InsightsNovember 23, 2023
What is tax interest?￼
As an entrepreneur, it’s not always possible to submit all your declarations on time. In such cases, you may encounter tax interest. What is tax interest exactly, and why do the Tax Authorities charge it?
What is tax interest?
Tax interest is a fee you pay to the Tax Authorities on the amount of tax owed. In essence, you are immediately liable for taxes at the end of a period. After filing the declaration, the interest continues until the Tax Authorities process the declaration and issue an assessment. If you file a declaration but don’t pay, collection interest is calculated, and potential fines are imposed. This blog focuses only on the tax interest you pay when filing late.
Because it’s often impossible to submit a declaration immediately after a period, there is usually a tax interest-free period. The duration depends on the type of tax. Below, you’ll find, for each type of tax, the period over which tax interest is calculated and the interest rate. But first, how do we calculate tax interest?
Calculating tax interest
The Tax Authorities calculate tax interest proportionally on the amount of tax owed. The days for which tax interest is calculated are initially divided by the number of days in the year. So, there are three factors in the calculation of tax interest:
- The amount of tax owed
- The percentage of tax interest
- The period over which the tax is calculated
Tax owed: €5,000
Tax interest rate: 6%
Period over which tax must be paid: 30 days
€ 5.000 x 6% x (30/365) = € 24
In 2023, you made a profit in your sole proprietorship. Technically, you owe taxes on this from January 1, 2024. However, it’s not possible to file income tax returns until March 2024. Therefore, the Tax Authorities do not charge interest if your declaration is submitted before May 1, 2024, and they accept it without changes. If you submit your declaration later than May 1, they will charge tax interest from July 1, 2024, for a maximum of 19 weeks after receiving the declaration. Until July 1, 2023, the tax rate was 4%, but it has since been raised to 6%.
Corporate income tax
Because corporate income tax interest is linked to the interest for statutory trade relationships, this tax interest is the highest. You pay 8% tax interest on the profit from your BV in 2023. You don't pay tax interest if you file before June 1, 2024, and the Tax Authorities accept your assessment without changes. From July 1, tax interest is calculated until 6 weeks after the issued assessment.
VAT and payroll tax
For VAT and payroll tax, you only pay interest on supplementary assessments. You generally remit VAT and payroll tax within the month following the period. You automatically receive a fine if you fail to file on time. So, tax interest is only applicable when a supplementary declaration is submitted for a closed fiscal year. You pay tax interest on a supplementary declaration for 2023 if it’s submitted after April 1, 2024. The tax interest is calculated retroactively from January 1, 2024, and lasts until 14 days after the supplementary assessment.
How to avoid tax interest?
As mentioned, you don’t pay tax interest if you file before a certain date. However, this is not always possible. You can avoid tax interest for income tax and corporate income tax by filing a provisional assessment. By estimating your profit, you pay taxes throughout the year. You can choose to pay this at the beginning of the year or in monthly installments. The amount paid with your provisional assessment will ultimately be reconciled with the amount you actually owe in income tax. So, you only pay tax interest on the difference between the provisional and final assessments.
Keep in mind that if you request a provisional assessment for the current year, you will also receive one the following years. Usually, as a business owner, you automatically receive a provisional assessment from the Tax Authorities within 1 year. Your profit is estimated based on a previous declaration. It’s always possible to adjust a provisional assessment if it is too high or too low, so inform your bookkeeper if you estimate your profit differently than the Tax Authorities have.
If you request a provisional assessment after the end of the year, you must pay this assessment in one installment and do not have the option to pay in installments.
Is tax interest tax-deductible?
Tax interest is tax-deductible for business tax forms, namely VAT, payroll tax, and corporate income tax. The tax interest on your income tax and ZVW contribution is not deductible because these two tax forms are private.
Can you receive tax interest?
For an income tax return, the Tax Authorities have 13 weeks to issue an assessment. If they take longer without making any adjustments and you receive a tax refund, they will pay tax interest on this amount. For VAT and payroll tax, the Tax Authorities have 8 weeks to arrange the refund. If they take longer, they will also pay tax interest.
Do you have questions about the tax interest? Feel free to contact your bookkeeper.