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  • Notification of tax-exempt income - a new duty when filing individual income tax return

    01. 06. 2015

    Notification of tax-exempt income is among new duties imposed on individuals as of 2015. This duty arises for every tax payer whose tax-exempt income is in excess of 5 million Czech crowns in a given tax year, while the 5-million threshold applies to each individual income separately. The notification must be filed with the tax administration together with the tax return, i.e. within the same deadline. The Ministry of Finance has published the specimen of the form on the web site of the Financial Administration of the Czech Republic under no. 25 5252 MFIN, specimen No. 1. Using this form, the taxpayer must provide essential information in keeping with provisions of Section § 38v of Act No. 586/1992 Coll., the Income Tax Act, as amended (the "ITA"), which include the amount of income, description of circumstances under which the income was created and the date when the income was created. In case of income to joint property, only one of the spouses files the form.

    According to the third paragraph of the aforementioned provisions of the ITA, the obligation to notify tax-exempt income doesn´t apply to income recorded in registries or records to which the administrator has access. However, it has not been satisfactorily explained by the administrator which particular types of incomes the legislator had in mind, i.e. for which types of income the notification will not be required from the taxpayer.

    In a communication from the Financial Administration of the Czech Republic on tax-exempt individual income dated 21. 1. 2015, it is stated that registries or records, to which the tax administrator has access, are limited to the Land Registry (the cadaster) of the Czech Republic. The Financial Administration of the Czech Republic in the said communication goes on to conclude that the obligation to file the notification doesn´t thus apply to:

    • income from the sale of a house and attached land which are exempt from tax according to provisions of Section 4 (1)(a) of ITA;
  • • income from the sale of immovable property made more than five years after the acquisition of such immovable property exempt from tax under provisions of Section 4 (1)(b) of the ITA; and
  • • income from the sale of a unit, which is not commercial space other than a garage, basement or storage room, and related land exempt from tax according to the provisions of Section 4 (1)(u) of the ITA.

  • However, such interpretation is inconsistent with the language and terminology of the new Civil Code, effective as of January 1st, 2014, which does not identify the Land Records (cadaster) as a register or records but as a public list. With this in mind and given the hitherto practice of the Financial Administration of the Czech Republic, additional changes in the interpretation of the said obligation may be expected during the course of 2015. Moreover, taxpayers cannot be sure about the form to be used to notify the tax-exempt income because according to information from the General Tax Directorate, the current form of the notification published may change during 2015 as well.

    Although, it appears from the above that many issues surrounding the obligation to notify tax-exempt income remain unclear, there is still time for clarification, as the individual income tax return for the year 2015 is due to be filed by 1st of April, 2016.

    If no clarifications are made available by competent authorities in due time to clarify the obligation of tax payers in relation to reporting of tax-exempt income, it is be recommended to notify any and all exempt income regardless of the exceptions set out in the provisions of Section 38v (3) of ITA because a failure to report such income is subject to a fine of up to 15% of the amount of undeclared income.

    If no clarifications are made available by competent authorities in due time to clarify the obligation of tax payers in relation to reporting of tax-exempt income, it is be recommended to notify any and all exempt income regardless of the exceptions set out in the provisions of Section 38v (3) of ITA because a failure to report such income is subject to a fine of up to 15% of the amount of undeclared income.

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