Notification of exempt income

Since 2015, personal income tax payers have had to report exempt income. The income subject to the reporting obligation is income that is exempt under Act No. 586/1992 Coll., on Income Taxes (hereinafter referred to as "ITA") and is higher than CZK 5,000,000, and the income is assessed individually. However, the reporting obligation does not apply to exempt income from the sale of immovable property registered in the Land Registry of the Czech Republic (e.g. family house, land). 

Taxpayers tend to neglect to notify exempt income mainly due to ignorance of this obligation under Section 38v of the ITA. Notification must be made no later than the end of the deadline for filing the tax return for the tax year in which the income was received. Here we must point out that the notification obligation applies unconditionally to all taxpayers who receive exempt income in excess of CZK 5 000 000, even those who are not obliged to file a tax return. The deadline for filing the notification can be extended if the taxpayer grants the tax advisor a power of attorney to file the tax return, in which case the notification can be filed within the extended deadline according to Act No. 280/2009 Coll, The notification of exempted income is linked to the tax return by the time limit for filing, but it is a separate filing which can be made in writing, orally in a report or electronically, either by data box or via the portal of the tax administration, in accordance with the Tax Code.

Any failure to report exempt income will result in penalties, which may be a penalty for failure to report or late reporting of income. The penalty for failure to report exempt income is as follows:

0.1% of the amount of the unreported income if he complies with this obligation without being required to do so,

10 % of the amount of the unreported income if the taxpayer complies with the obligation within an alternative period of time after being invited to do so; or

15 % of the amount of the unreported income if the taxpayer fails to comply even within the replacement period

Taking into account the maximum possible penalty for non-reporting, the exempt income becomes de facto non-exempt income, as the 15% penalty for non-compliance corresponds to the 15% income tax rate to which the income would have been subject if it had not been exempt.

According to the ITA, a penalty for non-compliance cannot be imposed if the time limit for determining the tax within which the exempt income occurred expires. The period for assessment is generally 3 years.

Failure to comply with this obligation may have adverse consequences for the taxpayer's financial situation and relying on the expiry of the assessment period is certainly not recommended. However, the ITA does allow the tax authority to waive the penalty in whole or in part under certain circumstances if the failure to report exempt income was due to a justifiable reason.

When can a penalty be waived?

According to the Tax Code, in general, the tax can only be waived if the tax has been paid, so payment of the penalty is the first point that must be met before the application can be submitted. [2]

The application itself is then subject to an administrative fee of CZK 1,000; if the waiver of an amount exceeding CZK 3,001 is requested, the application is subject to three times the administrative fee, i.e. CZK 3,000.

If the taxpayer would like to use the institute of remission of the corresponding tax, it is not possible that as a taxpayer or a person who is a member of the statutory body, he/she has seriously violated tax or accounting regulations in the last 3 years. If the applicant passes the so-called "tax compliance" test, the tax administrator will assess in the following phase to what extent the penalty can be waived, but this does not mean that the taxpayer will be granted a waiver.

For an assessment to be made, as already mentioned, there must be a justifiable reason that prevented the taxpayer from reporting exempt income. According to the interpretation of Instruction D-28, this should be an exceptional case that is excusable from a human perspective. Such reasons include, for example, an adverse medical condition or a natural disaster. However, the list of such events is not sufficiently enumerated by the tax administrator, and thus this situation has already come before the Supreme Administrative Court ("SAC"), where the SAC in its judgment 5 Afs 245/2019 - 28 refuted that the justifiable reasons for remission of the penalty must be exhaustively enumerated in the D-28 instruction. The subject matter of the dispute was a situation where the taxpayer did not declare the exempt income from a gratuitous transfer in the amount of CZK 24,300,000, citing as a reason for requesting the waiver an adverse health condition where he had to undergo regular dialysis due to kidney failure. Such reasons were not considered sufficient by the tax authorities. The Regional Court also agreed with the findings of the tax office. Only the Supreme Administrative Court (SAC) agreed with the taxpayer, stating in its judgment that the instruction D-28 is not sufficiently exhaustive and, in general, the reasons must always be assessed individually.

In addition to an adverse health condition or a natural disaster, the tax administrator may take into account a situation where the taxpayer has filed a notice of exempt income without a notice from the tax administrator within 60 days or upon notice within 90 days after the filing deadline. However, judgments are beginning to appear here which do not accept this interpretation because of the vague legal concept of "justifiable reason", e.g. the judgment of the KS Ostrava of 2 August 2021, No. 65 Af 27/2020-49.

If the taxpayer is not sure, for example, about the value of the real estate received as a gift, it is worthwhile to have an expert opinion on the value of the real estate. If he is not sure whether his income is notifiable or not, he should seek a tax adviser to ensure that he files the application correctly and in a timely manner. If for some reason the taxpayer has not fulfilled his reporting obligation, it is appropriate to seek a tax advisor to prepare an application for a waiver of the penalty for failure to report exempt income.

[1] Instruction D -28 https://www.financnisprava.cz/assets/cs/prilohy/d-zakony/Pokyn_GFR_D-28.pdf

[2] Section 259c(2) of the Tax Code