Tax-exempt sale of real estate and the reporting obligation

Reporting Obligation: The Key Limit of CZK 5 Million and the Risk of Penalties

The Czech Income Tax Act (ITA) in Section § 38v of the ITA imposes an obligation on individual income taxpayers to notify the tax authority of the receipt of any income that is tax-exempt but exceeds the threshold of CZK 5,000,000. This threshold is assessed for each individual income separately, not in aggregate.

The reporting obligation was introduced primarily as a control mechanism. It serves the tax authority to verify the actual state of taxpayers' property and income relationships, especially in the context of large financial flows, and is intended to prevent the concealment of valuable assets.

Our Prague-based lawyers regularly encounter cases where even experienced investors overlook the fact that tax-exempt income does not automatically mean the absence of any administrative duty, leading to unexpected penalties. Our lawyers are ready to help you – write to consultation@arws.cz. 

Sale of Real Estate: When Does the Reporting Obligation Apply to You and When Does It Not?

A key element in assessing the reporting obligation is whether the tax authority can ascertain the tax-exempt income from public registers and records to which it has access. This means that you will most likely not have a reporting obligation for a standard sale of domestic real estate.

The reporting obligation does not apply to tax-exempt income from the sale of immovable property for which the tax authority can obtain data from the Land Registry (Katastr nemovitostí - KN), as stipulated by law and specified in the internal guidelines of the Financial Administration (e.g., GFD Guideline D-56). The exemption specifically applies to these three categories of tax-exempt income from the sale of real estate:

• A family house and its associated land, or

• A unit (apartment) that does not include non-residential space (except for a garage, cellar, or storage room), and its associated land.

• Other immovable property registered in the Land Registry of the Czech Republic (e.g., land, recreational properties, or commercial buildings)

It is important that all these immovable properties must be registered in the Land Registry (KN), as access to this data is the reason for the waiver of the reporting obligation.

The ARROWS law firm can provide you with precise legal opinions that protect against fines and audits, and assess whether your sale falls within the narrow definition of the exemption. For an immediate solution to your situation, write to us at consultation@arws.cz. 

When Does the Reporting Obligation Apply?

Although the sale of domestic real estate registered in the Land Registry is exempt from the reporting obligation, this obligation persists for all other tax-exempt income not covered by the exemptions.

The reporting obligation applies to you if the income exceeds CZK 5 million and, at the same time, it is income that the Financial Administration cannot ascertain from any public register or record. This typically applies to the following areas:

1. Sale of Movable Property: For example, the sale of precious metals, antiques, works of art, or other valuable assets (excluding vehicles) whose transfers are not subject to registers.

2. Other Tax-Exempt Income: The obligation also applies to large gifts, inheritances, and other income exempt from personal income tax that do not fall under explicit exemptions.

Key Risks and Penalties: Why Ignoring the Obligation Can Be More Expensive Than the Tax Itself

Ignoring the reporting obligation is extremely risky financially. The penalty is not calculated based on any potential profit, but on the entire unreported tax-exempt income.

If a taxpayer fails to meet this obligation on time, the tax authority will impose a penalty, the amount of which depends on how quickly the situation is rectified:

1. If the taxpayer fulfills the obligation without being prompted, but does so late, the penalty is 0.1% of the unreported tax-exempt income.

2. If the taxpayer fulfills the obligation only after being prompted by the tax authority, the penalty is 10% of the unreported tax-exempt income.

3. If the taxpayer fails to fulfill the reporting obligation at all, the penalty is set at 15% of the tax-exempt income.

For a property sale of CZK 20 million, a 15% penalty can amount to CZK 3 million, even though the income was tax-exempt. This risk is often underestimated, but it is crucial for owners of significant assets.

Deadlines for Filing the Notification

The deadline for filing the notification of tax-exempt income over CZK 5 million is tied to the deadline for filing the tax return for the tax period in which the income was received.

If a taxpayer normally files a tax return within 3 months after the end of the tax period, the same deadline applies to the notification. Importantly, if the taxpayer uses the services of a tax advisor, and the deadline for filing the return is therefore extended, the deadline for fulfilling the reporting obligation is also extended.

Prevention is Key: How to Properly Fulfill the Reporting Obligation

Although the Ministry of Finance has issued templates, the notification of tax-exempt income does not have a prescribed form and is submitted in a free format. However, it must contain all the legally required elements, such as the taxpayer's identification, the exact amount of income, and a description of the circumstances under which the tax exemption occurred.

Although the form of the notification is flexible, clients should not underestimate the importance of its precise preparation. A professionally prepared notification significantly reduces the risk of additional inquiries, requests for further information, and, above all, the risk of subsequent penalties from the tax authority.

Although it is an administrative act, the precise preparation of the notification of tax-exempt income is an essential legal preventive measure that ARROWS can help you ensure. The ARROWS law firm will assist you in preparing the legally required documents to the highest standard. We provide long-term services to more than 150 joint-stock companies and 250 limited liability companies, which guarantees speed and high quality in your case as well.

Furthermore, our extensive portfolio of high-net-worth clients allows us to do more than just solve legal problems. If interesting investment or business opportunities arise while handling your sale, we can connect you with our clients. And we are also happy to hear your interesting business ideas. Connect with us at consultation@arws.cz and get a tailor-made legal solution.

Can You Reverse the Penalty? Rules for Waiving the Sanction 

If a breach of the reporting obligation has already occurred and the tax authority has imposed a penalty on you, there is a possibility to reverse the situation. The law (Section 38w(6) of the ITA) allows the tax authority to waive the penalty in whole or in part if the failure to comply occurred for so-called excusable grounds.

However, the waiver is not automatic but requires an active step. The taxpayer must submit a written application for a penalty waiver to the locally competent tax authority. The tax authority must decide on this application within six months from the date of its submission.

The success of the application depends on the persuasiveness of the arguments regarding the excusable grounds. The General Financial Directorate has issued an internal methodological guideline on this topic – GFD Guideline D-56. This guideline details the procedure for the Financial Administration authorities when deciding on a penalty waiver and defines what circumstances may be considered excusable. Knowledge and correct application of this guideline in legal argumentation are key to achieving a waiver or reduction of the penalty.

The lawyers at ARROWS have experience in filing applications for penalty waivers based on GFD Guideline D-56 and provide comprehensive representation before administrative authorities, even if a breach of duty has already occurred.

Our Experience is Your Advantage: ARROWS as Your Partner in Tax Law

Our extensive experience from providing long-term services to our clients is your strong guarantee. We pride ourselves on the speed and high quality of our solutions, which is essential in tax matters with firm deadlines. For corporate clients and business owners, we focus on systemic prevention that protects management from personal liability and the company's financial losses.

We offer the drafting of internal directives and rules for managing tax risks, which will ensure proper fulfillment of obligations for all transactions exceeding the established limits. At the same time, we provide expert training for employees, Chief Financial Officers (CFOs), and management, focused on tax obligations related to the sale of assets and investments, including a certificate.

Whether you need the preparation of documentation before a sale or urgent representation before administrative authorities in the event of a looming penalty, ARROWS is your partner for minimizing tax-legal risks.

Conclusion: Prevent Financial Losses – Leave the Obligations to the Experts at ARROWS

Income from the sale of assets over CZK 5 million requires active legal management, even if it is exempt from personal income tax. The penalties for omitting the reporting obligation are drastic, calculated on the entire income, and must be prevented by timely action and precise fulfillment of obligations.

The ARROWS law firm offers you comprehensive legal services that cover the full range of risks associated with the sale of large assets, including:

• Legal consultation and tax analysis of the transaction, including assessment of the holding period test.

• Preparation of legally required documents (Notification of Tax-Exempt Income) and ensuring fulfillment of obligations.

• Representation before administrative authorities and drafting qualified applications for penalty waivers according to GFD Guideline D-56.

• Drafting internal directives and expert training for prevention within your company.

Do not ignore the risk of a 15% penalty on the entire income. Get a tailor-made legal solution from experts who deal with this issue on a regular basis. Connect with us at consultation@arws.cz and minimize your tax risks.