30. 11. 2023
The obligation to report exempt income as reflected in the case law of the Supreme Administrative Court
In a recent court case, the Supreme Administrative Court dealt with the issue of the acquisition of income in the form of a gratuitous transfer of unit certificates, which is exempt from taxation under the Income Tax Act ("ITA"), as it was a transfer of shares from the husband's sole ownership to his wife. The subject matter of the present case was the failure to file a notification of exempted personal income within the meaning of section 38v(1) of the ITA. The transfer involved several unit trusts which, individually, did not exceed the limit of CZK 5 000 000 for the notification requirement, but which together were worth more than CZK 15 000 000.
The tax administrator therefore invited the applicant to submit such a notification. After the applicant had sent it, the tax administrator issued a payment order imposing a fine of 10 % of the amount of the unreported income for failure to notify exempt income. The main argument was that, although there were several different units, the transfer of the units took place on the same day and from the same person.
In the continuing litigation, the Regional Court, on the other hand, held that the transfer in question could not be regarded as a bulk transfer but as separate transfers whose value did not exceed the threshold for notification under section 38v of the ITA. The Regional Court argued that section 38v of the ITA referred to the word 'income' in the singular.
The tax administrator appealed against this judgment. In it, it starts by pointing out that the institution of notification of exempt income was adopted for measures which would lead to greater transparency of property transactions and thus promote the fight against tax evasion and the uncovering of transactions taking place in the 'grey' or 'black' part of the economy'.
After examining the case at hand, the Supreme Administrative Court concluded that income must be viewed in terms of content and not in terms of form, since income is understood as an increase in the taxpayer's assets. It therefore concluded that the subject of the gift was a transfer of property with a value exceeding CZK 15,000,000, and therefore the limit set for the reporting obligation. That property consisted of 12 share certificates. That combination was possible because both the objective (same legal title for the transfer - the gift agreement) and the subjective (common purpose and recipient of the gift) unity were met.
On the basis of the above arguments, the Supreme Administrative Court thus found in favour of the tax administrator and annulled the judgment of the Regional Court. Thus, the clear message for taxpayers is that once they acquire anything exempt and if there is reasonable doubt whether or not to report it, it is always better to proceed to that step. As the SAC itself has argued, this action is not voluntary, but mandatory under certain conditions.
If you are in doubt, please do not hesitate to contact us and we will be happy to help you resolve the issue.
Author: Alexa Horváthová, Junior Tax Consultant
Author: Vladimír Chylík - Partner, Tax
15. 11. 2023