CJEU Backs Fixed VAT Default Interest Despite Proportionality Challenge
Introduction
Within the EU VAT system, Member States are permitted to impose interest and financial penalties to ensure the effective collection of tax and to deter non-compliance. However, such measures must operate within the broader principles governing EU VAT law, particularly the principles of proportionality and fiscal neutrality. Difficulties arise where taxpayers are exposed to multiple or excessive financial burdens — for example, through the combined application of default interest and administrative penalties — which may go beyond what is necessary to protect public revenue. In such situations, questions emerge as to whether the sanctions reflect a fair balance between enforcement objectives and taxpayers’ rights, and whether they risk undermining the neutrality of VAT by placing disproportionate economic burdens on taxable persons. These issues have increasingly attracted the attention of the Court of Justice of the European Union, which has sought to define the limits of Member States’ discretion when designing VAT sanction regimes.
.
Background to the Dispute
Case C‑544/24, was the result of a dispute between a Lithuanian company,Nekilnojamojo Turto Valdymas, and the Lithuanian tax authorities. The company had failed to pay VAT on time. Under Lithuanian law, such late payment triggered two financial consequences, namely the automatic application of fixed default interest on the outstanding VAT amount, and the potential imposition of an administrative penalty for breach of VAT obligations.
The taxpayer challenged this system, arguing that the cumulative effect of interest and penalties was excessive and incompatible with EU law. The referring national court asked the CJEU to clarify whether imposing fixed interest, potentially alongside penalties, infringes the EU law principle of proportionality.
Legal Framework
EU VAT law does not harmonise penalties or default interest regimes in detail. Member States retain discretion to determine appropriate measures to ensure the correct collection of VAT and to prevent tax evasion. However, when exercising that discretion, national rules must comply with general principles of EU law, including proportionality, effectiveness, and fiscal neutrality.
Default interest is generally intended to compensate the tax authority for the loss of use of funds caused by late payment, whereas penalties aim to punish and deter unlawful conduct. The Court therefore had to assess whether the Lithuanian default interest mechanism went beyond compensation and became punitive in nature.
Findings of the Court
The CJEU held that the application of fixed default interest on overdue VAT does not, in itself, breach EU law. The Court emphasised that interest, intended to compensate for late payment, serves a legitimate objective and is consistent with the proper functioning of the VAT system.
Crucially, the Court found that fixed default interest, calculated according to predetermined rules, applied automatically and linked to the duration of the delay, does not infringe the principle of proportionality, provided it is not excessive, in comparison to the amount of VAT due.
The CJEU distinguished default interest from administrative penalties. It ruled that default interest, even if fixed by law, does not constitute a penalty where its primary function is compensatory rather than punitive. As a result, its application alongside a penalty does not automatically amount to an unlawful duplication of sanctions.
Proportionality and Duplication of Sanctions
On the issue of proportionality, the Court reaffirmed that national measures must not go beyond what is necessary to achieve their objectives. However, it acknowledged that Member States may impose both compensatory interest and punitive penalties, provided each measure serves a distinct purpose.
The Court rejected the argument that combining default interest with penalties necessarily leads to disproportionate outcomes. Instead, the proportionality assessment must consider the overall framework, including the rate of interest, the method of calculation, and the availability of safeguards allowing penalties to be reduced or waived in appropriate circumstances.
Practical Implications
The judgment confirms that Member States have scope to design VAT enforcement mechanisms, including fixed default interest regimes. For taxpayers, the decision underscores that late payment of VAT, may result in multiple financial consequences, without infringing EU law.
For tax authorities, the ruling provides reassurance that fixed interest systems are compatible with EU law, as long as they are not excessive and remain genuinely compensatory. Nonetheless, tax authorities must ensure that penalties remain capable of individual assessment and that the cumulative burden, imposed on taxpayers, is not manifestly disproportionate.
Conclusion
Case C‑544/24 reinforces the CJEU’s consistent approach to VAT enforcement i.e. while Member States enjoy considerable discretion, that must be exercised in accordance with the general principles of EU law. Fixed default VAT interest is permissible and does not violate proportionality or neutrality, even when applied alongside penalties, as long as it serves a compensatory function and does not impose an excessive financial burden on taxpayers.
The judgment is likely to be influential in any future challenges to national VAT sanction regimes and provides clarity, on the distinction between interest and penalties, under EU VAT law.