Was your income for the year 2018 higher that 5 million CZK and exempt from tax according to the legislation on personal income tax? Then you may be one of those people who are obliged to notify the tax office of their tax exempt income. This obligation was introduced in 2015. In this article we will inform you about when the obligation arises to submit a Notice of tax exempt personal income (further only “Notice”) to the tax office, and, further, you will learn the deadline for the submission, and last but not least what sanctions may be imposed against you if you do not notify the tax office.   

The law states that natural persons with tax exempt income higher than 5 million CZK have the obligation to notify the tax office. They may submit the Notice already during the year in which they acquire this income. The furthest date for submission is the same as the date for submitting your personal income tax return forms. The obligation to submit this Notice applies to all natural persons regardless of whether they are obliged to submit a tax return form relating to personal income tax, or not.  

It is necessary to state the range of income types which this obligation to notify applies to. As was mentioned already, all of them are exempt from income tax. To exemplify, such types of income include: gifts, inheritance, and sale of shares. There are of course many more, but listing them all is not the main aim of this article. This obligation does not apply to cases in which the tax administration can access the information about tax exempt income exceeding 5 million CZK through registers and records. This exception is best illustrated with examples. 

Example no. 1:

Mrs Smith inherited a house in Prague from her father. The value of the house was established during the proceedings of the succession to be 7 million CZK. Because the tax administration can access the information about the transfer of immovable assets from the cadastre register, no obligation to submit the Notice arises in this case. Should Mrs Smith inherit something else than real estate property, for example an art collection valued at 7 million CZK, she would have the obligation to notify.

We would like to note at this point that the Czech tax administration does not agree with this opinion. According to them it is necessary to report also the tax exempt income from transfer of a Czech real estate where acquired differently from purchase (e.g. inheritance, gift). In such a case it is to recommend reporting such income even though such obligation does not flow from the Income Tax Act directly, or file a law suit.   

Example no. 2: 

Mr Black has decided to enjoy his retirement properly and to get the means, he wants to sell some paintings from his collection. He sold 2 paintings in June. One for 4 million CZK, the other one for 3 million CZK. He sold both of them to the same buyer within one single transaction. In this case, this transaction counts as one income and Mr Black has the obligation to submit the Notice to the tax office.

The Notice does not have a specific fixed form, but must include information required by the law.  

The Income Tax Act stipulates the rates of fines which may be imposed on natural persons if they fail to notify the tax office of a tax exempt income. The amounts depend on the amount of income which one failed to notify of:  

• 0,1% if the taxpayer fulfils the obligation after the deadline without being asked, 
• 10% if the taxpayer fulfils the obligation in the additional period after having been asked by the tax office, 
• 15% if the taxpayer does not fulfil the obligation even in the additional period.  

Example no. 3:

In 2017, Mrs Fox received an art collection valued at 8 million CZK as a gift from her parents. Because she had not submitted the Notice of this tax exempt income, the tax administration asked her to rectify that. Mrs Fox submitted the Notice within the 15-day additional period. The tax office subsequently assessed a fine of 800 000 CZK. 

In cases with enough well-founded reasons, it is possible to apply for immunity from the fine. However, it cannot be demanded. If you are interested in a consultation regarding this topic, do not hesitate to contact us.  

Veronika Džalavjan & Daniela Riegel