In its judgment of 4 February 2025 (Case No. 9 Afs 112/2024), the Supreme Administrative Court (“SAC”) addressed the question of whether the income of a natural person engaged in the purchase and sale of paintings from the sale of works from a private collection may be exempt from tax under Section 4(1)(c)(3) of the Income Tax Act (“ITA”). The court concluded that the tax administrator incorrectly assessed the income as taxable because the taxpayer had sufficiently documented that it was a private collection and not business property.

Dispute over the nature of the sale of paintings

The entrepreneur operated a gallery and had a business license to buy and sell artwork. However, in addition, between 2016 and 2018 he sold paintings on a large scale, which he considered part of his private collection that he had been creating since the 1990s. He did not include this income in the tax base because he believed that it was exempt from tax. The tax administrator, however, concluded that this was a business activity because the sales took place over a long period of time. Since the income from the sale of private paintings exceeded the income from business several times, the tax administrator assessed tax according to aids.

The SAC did not agree with this conclusion. It noted that repeated sales in themselves need not mean that business is being conducted, if it can be shown that the paintings were part of a private collecting activity and not commercial property. It would not be relevant whether they became business assets by the entrepreneur contributing them from his own assets or whether they were acquired in the course of his business.

Distinction between business and private property

The SAC emphasized that the possession of a trade license does not in itself mean that all the actions of an individual constitute business. The decisive factor should be whether the assets sold are related to the business and whether they have been classified as business assets for that purpose. If the items are sold from personal ownership and their acquisition was not primarily for profit, the income may be exempt from tax.

The court took the view that the sale of the paintings from the collection was not part of the business and therefore did not give rise to an obligation to include them in the tax records. Even if the income from these sales exceeded the income from the business and part of it was reinvested in the gallery, this does not automatically create an obligation to tax this income.

Exemption of income from the sale of movable property

The SAC recalled that the purpose of the exemption of income from the sale of movable property under Section 4(1)(c) of the ITA is a situation where there is no actual increase in property, but only its transformation into monetary form. Conversely, if there were systematic purchases and sales of paintings for profit, it would be business and the exemption would not apply.

The key was that the entrepreneur had demonstrated a long-term collecting activity and that the paintings were acquired for the purpose of expanding the collection, not for resale.

Erroneous procedure of the tax administrator and assessment according to aids

According to the SAC, the tax administrator erroneously failed to consider it relevant, if the paintings were indeed part of a private collection. Instead, it assumed without further ado that it was a matter of business, which led to the incorrect assessment of tax.

The court emphasized that the taxpayer has the right to own private property in addition to commercial property, and if the tax administrator wanted to challenge the exemption, it should have focused on the origin of the paintings and the reasons for their acquisition. Since it did not prove this fact, the conditions for assessment of tax according to the aids were not met.

Conclusion of the SAC

The Supreme Administrative Court overturned the decisions of the tax administrator and the regional court and confirmed that income from the sale of paintings from a private collection can be exempt from tax if it is proven that it was not related to business. At the same time, the SAC emphasized that in tax proceedings, a careful distinction must be made between private property and commercial property and that the tax administrator must actively prove its doubts if it wishes to challenge the taxpayer’s statement.

This ruling sets an important precedent for entrepreneurs who manage private collections or investment assets in addition to their business, and confirms that consistent tax record keeping and a clear separation of personal assets from business assets is crucial for tax assessment.