Oznámení o osvobozených příjmech – kdy je nutno podat?

Notification of Exempt Personal Income - what is actually the 5 million threshold?

This time we bring you an extremely interesting judgment of the Regional Court (more details HERE) addressing the question whether the taxpayer in the case at hand was obliged to notify the tax administrator of exempt income within the meaning of Section 38v of the Income Tax Act ("ITA").

Situation

• On 14 April 2016, the husband transferred securities with a total value of over CZK 15 million to his wife (the applicant). Specifically, these were variously designated unit certificates (e.g., CSOB Wealth, CSOB Portfolio Pro May 90, CSOB Growth, etc.).
• None of the transferred units exceeded the total value of CZK 5,000,000.
• The tax administrator further found that the spouses had had a reduced community of property since 2005 and therefore the transfer of the securities was a transfer from the sole ownership of the husband to the sole ownership of the applicant. The gratuitous income from the husband is exempt from tax under section 10(3)(c)(1) of the ITA.

The tax authorities' view

• The tax administrator concluded that the applicant received income in excess of CZK 5 000 000 by way of the transfer of securities and was obliged to notify the tax administrator of this fact by the end of the deadline for filing the tax return for the tax period in which the income was received, pursuant to Section 38v of the ITA. However, the applicant did not submit a notification of the exempt income until the tax administrator's request of 13 January 2020, thereby incurring an obligation to pay a penalty for failure to notify the exempt income in the amount of 10 % of the amount of the unreported income.
• In their assessment, the tax authorities based their assessment in particular on the fact that, although the securities were several different securities, they were transferred on the same day and from the same person (the applicant's husband).

The taxpayer's view

• The applicant considers that the contested decision is unlawful on the ground of incorrect interpretation and application of Section 38v of the ITA. According to the applicant, the tax authorities interpreted the provision in question extensively, since they interpreted the (individual) income as incomes (plural). However, according to the applicant, the provision in question is so precise and unambiguous that it does not allow such an interpretation and must be interpreted literally. The applicant submitted that it had proved the individual nature of the income by submitting orders for the registration of the transfer of investment instruments, which showed that they were transfers of various securities and that none of the income exceeded CZK 5 000 000.

The Regional Court's view

• The limit of CZK 5 000 000 for the creation of a reporting obligation for exempt income within the meaning of section 38v of the ITA is assessed for each individual income received by the taxpayer. It is not possible to add up several incomes without further consideration and only for the amount thus generated to assess whether it exceeded the limit. The wording of the Act is unambiguous and the legislature has used the term income in the singular.
• A single income within the meaning of Section 38v of the Income Tax Act is, in principle, any benefit received in the form of monetary, non-monetary or, where applicable, in the form of a monetarily valued benefit (which is exempt from personal income tax). Further, a single receipt in the form of a collective item or a receipt that has been purposely spread over several receipts in order to circumvent the regime of Section 38v of the ITA should be considered a single income.
• The tax authorities limited themselves to emphasising the temporal aspect of the whole transaction and the fact that all the securities were transferred to the applicant from one person, but this cannot in itself be sufficient to conclude that it was a single income. Generally speaking, where a taxpayer receives several non-monetary transactions (items), even if received on one day and from one person, it may not automatically constitute a single income. Such a conclusion is not supported by the law, the explanatory memorandum or the commentary literature. The assessment will vary from case to case. If a taxpayer receives several individual items in this way, but they can also be considered as one collective item, it will be an individual income. However, if there are individual items which do not meet the above conditions, they will be separate incomes.
• The applicant has received a set of securities consisting of differently designated units. Those units were transferred to her on the basis of a total of 12 orders for registration of the transfer of investment instruments (the applicant attached those orders to her appeal against the payment orders). It is also apparent from those orders that they are separate investment instruments with different identification numbers (ISINs).
• In the Regional Court's view, it cannot be concluded from those facts that the set of securities in question constitutes a single collective item. The documents collected by the tax authorities do not in any way show that there is such an internal connection between the individual elements (the units) in the present case that the whole set of securities can be regarded as a single object bearing a common designation. Their receipt by the applicant cannot therefore be regarded as the receipt of a single income, but of a total of 12 incomes (i.e. that each unit was a separate income).
• When the entire transaction is assessed in such a way that there were a total of 12 separate incomes, it is not the case that the statutory limit of CZK 5,000,000 per individual income was exceeded.

A cassation has been filed, so we look forward to what the Supreme Administrative Court has to say.

If you have any questions, please contact the EY tax team you regularly work with.

Author:

Lucie Říhová