As of 1 January 2014, the act on inheritance, gift, and real estate transfer tax was repealed. Since then, it has become a common idea that things donated to one's own children are not subject to any tax. Several of our clients have seen for themselves that it is not so. The adjustment of the inheritance and gifts tax has been transferred into the income tax act. The legislators endeavoured to maintain the same effects as those ensuing from the original legislation. Did they succeed in doing so? In this article we will focus on evaluation of tax effects of donation between natural persons in direct line of descent, that is for example between parents and children.

According to the original gift tax act, gratuitous acquisition of property, if it occurred between persons include in the 1st line (direct line relatives and spouses) and in the 2nd line (collateral line relatives), was exempted from the gift tax. Are these gratuitous acquisitions treated the same way in the income tax act?

The income tax act treats the taxation of gratuitous income (in the form of a git) in the case of natural persons in article 10. This means that it includes this income in the so-called other income. In article 10 paragraph 3 it is stated that gratuitous income from a relative in direct line and in collateral line, among others, are exempted from the income tax. This would suggest a similar adjustment as the act on gift tax. But a problem occurs in the sense of what is understood by other income? The stipulation of article 10 defines at the beginning that: “Other income, which raises the assets, unless this is income according to article 6 to 9, includes especially the following”. This definition thus specifies that not all gratuitous income between natural persons in direct line can be included among in income and exempted. Exemption does not relate to gratuitous income connected to employment, self-employed activity, capital income and income from rent.

A similar limitation is not a complete novelty in the income tax act, a certain similarity had already existed when the gift tax act was in operation, when it was stipulated in the income tax act that gifts are not subject to the income tax of natural persons, with the exception of gifts accepted in connection with performing employment, or in connection with enterprising or performing another activity of self-employment. According to the new legal regulation, this limitation is also extended to gifts received in connection with income from rent.

Cases of when gifts are received mainly in connection with enterprising and when not have also been resolved by the Supreme Administrative Court (for example: 2 Afs 23/2008-66, of 28 August 2008). An annotation of this judgment says: “The connection between receiving a gift and enterprising in the sense of article 3 paragraph 4 letter a) of act no. 586/1992 Sb., on income taxes, must be a clearly prevailing connection. Because id there are other connections here, which prevail over the connection to enterprising, or if these connections are put on par with the connection with enterprising, it is not possible in such a case to reach an unambiguous conclusion that the gift was received in connection with enterprising and not in connection with another fact.” The case-law thus often interprets these cases in favour of the tax subject, if another, all be it slight, connection, exists.

With regard to the above-mentioned, we recommend a clear formulation of the purpose of making the donation, so that it is clear what income and activities this gift relates to. If you are not certain when donating, we are prepared to offer our services to you and co-operatively formulate the purpose of donation correctly and unambiguously.

Next time we will continue our story about donation with VAT and other taxes.

Ivan Fučík in cooperation with Jan Dyškant