How wealthy individuals must prove the origin of their assets

Legislative Basis and Intent of the Act

The Act gives tax authorities two key powers: the authority to call upon a taxpayer to prove their income and the authority to request a declaration of assets. This power of tax administrators is quite common and exists in most European states, signaling an international trend towards greater tax transparency.

Dual Control Regime: Tax Administration vs. AML Regulator

For high-net-worth clients, the risk of regulatory scrutiny is divided into two main, yet closely interconnected, areas. The first is tax risk, which relates to the consistency between officially declared income and the actual increase in assets. This risk is governed primarily by the Tax Code and specific provisions of the Income Tax Act (§ 38x et seq.).

The second area is AML Risk (Anti-Money Laundering), which concerns the legality of sources in the context of business relationships, governed by Act No. 253/2008 Coll. (the AML Act). This risk is not limited to the state but is also actively monitored by private entities – so-called "obliged persons," which include banks, investment companies, and, under certain conditions, law firms.

Insufficient documentation or doubts about the source of funds with one obliged person (such as a bank or a lawyer) can lead to an immediate escalation into the second area. If a lawyer or bank does not receive satisfactory evidence of the origin of a large financial flow, they are obliged to report a suspicious transaction to the Financial Analytical Office (FAÚ). 

A report from the FAÚ, or even an international report from a bank under CRS or FATCA, can become a direct impetus for the Tax Administration to initiate tax proceedings on the proof of assets if the Tax Office identifies a discrepancy exceeding the threshold of CZK 10 million. A client who takes the risk of non-transparency in the AML sphere automatically increases the risk of a direct tax audit. This interconnectedness requires a comprehensive, integrated compliance strategy that secures both fronts simultaneously.

The Tax Regime: Rules of the Game with the Tax Administration

The Act on Proving the Origin of Assets focuses on taxpayers where there is a significant discrepancy between their declared income and the actual increase in their assets. The Tax Administration cannot initiate audits across the board but must meet strict criteria.

Critical Audit Triggers: Wealth Thresholds Under Scrutiny

A tax audit of assets is triggered if the Tax Office finds that the difference between the assets a taxpayer cannot substantiate with taxed or tax-exempt income reaches at least CZK 10 million. This threshold is intended to ensure that the law focuses on genuinely significant cases, not on minor errors.

If this threshold is met and the taxpayer is unable to prove the origin of their income, the Tax Administration will assess the tax using "aids," meaning it will estimate the taxpayer's income based on the increase in their assets. However, this step can only be taken if the estimated amount of the additionally assessed tax (based on untaxed income) is higher than CZK 2 million. These two financial thresholds form the primary "triggers" for a tax audit of assets.

The Strategic Importance of the Declaration of Assets

The institute of proving the origin of assets gives the Tax Office the authority to call upon a taxpayer to submit a declaration of assets. This procedural step is strategically crucial for the tax administrator as it allows them to capture the current state of a taxpayer's assets where a significant amount of untaxed income is suspected.

The purpose of the declaration is to prevent the taxpayer's future arguments. If the taxpayer later claims that the assets the Tax Office is now reviewing were owned previously, the declaration of assets from that date effectively refutes this claim. It is therefore a tool for fixing the state of assets.

It is absolutely crucial that submitting a false or incomplete declaration of assets is classified as the criminal offense of breaching the duty to make a truthful declaration of assets (§ 227 of the Criminal Code). This illegal act carries a penalty of imprisonment from six months to three years, a monetary penalty, or a ban on activities. 

This risk poses a direct and serious threat to the personal freedom of HNWIs, and it is therefore necessary to approach the completion of the declaration with maximum legal diligence.

The Evidentiary Burden of Historical Assets

For HNWIs, the problem of proving the origin of assets acquired long ago, often before the Act came into effect in 2016, frequently arises. While the tax administrator may primarily review the increase in assets after this date, they are also entitled to question older deposits if they were used to finance current wealth.

As case law shows, for example in the case of personal contributions to a business (a law firm), the Tax Office insists on relevant documentation of the origin and taxation of these funds, even if they were contributed to the company earlier. In other words, if a taxpayer claims to have financed assets from personal savings, these savings must be supported by relevant evidence proving their origin and taxation at the time they were generated. Merely making a statement or a statutory declaration is not sufficient.

A legal strategy for high-net-worth clients must therefore include a comprehensive forensic reconstruction of cash flows, which retroactively links historical acquisition titles, inheritances, gifts, and tax-exempt income with the current state of assets. This is the only way to legally address and neutralize the potential CZK 10 million discrepancy that can arise even from old and poorly documented transactions.

Global Transparency and AML Obligations: More Than Just a Tax Audit

Tax proceedings are no longer an isolated national matter. Thanks to international agreements and AML regulations, HNWIs face scrutiny that transcends national borders and integrates the tax sphere with the fight against money laundering.

International Overview: How FATCA and CRS Monitor You

The automatic exchange of information (AEoI) is ensured by the implementation of global standards, the most important of which are CRS (Common Reporting Standard) and FATCA (Foreign Account Tax Compliance Act). The implementation of CRS into Czech legislation was carried out by Act No. 164/2013 Coll. with the aim of preventing tax evasion.

Banks, as obliged persons, have identification, verification, and reporting obligations towards clients who are tax non-residents (under CRS) or U.S. persons (under FATCA). The automatic exchange of data through CRS and FATCA provides the Czech Tax Administration with a global view of a client's assets, even before any audit is initiated. 

This data, which shows foreign bank accounts and investments, serves as a primary impetus for identifying significant, undocumented cash flows that could exceed the CZK 10 million trigger threshold for domestic tax proceedings. Connect with us at consultation@arws.cz to prevent international tax audits. 

Any discrepancy between an international bank report and a Czech tax return is immediately detectable and becomes a direct path to an additional tax assessment and penalties. Another element of international control is the Cash Control Regulation, which requires that the transport of cash amounting to at least EUR 10,000 when entering or leaving the European Union be declared to the Customs Administration. 

The AML Act and the Duty of Inquiry (Lawyers and Banks)

Lawyers fall under the AML Act (Act No. 253/2008 Coll.) if they perform so-called monitored activities. These include, for example, arranging the purchase or sale of real estate, managing a client's money, securities, or other assets, or acting on behalf of a client in connection with establishing a bank or securities account.

As part of standard client due diligence, a lawyer is obliged to ascertain the source of the funds or other assets involved in the specific transaction or business relationship. This process is necessary to verify that the money does not originate from criminal activity.

Enhanced Due Diligence for Politically Exposed Persons (PEPs)

The level of regulatory scrutiny increases significantly for clients who are considered Politically Exposed Persons (PEPs). In this case, the lawyer is not only obliged to ascertain the origin of the money for the specific transaction. Instead, they are required to take reasonable measures to ascertain the origin of the person's ENTIRE assets, not just the subset being used in the transaction in question.

This requirement forces HNWIs with a political background to maintain the strictest level of transparency and documentation. Insufficient proof of the origin of their entire wealth can block even relatively small transactions or lead to the refusal to establish a business relationship by banks or lawyers.

The seriousness of AML risk is underscored by sanctions. Failure by an obliged person to report a suspicious transaction can lead to a fine of up to CZK 5,000,000 and the risk of criminal prosecution for complicity. Furthermore, failure to register the ultimate beneficial owner in the evidence register is punishable by a fine of up to CZK 1,000,000 and causes problems with banks and business partners.

The Anatomy of Bulletproof Documentation: How to Prove the Origin of Historical Assets

In tax proceedings, the burden of proof lies with the taxpayer. If a taxpayer is called upon by the Tax Office to prove their income, the case law of the Supreme Administrative Court clearly states that it is not sufficient to respond to such a call with a mere assertion. This means that a client's statutory declaration, although part of the documentation in legal practice, is NOT in itself relevant evidence in tax proceedings and does not sufficiently prove the origin or taxation of the funds. 

Practical Checklist of Key Documents for Proving Origin

To ensure the highest evidentiary strength when proving the origin of assets, the following type of documentation is required:

1. Contractual documentation and acquisition titles: Documents proving the acquisition title are key. These include gift agreements, loan or credit agreements, purchase agreements, and, in the case of corporate finance, decisions on profit distribution or an increase in share capital.

2. Official and public records: Among the strongest evidence are documents issued by public authorities, such as court decisions (e.g., in inheritance proceedings) or extracts from public registers, such as the public register of commercial companies or the Land Registry.

3. Financial flows: Detailed bank statements from the client's account, which document the preceding and subsequent flow of funds, are essential. These statements must provide information on the volume, frequency, and direction of transactions (from whom and to where the assets were moved).

ARROWS' services include preparing documentation that protects against fines and sanctions, and ensuring that your documents will stand up to scrutiny from the Tax Office and the FAÚ. For an immediate solution for your documentation, write to us at consultation@arws.cz.

Principles for Handling Large Tax-Exempt Income

A significant portion of HNWIs' wealth comes from income that is legal but exempt from tax (e.g., the sale of valuable assets after the time test has been met, inheritances, gifts). If this tax-exempt income exceeds the threshold of CZK 5,000,000 per tax period (assessed for each income separately), it is subject to a reporting obligation to the Tax Office.

This reporting obligation, often perceived as an administrative burden, is actually a key tool for legal defense. The notification must include the amount of income, the legal provision for the exemption, a description of the circumstances of acquisition, and the date the income arose. In the case of an inheritance, the date the income arose is the date the court's decision on the inheritance became final.

By proactively and flawlessly submitting the Notification of Tax-Exempt Income, the taxpayer formally informs the state of a large, legal, and non-taxable financial flow. This preemptively neutralizes a potential discrepancy in the future. If this large but undocumented income were later used to purchase assets, it could, without notification, be mistakenly included in the critical CZK 10 million threshold of untaxed income, which would trigger a tax audit.

Proactive Asset Protection with ARROWS: Your Integrated Shield Against Regulators

Given the increasing digital and international transparency, a passive approach to documenting one's own assets is unsustainable and highly risky for HNWIs. Clients need a solution that transcends the boundaries of individual legal fields. The ARROWS law firm provides a comprehensive, integrated defense that addresses tax law, administrative AML risks, and potential criminal consequences.

Legal Audit and Ensuring Evidentiary Strength

The strategic imperative is to act proactively, not reactively. Instead of waiting for an official call from the Tax Office to prove income (by which time it is too late for systematic correction), ARROWS conducts an internal legal audit of the asset structure.

This audit simulates a tax inspection with the aim of identifying weak points in the documentation. The audit includes a forensic reconstruction of the asset history. It checks whether existing contracts, acquisition titles, and bank statements meet the criteria of "relevant evidence" according to case law. Our Prague-based firm helps with tracing and legally securing documentation for historical assets and large tax-exempt incomes, especially those subject to the Tax Office's reporting obligation over CZK 5 million.

Comprehensive AML and Corporate Compliance

For the client's corporate entities, ARROWS ensures absolute compliance with the AML Act. A key service is the preparation of internal AML directives and ensuring mandatory employee training, thereby minimizing the risk of high fines (up to CZK 5 million) for insufficient awareness of suspicious transactions.

Furthermore, the management of the Ultimate Beneficial Owner (UBO) is critical. Ensuring the correct identification and registration of the UBO is essential for business continuity and communication with banks, and it eliminates the risk of a CZK 1 million fine. A correct UBO structure is the foundation for any subsequent AML or tax audit.

Managing Cross-Border and Digital Risks

Given the international structures of HNWIs, it is also necessary to address the complex issue of cross-border data. ARROWS provides advice on GDPR and IT compliance, especially when using global cloud platforms (like Microsoft 365, AWS).

Compliance is ensured for the transfer of personal data outside the EU (most often to the United States), which requires complex legal mechanisms, including so-called Standard Contractual Clauses (SCCs) and conducting a Transfer Impact Assessment (TIA) in accordance with the Schrems II case law. 

Our EU-based firm thus provides the client with comprehensive peace of mind and certainty that no regulatory area – tax, AML, criminal, or data – remains unsecured, thereby protecting not only the client's finances but also their personal freedom and business continuity.

Conclusion 

In an era of absolute digital transparency, where bank reporting (CRS/FATCA) provides the Tax Administration with a global view of your assets, passively relying on historical customs is dangerous. The assets of HNWIs are under constant cross-scrutiny. Any gap in documentation can lead to the initiation of tax proceedings, an additional tax assessment with a penalty of up to 100%, and, in the case of a false declaration, even criminal prosecution with the threat of imprisonment.

Do not leave the protection of your assets to chance. If you want to be absolutely certain that your wealth will withstand any tax or AML audit – from substantiating historical deposits to international reporting – a proactive legal audit and precise preparation of documentation with the highest evidentiary strength are essential.

The ARROWS law firm offers you a comprehensive legal assessment of your asset structure and the preparation of a detailed documentation strategy to eliminate all risks of sanctions, additional tax assessments with penalties of up to 100%, and criminal prosecution. Contact us today at consultation@arws.cz for a discreet and non-binding consultation on how to effectively secure your assets and achieve full regulatory compliance.