Penalties for Failure to Notify Tax-Exempt Income in the Case Law of the Supreme Administrative Court

The notification obligation does not apply to tax-exempt income that can be identified from public registers or records accessible to the tax authority, from which it can be verified that the income is tax-exempt and who received it. A typical example includes information available from the Czech Cadastral Register of Real Estate.

Failure to comply with the notification obligation is subject to relatively severe penalties. The law provides for a penalty of 0.1% of the unreported amount if the obligation is fulfilled subsequently without a request from the tax authority, 10% if the notification is submitted only following a request by the tax authority, and 15% if the obligation is not fulfilled at all. The circumstances under which such penalties may be remitted have long been the subject of judicial review. The recent case law of the Supreme Administrative Court confirms a very restrictive approach.

Current Case Law of the Supreme Administrative Court

In its judgment of 16 October 2025, the Supreme Administrative Court dealt with a case in which, in 2016, a taxpayer acquired investment fund units from her spouse by way of a gratuitous transfer, with a total value of approximately CZK 16 million. The transfer took place within the family and the income was exempt from personal income tax; however, it was not notified to the tax authority. Following a subsequent request by the tax authority, a penalty amounting to 10% of the unreported income was imposed.

The taxpayer applied for remission of the penalty pursuant to Section 38w(6) of the Income Taxes Act, arguing in particular that she had not been aware of the notification obligation and that the penalty imposed was disproportionate in view of her personal and financial circumstances. Neither the tax authority nor the administrative courts accepted these arguments, and the Supreme Administrative Court upheld their decisions.

Ignorance of the Obligation Is Not an Excuse

The Supreme Administrative Court emphasised that ignorance of the notification obligation cannot be regarded as a justifiable reason for remitting the penalty. In the case at hand, the Court pointed to the amount and nature of the income received. A one-off gratuitous transfer of assets worth tens of millions of Czech crowns constitutes such an extraordinary transaction that it should prompt the taxpayer to verify his/her tax obligations or seek professional advice. Failure to do so entails corresponding risks. 

This conclusion follows established case law, according to which taxpayers cannot rely on their subjective belief that a notification obligation does not apply to them. What matters is the objective fulfilment of the statutory conditions, not the taxpayer’s good faith.

Remission of Penalties as an Exceptional Measure

The Court further addressed the nature of penalty remission. It stressed that remission does not represent a “second instance” review of the legality of the imposed penalty. Rather, it is an exceptional instrument intended to mitigate excessively harsh effects of the law only in cases where the breach of the obligation occurred due to objectively justifiable reasons.

The tax authority is required to assess the proportionality of the imposed penalty only at the stage of deciding on its remission. At the same time, the burden of proof in such proceedings lies primarily with the taxpayer. It is not sufficient to claim in general terms that the penalty is high or that the taxpayer has a low regular income. The taxpayer must specifically demonstrate and substantiate the exceptional nature of the case and explain why the penalty would constitute a disproportionate interference with their property rights.

In the case under review, the Court noted that it had not been proven that the taxpayer was unable to dispose of the acquired assets or at least partially monetise them in order to pay the penalty. Arguments based solely on the level of employment income were therefore deemed insufficient.

Conclusion

The current case law of the Supreme Administrative Court once again confirms a strict approach to the sanctioning of failures to notify tax-exempt income. Arguments based on ignorance of the obligation cannot succeed, and penalty remission remains an exceptional remedy reserved for genuinely extraordinary circumstances. Increased attention should therefore be paid in particular to one-off transactions involving high-value income, even where such income is exempt from personal income tax.

We remind taxpayers that notification of tax-exempt income exceeding CZK 5,000,000 must be submitted no later than till the end of the deadline for filing the tax return for the period in which the income was received. For income received in 2025, this deadline therefore falls on 1 April 2026. If the taxpayer is also obliged to file a tax return together with the notification and submits it electronically, the deadline is extended to 4 May 2026; if the tax return is filed through a tax advisor, the deadline is extended to 1 July 2026.

In the event of any uncertainty as to whether a specific tax-exempt income is subject to the notification obligation, or whether an exemption applies due to the availability of information from public registers, it is advisable to consult professionals. We will be happy to assist you with assessing your specific situation, fulfilling the notification obligation and communicating with the tax authority, thereby helping you avoid unnecessary penalties.

Authors:

Gabriela Ivanco, Tax Department Manager

Anna Klímová, Newsletter Editor