Gift and Inheritance Tax

The Economic and Legal Context of Intergenerational Capital Transfer in the Czech Republic

This is not merely an administrative act of changing the owner in the relevant public register, but a complex strategic operation that has fundamental impacts on the stability of family ties, business continuity, and, last but not least, the fiscal integrity of family wealth.

Whether it involves founders of successful family businesses, owners of extensive real estate portfolios, or holders of significant investment assets, the year 2025 represents a specific milestone. The legislative environment in the area of income tax has undergone changes that, while maintaining a liberal approach to tax-exempt gifts within the family, also introduce stricter control mechanisms and penalties for administrative errors. 

Moreover, with the growing globalization of Czech families and their asset structures, international elements come into play, which can complicate previously simple transfers with the risk of double taxation or the application of foreign law.

Tax Aspects of Asset Transfers in 2025: From Gift Tax to Income Tax

It is essential to begin the analysis by refuting one of the most profound misconceptions that still persists among the lay public and, unfortunately, even a part of the professional community. Under Czech legislation, since 2014, there has been no formal separate "gift tax" or "inheritance tax" as distinct tax titles regulated by a separate act. This terminology, although still used as a shorthand in common parlance, is legally inaccurate and can lead to a misunderstanding of current obligations.

The transformation that took place integrated all gratuitous income, whether acquired through inheritance or donation, under the regime of Act No. 586/1992 Coll., on Income Taxes (hereinafter the "ITA"). While the previous regulation of inheritance and gift tax was based on categorization into groups with different rates, the current regulation in the ITA primarily works with a dual system: income is either exempt or subject to the standard personal income tax rate.

In 2025, it is therefore crucial to distinguish between two basic acquisition regimes that have different tax consequences:

1. Inheritance: Here, the legislator is maximally benevolent. Income from inheritance and bequests is exempt from income tax for individuals, regardless of the value of the assets and the relationship of the heir to the deceased. This means that even if a completely unrelated person inherits, they do not pay income tax. 

2. Gifting: Here, the situation is more complex. A gift is exempt only if specific conditions of kinship or cohabitation are met, as defined, inter alia, in Section 4a of the ITA. If these conditions are not met, the gift is subject to taxation at a rate of 15%, or 23% for income exceeding the progressive threshold (for 2025, the threshold for the 23% rate is set at 36 times the average wage, i.e., approx. CZK 1,676,052 per year).

Exemption from Income Tax for Gifts

When assessing the possibility of tax exemption, it is critical to accurately identify whether the intended recipient falls into the category of exempt persons. An error in this assessment can have fatal financial consequences. The law defines the circle of exempt persons based on the assumption of family solidarity and the economic unity of the family.

Direct and Collateral Lines of Kinship

The Income Tax Act operates with the terms "direct line" and "collateral line," which it adopts from civil law but defines specifically for tax purposes. Gratuitous income is exempt from:

• Relatives in the direct line: Here, the exemption is absolute. This refers to the ancestor-descendant relationship. Gifts from parents to children, grandparents to grandchildren, and vice versa from children to parents are always exempt. There is no value limit.

• Relatives in the collateral line: Here, the law explicitly lists: siblings, uncles, aunts, nephews, and nieces. It is important to note who is missing here – for example, cousins. A gift between cousins is not automatically exempt as a kinship relationship in the collateral line.

• Persons related by marriage and relationships arising from marriage: The legislator also reflects relationships created by marriage. Gifts are exempt from:

• a spouse,

• a child's spouse (son-in-law, daughter-in-law),

• a spouse's child (stepchildren),

• a spouse's parent (father-in-law, mother-in-law),

• a parent's spouse (stepfather, stepmother).

Here, it is necessary to point out an asymmetry in the law that often goes unnoticed. While the "aunt-nephew" relationship is exempt, the relationship with the aunt's husband (who is not a blood relative but only a "social" uncle) is not exempt unless he falls into the category of a cohabiting person. 

Therefore, if an aunt and her husband own a property in their joint marital property (SJM) and want to gift it to the aunt's nephew, half of the gift (from the aunt) is exempt due to kinship. The other half (from the aunt's husband) is not exempt, unless they can prove they share a common household. This is a typical trap for childless couples who want to transfer assets to the nieces or nephews of one of them. 

If you are not sure whether your family relationship falls into an exempt category, do not risk a tax assessment. For an immediate solution to your situation, write to us at consultation@arws.cz. 

For a complete overview of this service, visit our page HERE.

The "Cohabiting Person" Institute

As a safety net for persons who do not fall into the above categories (e.g., unmarried partners, more distant relatives, lifelong friends caring for each other), there is an exemption for persons who lived with the donor in a common household. There are two conditions, and they must be met cumulatively:

• Duration of cohabitation: For at least one year immediately prior to receiving the gift.

• Quality of cohabitation: For this reason, they jointly cared for the household or were dependent on the donor for maintenance.

In the practice of tax offices, this exemption is one of the most frequently scrutinized. The burden of proof lies exclusively with the taxpayer. In 2025, the Tax Administration has sophisticated tools for cross-checking data (energy consumption, mail delivery, location data during inspections). 

Merely formally registering a permanent residence at the registration office is completely insufficient to prove a common household, and the case law of administrative courts has repeatedly confirmed this. A "common household" is a factual state of permanent cohabitation and joint payment of living expenses.

Tax Implications and Rates for Non-Exempt Gifts

If a gift is not exempt, it becomes taxable income under Section 10 of the ITA (other income). The tax rate is progressive:

• 15% for the part of the tax base up to 36 times the average wage (approx. CZK 1.67 million for 2025).

• 23% for the part of the tax base exceeding this threshold.

For a property valued at, for example, CZK 10 million gifted to a "friend" (without a common household), the tax would be:

1. 15% of CZK 1,676,052 = approx. CZK 251,407

2. 23% of (10,000,000 - 1,676,052) = 23% of 8,323,948 = CZK 1,914,508

Total tax = CZK 2,165,915.

This calculation clearly demonstrates why utilizing legal exemptions is absolutely crucial and why any error in qualifying the kinship relationship is extremely costly.

Notification Duty: Administrative Risks and the Sanction Mechanism of Section 38w of the ITA

Even if an asset transfer within the family is fully exempt from tax and the client believes they "have nothing to do with the tax office," they can make a fatal mistake. The Income Tax Act, in Section 38v, introduces an obligation to report exempt income if its value exceeds a certain limit. This provision is often overlooked in practice, leading to draconian penalties that are unparalleled in Czech tax law in their severity relative to the "administrative" nature of the offense.

The CZK 5 Million Limit and Its Interpretation

The obligation to report exempt income arises if the value of the income exceeds CZK 5,000,000.

• Assessing the limit: The limit is assessed for each individual income separately. If you receive three gifts from the same person in one year, each valued at CZK 2 million, the CZK 5 million limit has not been exceeded for any single gift, and the notification duty does not arise (unless the gifts legally formed a single unit, e.g., a divided transfer of one property).

• Inheritance: In the case of inheritance, however, the "income" is considered to be the total value of the acquired inheritance share, not the individual items from the estate. The decisive day for valuation and the creation of the obligation is the day the inheritance decision becomes final.

• Valuation: A critical question is how to determine whether the limit has been exceeded. The law does not require an expert valuation for notification purposes; a professional estimate is sufficient. However, if the taxpayer estimates the value of a gifted house at CZK 4.8 million and does not file a notification, and the tax office subsequently finds during an audit that the market price was CZK 5.2 million, the taxpayer is in default and faces a penalty. 

In borderline cases (asset values between CZK 4 and 6 million), it is therefore strategically safer to always file the notification, even if the value is just below the limit (the law does not prohibit filing a notification for lower amounts for legal certainty), or to have an expert valuation prepared. 

The Sanction Mechanism: Why It Doesn't Pay to Remain Silent

Section 38v of the ITA defines the penalties for failing to report exempt income. These penalties are not a fixed amount but a percentage of the unreported amount, which can lead to astronomical sums for high-value assets.

This legal issue is more complex in practice than it seems. The table of penalties above clearly shows that the risk of error is enormous. A simple oversight can cost a family millions. 

The ARROWS law firm deals with this agenda daily, which allows us to significantly save the client's time and minimize the risk of errors. We are insured for damages up to CZK 350,000,000, which gives you absolute certainty. If you do not want to risk mistakes, damages, or fines, you can safely entrust the entire matter to ARROWS.

Real Estate: Transfer Strategies, Protection, and Cadastral Processes

Real estate traditionally forms the backbone of family wealth in the Czech Republic. However, its transfer is associated with risks of loss of control by the original owner (parent/donor). Fortunately, the legal regulations in the Civil Code (NOZ) offer robust tools to eliminate these risks.

Gifting vs. Inheritance: A Strategic Dilemma

Clients often face the question: "Should I transfer the house to my children now, or leave it to them in my will?" Both paths have their pros and cons, which must be considered in the context of 2025.

Gifting:

• Advantages: The donor is certain that the property has been transferred according to their wishes during their lifetime (eliminating the risk of disputes over the validity of the will). Notary fees for probate proceedings, which are calculated from the value of the property (for a house worth CZK 10 million, this can be tens of thousands of crowns), are avoided. Only the administrative fee for the Land Register (CZK 2,000) is paid.

• Disadvantages: The donor loses ownership rights. Without proper legal protection, they are exposed to the risk of being "kicked out" by the recipient or the property being sold.

Inheritance: 

• Advantages: The owner has full control over the property until the last second of their life. They can change the will at any time.

• Disadvantages: Probate proceedings take months. Notary fees are higher. There is a risk of disputes among heirs and claims by compulsory heirs.

In inheritance cases, the legal advice of a lawyer and the activities of a notary often complement each other, so we recommend involving a notary in the solution where appropriate. ARROWS collaborates, for example, with notary Mgr. Silvie Dohnalová, with Mgr. Tomáš Ostrožlík, and with several other notaries. We can thus offer clients a choice of collaborating notary offices according to the region where they operate or where they need a specific notarial act to be arranged. At the same time, we can help with the continuity of individual legal and notarial steps. For important client cases, it is possible to arrange a joint meeting with a notary directly at the ARROWS offices by prior agreement.

Protective Instruments: Easements and Prohibitions on Alienation

If a client decides to make a gift, the ARROWS law firm strongly recommends not relying on "good faith" within the family, but using real-property security registered in the public register (the Land Register). A modern gift agreement should contain the trio of instruments defined below:

Easement of Lifelong Gratuitous Use (Real Burden of Habitation)

This is the basic element of protection. The donor reserves the right to use the property (all or part of it) until their death. This right is registered on the title deed (LV) as an encumbrance on the property.

The easement has an in rem (real) effect. This means that even if the recipient sells the property (despite a prohibition, see below), the new owner must tolerate the donor's habitation. The donor cannot be evicted.

Real Burden of Care (Výměnek)

While an easement addresses "habitation," it does not address care. Modern contracts therefore often include a so-called real burden (often in the form of a "výměnek" under Section 2707 of the Civil Code). The recipient undertakes to provide the donor with personal care in old age or illness – ensuring shopping, cleaning, transport to the doctor, and meal preparation.

If the recipient fails to provide this care, they are in breach of contract, which may be (in extreme cases) a reason for revoking the gift for ingratitude or claiming compensation.

Prohibition of Alienation and Encumbrance

The easement itself does not prevent the recipient from selling the property (with the encumbrance) or mortgaging it to a bank. If they were to mortgage the house and fail to repay the loan, the house would go into foreclosure. The bailiff would sell the house at auction. While the easement would (usually) remain, living in a house with a new owner who bought it at auction is a nightmare.

Therefore, it is essential to establish a prohibition of alienation and encumbrance as a real right under Section 1761 of the Civil Code.

• Prohibition of alienation: The recipient cannot transfer the property to anyone else without the donor's written consent. The Land Register will not register the transfer.

• Prohibition of encumbrance: The recipient cannot encumber the property (mortgage, loan). The Land Register will not register the lien.

• Duration: It is usually established for the duration of the donor's life.

This combination (easement + real burden + prohibition of alienation/encumbrance) makes the property economically "dead" for anyone except the family. No bank will lend against such a property, and no speculator will buy it. This effectively "locks" the property within the family and protects the donor from the risky behavior of their recipient descendants. 

Do you need to prepare or review a contract with these protective elements? Do not hesitate to contact our office at consultation@arws.cz. 

Procedural Aspects of the Land Register

To register these rights, it is necessary to file an application for registration in the Land Register. In 2025, the registration fee is CZK 2,000. The application must be precisely formulated. An error in the description of the property or in the definition of the right will lead to the rejection of the registration and the need for a new proceeding (and a new fee).

The agreement establishing the easement and the prohibition of alienation can be part of the gift agreement (one document), which saves costs and simplifies the process.

Inheritance Law and Testator Protection: Limits on the Autonomy of Will

Although an owner has the right to dispose of their property, Czech law (inspired by the Germanic model) strongly protects so-called compulsory heirs. This is often a source of frustration for clients who wish to exclude some of their children from the inheritance.

Compulsory Heirs and Calculation of the Compulsory Share

Compulsory heirs are exclusively the children of the deceased (and if they do not inherit, their descendants). The spouse, parents, and siblings are not compulsory heirs.

If the deceased writes a will in which they "forget" one child or bequeath them too little, this child has the right to a so-called compulsory share. The compulsory share is not a right to a share of specific property (a house, a company), but a right to a monetary payment from the estate.

The amount of the compulsory share in 2025 is:

• A minor descendant: Must receive at least 3/4 of their statutory inheritance share.

• An adult descendant: Must receive at least 1/4 of their statutory inheritance share.

Strategy of Collation Against the Compulsory Share 

How can one legally reduce the claim of a compulsory heir who does not behave well towards the family, but the grounds for disinheritance are not met? The answer is the institute of collation.

Everything that the heir received gratuitously from the deceased in the last three years before their death is counted towards the compulsory share. For descendants, anything they received earlier (without a time limit) is also counted, provided it was a gift that exceeds "ordinary gifting" (e.g., money for an apartment, a building plot, payment of debts).

Do you need advice on preparing a will and a collation clause? Contact us at consultation@arws.cz. 

Trust Funds: An Alternative for Complex Families

Trust funds are an increasingly popular tool for protecting assets from fragmentation and from the claims of compulsory heirs.

The principle is that the founder sets aside assets from their ownership into a fund. The assets become "property without an owner," managed by a trustee for the benefit of the beneficiaries.

• Protection: Because the assets no longer belong to the deceased at the time of death (they belong to the fund), they do not fall directly into the inheritance proceedings. Although case law and legal literature debate whether assets in a fund can be counted towards the compulsory share (especially if they were placed in the fund shortly before death with the intent to circumvent the law), a fund generally provides a much higher degree of protection and flexibility than a simple will.

• Tax: Distributions from a trust fund to family members are exempt from income tax under the same conditions as gifts.

Conclusion and Summary Recommendations

The year 2025 brings a stable but administratively demanding environment for family asset transfers in the Czech Republic. The ability to transfer assets within the family with a zero tax burden is a privilege that is balanced by strict requirements for record-keeping (notification duty) and proof (expert valuations).

Key steps for ARROWS clients:

• Do not underestimate the notification duty: The CZK 5 million limit is low given today's prices for real estate and companies. The notification is free; the penalties are in the millions.

• Secure evidence of value: An expert valuation as of the date of the gift is your insurance for the future sale of a company or property (time test, CZK 40 million limit).

• Protect the donor: A gift agreement without an easement and a prohibition of alienation is a gamble. Make full use of the Land Register.

• Think about the "black sheep": Use the institute of collation against the compulsory share to protect the testator's will from compulsory heirs.

• Address the international element: If you have assets or children abroad, standard Czech solutions are not enough. A choice of law in the will and a tax analysis of the other jurisdiction are essential.

The ARROWS law firm is prepared to provide highly specialized legal and tax advice in these areas to ensure that your assets will serve future generations exactly as you wish.