A Grant as an Obligation: What Has the Recipient Actually Signed Up For?
Many grant recipients treat the decision to award a grant as a straightforward promise of funding. In reality, it constitutes a unilaterally set legal framework whose terms the recipient cannot negotiate – they either accept them in full or do not apply at all. Once the decision is accepted and the funds are drawn, the recipient bears full responsibility for compliance with all conditions, regardless of their good faith or culpability.
The central legal concept is breach of budgetary discipline, as defined by Act No. 218/2000 Coll., on Budgetary Rules (the so-called major budgetary rules), or Act No. 250/2000 Coll., on Budgetary Rules for Territorial Budgets. A breach occurs whenever public funds are used contrary to the purpose or conditions set out in the grant decision, or when unspent funds are not returned within the prescribed period following project completion.
- A critical and often surprising fact: the recipient's liability is objective. The recipient is responsible for the project as a whole and bears full exposure for the failures of their employees, external project managers and contractors alike. Arguments such as 'I was unaware' or 'the fault lay with the subcontractor' are legally irrelevant when it comes to establishing whether a breach has occurred.
This position has been consistently upheld by the Supreme Administrative Court of the Czech republic, which has emphasised that statutory grounds for exemption from liability do not exist in Czech grant law and cannot be judicially created beyond the scope of the statute.
Three Phases of a Grant Project and Their Legal Risks
The legal risks associated with a grant project differ depending on the phase in question. An experienced lawyer must be prepared to engage actively at each stage.
1. Preparation and Application Phase
Errors made before the application is submitted can have fatal consequences that only come to light during implementation or at the final audit. The most common pitfalls include:
• Incorrect determination of the applicant category – misclassifying a company as a small or medium-sized enterprise under the applicable EU regulation can lead to disqualification or an obligation to repay the full grant amount.
• Incorrect classification of the project under State aid rules – not every grant constitutes State aid within the meaning of Article 107 TFEU, but where it does, the project must comply strictly with the conditions of the applicable block exemptions (GBER) or be notified to the European Commission prior to the award.
• Underestimating the administrative burden – from day one, recipients must maintain separate analytical accounting records, carefully label all documents and comply with the applicable procurement rules.
• Misalignment of the business plan with the call conditions – approval of the application does not guarantee that the project will be recognised as eligible at the final audit.
Legal advice in the preparatory phase is the most cost-effective investment in the security of the project. Identifying risks before submitting an application is many times more efficient than addressing them once an audit has commenced.
2. Project Implementation Phase
This is the most critical period from a legal risk perspective. The implementation phase combines administrative demands, contractual relationships with suppliers and ongoing reporting – and each of these areas conceals risks.
The most common failures in the implementation phase include:
• Errors in procurement procedures – breaches of public procurement rules or grant-specific procurement conditions can result in financial corrections of between 25% and 100% of the contract value.
• Ineligible expenditure – attempts to claim reimbursement for VAT (where not permitted by the grant conditions), exchange losses or costs incurred outside the approved project period.
• Insufficient documentation – every item of expenditure must be fully supported by evidence: invoice, delivery note, contract, acceptance protocol. Missing documents equate to ineligible expenditure.
• Unapproved project changes – any modification to the approved project (timeline, technical solution, replacement of a key supplier) must be agreed in writing with the grant provider in advance. Unilateral changes are among the most serious breaches.
• Breach of publicity requirements – the absence of the EU logo on a website or an information board that does not comply with the applicable manual may appear trivial, but in practice leads to financial corrections.
3. Sustainability Phase
Following the formal completion of the project and final financial reporting, a sustainability period begins, typically lasting three to five years. Recipients often mistakenly regard this phase as the end of their obligations. The opposite is true.
During the sustainability period, the recipient must not:
• sell or transfer assets acquired using grant funds,
• change the purpose for which those assets are used,
• fundamentally alter the nature of their operations or business.
Recipients must also continue to meet the agreed monitoring indicators (for example, maintaining a specified number of jobs created). Audits may take place several years after project completion, and any breach of sustainability conditions will typically result in an obligation to repay part or all of the grant.
Are you planning a restructuring, the disposal of part of the business or a change in legal form during this period? A legal opinion is essential before any such step – otherwise you risk an unexpected repayment obligation together with penalty interest.
Audits: Who Will Come and What to Expect
The oversight system in the area of grants is deliberately robust and multi-layered. As a grant recipient, you must be prepared for control by any of the following bodies:
- The Grant Provider (Managing Authority) — carries out substantive and formal checks on compliance with the grant conditions; the outcome is an Inspection Report, against which objections may be submitted.
- The Ministry of Finance — acts as the Audit Authority or the Paying and Certifying Authority for projects co-financed from EU funds.
- The Tax Authority (Financial Office) — the sole body empowered to assess a levy for breach of budgetary discipline and the corresponding penalty; proceedings are governed by the Tax Code.
- The Supreme Audit Office (NKÚ) — audits the management of public funds; while it cannot impose sanctions directly, its findings serve as a strong signal to other supervisory authorities.
- OLAF (for EU-funded projects) — the independent EU anti-fraud investigative body; it does not impose sanctions itself but forwards its final report with recommendations to the relevant national authorities for further administrative or criminal proceedings.
The administrative process itself unfolds in several consecutive stages. The first is the administrative control carried out by the grant provider – the critical juncture being the written objections against the Control Report, which must be submitted within 15 days and be substantiated both legally and on the merits. Well-constructed objections can resolve the matter at the outset, before it is referred to the tax authority.
If the tax authority confirms the breach, it issues a payment assessment notice. It is possible to appeal the payment assessment within 30 days of its delivery. Although here lies one of the most significant procedural traps: an appeal against a payment assessment notice does not have suspensive effect. This means that the assessed amount must be paid even while the appeal is pending – failure to do so exposes the recipient to enforcement proceedings. This requirement can severely disrupt a company's cash flow even where the appeal is ultimately well-founded.
Defence: Challenging the Amount of the Levy
Although it is not possible to escape liability for a breach of grant conditions, this does not mean that a 100% repayment obligation is automatically triggered. This is where effective legal defence becomes available.
The Principle of Proportionality
The Supreme Administrative Court has consistently held (see, for example, judgments ref. 1 Afs 291/2017-33 and 10 Afs 319/2022-33) that the amount of the levy must be proportionate to the gravity of the breach. An administrative authority therefore cannot automatically assess a full levy for a marginal or administrative deficiency.
Legal argument based on the principle of proportionality focuses in particular on:
• demonstrating that the main purpose of the grant was achieved despite the individual breach (the project is operational, jobs have been created, the investment has been completed),
• establishing that the breach was purely administrative in nature and had no adverse impact on the substantive performance of the project,
• showing that imposition of a full levy would be financially ruinous and wholly disproportionate to the gravity of the breach.
Application for Remission of the Levy
Even after a final and enforceable payment assessment notice has been issued, an extraordinary remedy remains available: an application for full or partial remission of the levy and penalty interest. The application is submitted to the body that originally provided the grant, within one year of the assessment notice becoming final and binding.
The law permits remission on grounds that are worthy of special consideration, without defining those grounds further – this opens space for individually tailored legal argument. Relevant factors include the positive social impact of the project, the recipient's good faith, the degree of third-party culpability and the overall context of the case.
Ambiguous Conditions: In Dubio Pro Libertate
Where the conditions in the grant decision or related documentation are ambiguous or unclear, they cannot be interpreted to the detriment of a recipient who acted in good faith on a reasonable reading of the text. This principle, derived from administrative law, provides a viable avenue for argument in cases where the recipient followed what was logically available to them at the time.
Cross-Border Dimension: EU Funds and OLAF
Projects financed from European Union funds are subject to a stricter oversight regime and more complex rules. In addition to national control bodies, recipients face the possibility of investigation by the European Anti-Fraud Office (OLAF).
OLAF does not itself impose sanctions – its final report with recommendations is forwarded to the relevant national authorities (the tax authority, the police, the public prosecutor's office), which then conduct their own administrative or criminal proceedings. The mere opening of an OLAF investigation, however, dramatically increases reputational and legal exposure and requires an adviser with command of both Czech and European procedural law.
Conclusion
A grant is an opportunity – but also an obligation whose non-performance can threaten the very existence of a business. Preventive legal advice, commenced before the application is submitted, is the most effective and cost-efficient means of turning that opportunity into a genuine benefit without incurring unacceptable risk.
