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| March 31, 2016

Income exempted from the income tax must be announced to the tax office

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As of January 1, 2015, an amendment of the income tax came in operation, based on which taxpayers are obliged to announce even income, which is exempted from personal income tax, but has exceeded the sum of CZK 5,000,000, to their local tax administrator.

For illustration, this may include the following exempted income:

  • gifts from relatives in direct line or side-line;
  • inheritance acquired through the death of the devisor, if he was in direct line or side-line with the  heir;
  • winnings from lotteries, betting and other games exempted according to the income tax act;
  • revenues from the sale of a stake in a company, which was exempted from taxes; etc.

In case of acquiring exempted income above the limit of CZK 5,000,000, the tax office demands the following information:

  1. the height of income;
  2. description of the circumstance of acquiring the income; and
  3. the date, on which the income occurred.

The notification duty does not relate to cases, when the tax office can find out information about the source of income from registers, to which it has access and which are published on the notice board. Typically, this means for example exempted income acquired from the sale of real estate. The tax administrator has not published any registers affected, on its notice board. It therefore remains an open question if all exempted income exceeding the given limit should not be announced, according to a strict interpretation of this act, until this list has been published.

With regard to the fact that this is a new legal obligation, many unanswered questions arise, such as for example the question if it is necessary to announce income, which was not taxed for other reasons than exemption from taxes (for example they are not subject to taxation or they are not taxed due to the form of roundup of the withholding tax). A major question is, how the limit of CZK 5,000,000 should be assessed in case the income is paid to the taxpayer in parts (instalments), that is if only the individual instalments exceeding the given limit should be announced, or all instalments, if the total income relating to the same transaction will exceed this limit. Problems of interpretation may also arise in case of income acquired through inheritance and income passed to the common property of spouses, or proportionate co-ownership. Within foreseeable future, a meeting is being prepared of representatives of the Chamber of Tax Consultants and officials from the General Financial Directorate. We will inform you about the possible interesting conclusions.

In case of failure to announce exempted income to the tax office, tax payers may face a fine reaching:

  1. 0.1 % of the sum of the unannounced income, if fulfilling this duty without being asked to;
  2. 10 % of the sum of the unannounced income, if the taxpayer fulfils the duty within an additional period, after having been asked to do so by the tax office, or
  3. 15 % of the sum of the unannounced income, if the taxpayer fails to fulfil this duty even within the additional period.

Exempted revenues are announced using a prescribed form entitled “Oznámení o osvobozených příjmech podle § 38v zákona”. For the year 2015, it needs to be submitted within the deadline for submitting the personal income tax return for the year 2015, that is by April 1, 2016, or by July 1, 2016, in case the taxpayer has authorised a tax consultant to draw up and submit his tax return. 

If the duty to announce exempted income has arisen for you, we will be happy to prepare the report for you, or advise you with if there are any unclear cases.