Comments on ECJ C-544/24 – Nature of Tax Interest: Not a Penalty and Proportionate Even When Elevated

CJEU Clarifies Nature of Tax Interest: Not a Penalty and Proportionate Even When Elevated – C-544/24 (Nekilnojamojo turto valdymas)

Summary

The CJEU confirms that late payment interest on VAT is not a “penalty” under Article 49(3) of the Charter, even where a “penalty-like” component exists.
Interest remains compensatory and preventive in nature, and thus falls outside the scope of proportionality rules applicable to penalties.
A system where interest cannot be reduced based on the severity of the infringement is compatible with EU law, provided it is appropriate, necessary, and proportionate in ensuring VAT collection.

Source newsletter of 14.05.2026: C-544/24, Nekilnojamojo turto valdymas (judgment), penalty interest

ECJ VAT C-544/24 (Nekilnojamojo turto valdymas) – Judgment – Fixed default VAT interest acceptable, does not violate proportionality – VATupdate

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C-544/24, Nekilnojamojo turto valdymas – Interest Is Not a Penalty under EU Law

In its judgment of 30 April 2026 in C-544/24, Nekilnojamojo turto valdymas, the Court of Justice of the European Union (CJEU) delivered important clarification on the legal nature of tax interest in the context of VAT. The ruling addresses whether late payment interest—including a component exceeding pure financing costs—constitutes a “penalty” under Article 49(3) of the Charter of Fundamental Rights and whether such interest must be adjustable in light of the severity of the infringement.

Background of the Case

The case arose following a tax audit conducted by the Lithuanian tax authorities. The authorities concluded that the taxpayer, a Lithuanian company, had wrongly deducted input VAT. As a result, they assessed:

Additional VAT due: €6.5 million
Late payment interest: €2.4 million
Fines: €1.8 million

The taxpayer sought relief from part of the interest. It argued that the interest comprised two distinct elements:

A compensatory component reflecting the cost of capital (aligned with government bond rates); and
An additional 7 percentage point increment, which it characterised as a penalty component.

The Lithuanian legal framework, however, did not allow the tax authorities to reduce late payment interest based on the minor nature of the infringement. This led the referring court to question whether such a system is compatible with EU law.

The Core Legal Question

The central issue was whether the inability to reduce interest—particularly its “penalty-like” portion—violates EU principles, notably:

Article 49(3) of the Charter (principle that penalties must be proportionate), and
The general principle of proportionality under EU law.

The Court’s Assessment: Interest Is Not a Penalty

The Court began by examining whether late payment interest falls within the notion of a “penalty” under Article 49(3) of the Charter.

To determine this, the Court applied its established three-criteria test:

Legal classification under national law
Nature of the infringement
Nature and severity of the sanction

While not all criteria must be cumulatively satisfied, the latter two are particularly decisive.

The Court concluded:

No punitive classification under national law: Lithuanian law does not treat interest as a sanction of a punitive nature.
Nature of the measure: Interest serves a compensatory and preventive function, ensuring that the State is compensated for delayed payment and encouraging timely compliance.
Severity of the measure: Even where the interest includes an additional increment, its design and purpose do not transform it into a punitive measure.

Importantly, the Court held that interest does not become a penalty merely because it exceeds the pure financial loss suffered by the State. As a result, Article 49(3) of the Charter does not apply.

Proportionality of the Interest Regime

Although Article 49(3) was deemed inapplicable, the Court proceeded to assess the interest regime under the general principle of proportionality.

The analysis followed the classic three-step test:

Suitability

Interest on late payment is suitable for achieving legitimate objectives, notably:

Ensuring effective VAT collection
Preventing tax evasion and late compliance

Necessity

The Court confirmed that such interest is necessary:

It compensates the State for delayed revenue
It creates an incentive for taxpayers to meet obligations on time
Without it, the system would undermine timely tax compliance

Proportionality stricto sensu

The Court then assessed whether the measure imposes an excessive burden:

Predictability and legal certainty: Interest rates are fixed by law, reducing arbitrariness.
Link to duration: The amount of interest depends on the length of non-payment, ensuring a direct connection with the taxpayer’s behaviour.
Legislative discretion: Even if interest exceeds actual financial damage, it reflects the legislature’s assessment of the broader harm caused by delayed payment.
Moderation mechanisms: Lithuanian law provides limited possibilities for relief under certain conditions, ensuring flexibility.
Functional distinction from penalties: Unlike fines, interest does not depend on the gravity of the infringement but on the duration of delay, reinforcing its preventive nature.

On this basis, the Court concluded that the absence of a discretionary reduction mechanism based on the seriousness of the infringement does not render the system disproportionate.

Key Takeaways for VAT Practice

This judgment provides several important clarifications for VAT practitioners and policymakers:

Clear distinction between interest and penalties: Even elevated or “two-tier” interest systems will not readily be classified as punitive.
Limited role for Charter-based proportionality arguments: Article 49(3) will only apply where a measure is genuinely punitive in nature.
Legislative autonomy preserved: Member States retain significant flexibility in designing interest regimes, including fixed rates and limited mitigation options.
Focus on timing, not behaviour: Interest is inherently linked to the duration of non-payment, not the subjective gravity of the infringement.

Conclusion

The Nekilnojamojo turto valdymas judgment reinforces the CJEU’s consistent approach in distinguishing tax interest from penalties. By confirming that even relatively high interest rates—without case-by-case reduction based on fault—can comply with EU law, the Court strengthens legal certainty for Member States designing enforcement mechanisms within their VAT systems.

For businesses, the ruling serves as a reminder that late payment interest is structurally difficult to challenge under EU law, even where it appears economically burdensome.