At the end of last year, the Supreme Administrative Court (“SAC”) dealt with a dispute regarding the definition of individual income in terms of the threshold for reporting exempt income under Section 38v(1) of Act No. 586/1992 Coll. on Income Taxes (“ITA”). The appeal proceedings finished with judgment No 8 Afs 370/2021-43 of 3 October 2023.

The individual (“the plaintiff”) received 12 share certificates as a gift from her husband, none of which individually exceeded the statutory limit of CZK 5,000,000 for the reporting obligation,

but the sum of their values was more than three times the limit. The husband held the share certificates in his sole ownership and the plaintiff also acquired them outside the matrimonial property. Gratuitous income between spouses is exempt under section 10(3)(c)(1) of the ITA, but the plaintiff viewed the share certificates as 12 separate incomes and so did not file a notice of exempt income with the tax authorities. The tax administrator subsequently imposed a fine of 10% of the value of the unreported income, i.e., almost CZK 1.6 million.

The Regional Court in Hradec Králové agreed with the plaintiff’s opinion, i.e. that it was not possible to add up several incomes without further consideration and only to assess whether the amount thus generated exceeded the limit. However, the Appellate Tax Directorate stressed that what should be relevant is whether the transfer takes place at the same time, between identical entities, possibly with one payment and one title. The orders to register the transfer of investment instruments with different identification numbers, which the donor had to make for each unit separately, are only a manifestation of the donor’s obligation under the gift agreement. Ownership is acquired only by entry in the property account, which the bank credited to the plaintiff for all the units at once. The receipt was thus effected in one payment.

The donated property was transferred for a common purpose, between the same subjects and on the basis of a common legal title – the donation contract. In terms of meaning, this was not merely a mechanical addition of the value of the twelve share certificates, but a one-off transfer of assets, which at that time took the form of share certificates. Although the term “income” is not precisely defined in the ITA, it is generally understood as an increase in assets. The fact that the assets transferred took the form of twelve units is therefore irrelevant in the light of the above. In other words, individual income must be judged by its actual content, not its form.

The SAC found the appeal to be well-founded, annulled the contested judgment and remanded the case for further proceedings.