreting the legal regulation or the grant conditions, that the finding is not supported by evidence, or that procedural defects occurred.

At this stage, ARROWS’ attorneys in Prague review the reports and prepare well-founded objections that have a real chance of overturning the findings even before a payment assessment is issued.

Related questions on objections and how to file them

1. What happens if I file objections and the authority rejects them?
If the provider/tax administrator does not uphold the objections, a decision (payment assessment) setting the repayment is issued. You can appeal against it.

2. Do I have to attend meetings with the authority myself?
You can be fully represented by a Prague-based law firm under a power of attorney. ARROWS will handle all communication and attendance at meetings.

3. What form must the objections take?
They must be in writing, it must be clear what they are directed against and what they propose, and they must be filed within the prescribed deadline.

Phase 2: Tax proceedings before the Czech tax authority and appeal

If a breach is found, the tax authority will issue a payment assessment for a repayment for breach of budgetary discipline. This process is governed by the Czech 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 service. IMPORTANT: The appeal is filed with the tax authority that issued the decision, but it is decided by the superior authority – the Appellate Financial Directorate (OFŘ).

In cases where a repayment is assessed, the appeal has suspensive effect only in certain specific situations. Crucially, in the appeal you must state all reasons why you consider the decision unlawful or incorrect.

The key concept here is the principle of proportionality (reasonableness). The tax administrator must consider the seriousness of the breach and whether the repayment amount corresponds to the nature of the error. If the purpose of the grant has been fulfilled and only a formal error occurred, the repayment should not be punitive or in the full amount of 100%.

The principle of proportionality – your strongest legal tool

The principle of proportionality means that the sanction must be reasonably proportionate to the seriousness of the breach. The Supreme Administrative Court has repeatedly held that the tax administrator cannot proceed mechanically and automatically demand repayment of 100% of the grant for any breach, unless the law explicitly requires it.

A typical example of a successful defence is a situation where the project physically exists, operates, and fulfils its purpose, but the recipient made an administrative error in the tender procedure that had no impact on the price or the selection of the supplier. In such a case, a 100% repayment would be found disproportionate.

Related questions on the principle of proportionality in practice

1. Does this mean that if I breach the grant only slightly, I don’t have to repay anything?
No. It means the repayment amount should be reduced (e.g., to 5%, 10% or 25% of the grant) instead of the full 100%.

2. How do I prove that the repayment is disproportionate?
You need a thorough legal analysis and references to relevant case law of the Supreme Administrative Court. ARROWS prepares submissions that compare your case with matters already decided by Czech courts.

3. Will the court take the principle of proportionality into account?
Yes, the administrative courts are obliged to examine whether the administrative authority exceeded the limits of administrative discretion and whether it imposed a manifestly disproportionate sanction.

Phase 3: Administrative court – action and cassation complaint

If the Appellate Financial Directorate rejects your appeal, the court phase begins. You have the right to file an administrative action with the Regional Court (depending on the seat of the appellate authority, or based on specialisation, as applicable).

The deadline for filing the action is 2 months from service of the appeal decision. This deadline is strict and cannot be waived. 

The action must meet the requirements under the Code of Administrative Justice. The court reviews the legality of the decision as well as the procedure of the administrative authorities. It may annul the decision and remit the matter for further proceedings, or it may (in certain cases) moderate (reduce) the repayment.

If you do not succeed before the Regional Court, there is an extraordinary remedy – a cassation complaint to the Supreme Administrative Court. The deadline for filing it is 2 weeks from service of the Regional Court’s judgment. At this stage, representation by an attorney is mandatory.

ARROWS’ attorneys in Prague have experience in conducting disputes before the Regional Courts and the Supreme Administrative Court. We know the arguments that work in Czech courts.

Special situation: What if it is an EU grant?

EU fund co-financed grants are subject to specific rules, including Council Regulation (EC, Euratom) No 2988/95 on the protection of the European Communities’ financial interests. The key issue here is the limitation period. Under the Czech Budgetary Rules Act (Section 44 of Act No. 218/2000 Coll.), the levy cannot be assessed after 10 years from the breach.

EU regulations set a minimum period of 4 years, but the Czech ten-year period takes precedence in the Czech Republic.

ARROWS, a Prague-based law firm, examines in detail whether the preclusive time limit for assessing the levy has expired, which would mean the levy can no longer be collected.

Secondary line of defence: Application for remission of the levy

If the levy has been finally assessed, there is still an option to file an application for remission of the levy and the penalty.

Under Section 44a(11) and (12) of Act No. 218/2000 Coll., the General Financial Directorate (the Czech Republic’s central tax authority) may, for reasons deserving special consideration, fully or partially remit the levy or the penalty.

An application for remission is typically filed within 1 year from the date the payment assessment becomes final. Success depends on the quality of the reasoning—e.g., undue harshness of the law, a threat to the existence of a public-benefit activity, disproportionality between the error and the sanction, or social considerations.

ARROWS’ Czech legal team prepares comprehensive remission applications, combining legal and factual arguments to maximise the chances of success.

Time limits – what you need to meet

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

• Objections to the audit report: Typically 15 days (or as stated in the instructions in the report).
• Appeal against the Tax Office payment assessment: 30 days from service of the assessment.
• Administrative action before the Regional Court: 2 months from service of the appeal decision.
• Cassation complaint to the Supreme Administrative Court: 2 weeks from service of the Regional Court judgment.
• Application for remission: Within 1 year from the date the payment assessment becomes final.

If you are in a situation where any of these deadlines is running, contact us at office@arws.cz as soon as possible.

If you are facing a fine (levy) for a breach of budgetary discipline under Czech law, it is not the end of the world. The Czech legal system provides a number of options to defend yourself. The essential point is to understand that the levy must comply with the law and the principle of proportionality.

Many grant beneficiaries give up without using qualified legal assistance. ARROWS’ attorneys in Prague have experience with dozens of cases where levies were cancelled or significantly reduced.

Remember: deadlines will not wait. If you are in a situation where you have an audit report, a payment assessment, or you are preparing for a dispute, contact us at office@arws.cz. We will review your case and propose the best defence strategy.

ARROWS, a Prague-based law firm, is insured for professional liability up to CZK 400 million. Your matter is safe with us.

Related questions on defending against a disproportionate grant penalty

1. Is a levy for a breach of budgetary discipline a criminal offence?
No, the levy is an administrative measure (repayment of funds). A criminal offence (grant fraud) arises only in the case of intentional conduct aimed at unlawfully obtaining or using a grant. Ordinary implementation errors are not a criminal offence, but “only” a reason for imposing a levy.

2. What is the difference between a levy and a penalty?
The levy is the grant amount you must repay. The penalty is a sanction for late repayment (default interest). The penalty starts accruing on the day the breach of budgetary discipline occurs and can reach up to 100% of the levy amount.

3. What should I do if I have received an audit report and I disagree with it?
Submit written objections immediately. You have the deadline stated in the instructions (usually 15 days). In the objections, you must specify exactly what you disagree with and propose evidence. Contact an attorney to draft them.

4. How long does a dispute with the tax authority take?
Tax proceedings (audit + appeal) usually take several months up to a year. Subsequent court proceedings before the Regional Court typically take 1–2 years, and any cassation complaint before the Supreme Administrative Court may take another year or longer.

5. Is it possible to request an instalment plan?
Yes, you can request a deferral of payment (instalments) from the tax authority in the Czech Republic. You must demonstrate social or economic reasons. A deferral is associated with deferral interest, which is lower than default interest.

Notice: The information contained in this article is of a general informational nature only and is intended for basic guidance on the topic. Although we take maximum care to ensure accuracy, legal regulations and their interpretation evolve over time. To apply this information to your specific situation, it is necessary to contact ARROWS, a Prague-based law firm (office@arws.cz).

Read also:

• Ministry of Finance and subsidy control: Statutory representatives' responsibility for returning subsidies
• Compliance audits: How to conduct an internal audit before the authorities arrive
• How to prepare for administrative proceedings at the CNB: Legal and documentation minimum
• EU Company before a Czech Court: When You Need Local Representation
• Czech Insolvency Proceedings: A Practical Guide for Foreign Creditors