In its judgment No 5 Afs 220/2023-36, the Supreme Administrative Court (hereinafter the “SAC”) dealt with an appeal by an individual (the plaintiff) against the Appellate Financial Directorate (the defendant) in a dispute concerning the fulfilment of the conditions for exemption from personal income tax on the sale of real estate pursuant to Art. 1(a) of the Income Tax Act (“ITA”) where the seller had resided in the property for at least two years immediately prior to the sale.

Specifically, the case concerned an individual who received income from the sale of a family semi-detached house with house numbers Xa and Xb on two different plots and did not include this income in his tax return because he considered it exempt from personal income tax under Section 4(1)(a) of the ITA.

However, the tax administrator’s investigation revealed that one part of the semi-detached house was not occupied at all and therefore the conditions for tax exemption could not be met. The plaintiff therefore filed a supplementary tax return, taxing the income from the unoccupied part of the semi-detached house and, in respect of the other part, maintaining her conclusion that the condition for exemption from income tax – i.e. residence for 2 years immediately prior to the sale – was met.

Arguments of the defendant

The defendant pointed to the complainant’s numerous inconsistencies in the testimonies taken, which failed to refute the veracity of the evidence procured by the tax authorities from third parties (e.g. very low electricity supply, low water consumption, the building was not officially approved, etc.). According to the defendant, it cannot be concluded that the complainant resided in the property in question with the intention of staying there permanently only because she had stored her personal belongings, had the possibility to prepare refreshments or even to watch television in the building that had not received final building approval.

Further, the defendant noted that in order to qualify for the exemption, it is necessary to be resident there immediately prior to the sale, i.e. without unnecessary or unjustifiable delay. If the complainant claimed that she abandoned the property during the month of September 2018 and only entered into the contract of sale in November 2018, the sale took place in a property that was already abandoned. The condition of “residence immediately prior to the sale” could therefore not be met in this case.

Conclusions of the SAC

• The complainant’s notion that it is sufficient to prove the intention to permanently stay in the apartment for an unlimited period of time, at least one day, prior to the sale is completely incorrect for the purposes of exempting income from the sale of an apartment (family house) within the meaning of Section 4(1)(a) of the ITA.
• The SAC notes that the fact that someone is officially registered for permanent residence in a certain property does not automatically mean that they actually live there. Conversely, a taxpayer who is not permanently registered to reside in a particular property may prove that he or she has actually lived there and thus prove that the conditions for exemption are met. However, the complainant failed to do so.
• The SAC further notes that there is no general definition of the term “immediately before the sale”. However, it is clear that the seller does not have to live in the property right up to the last day before the sale. It is possible to take into account a certain time for vacating or modifying the property, etc. However, it is not possible to use the property in any other way (e.g. short-term renting) in the period between the actual end of living in the property and its sale.

For that reason, the SAC concluded that the plaintiff in the present case was not able to prove the primary condition itself, i.e. that she had a residence or a permanent apartment in the property sold. Even if she had met this condition, she would have had to be able to further prove that she had lived in the property immediately prior to the sale, i.e. to defend the relevant delay of approximately two months between moving out and the sale. The Supreme Administrative Court confirmed that the exemption from personal income tax could not be applied in this case and dismissed the cassation complaint.