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Dear Readers,

In this article, you will be informed about Judgment of the Supreme Administrative Court (the “SAC”) No. 5 Afs 220/2023 - 36 dated 16 August 2024. In this judgment, the SAC dealt with the term ‘residence’ used in Section 4 (1) (a) of Act No. 586/1992 Coll., on Income Taxes (the “ITA”) and a connection to compliance with conditions for exemption from tax on the sale of an immovable asset.

What was the Judgment about?

The complainant received income from the sale of a family house and made the income exempt from individual income tax in compliance with Section 4 (1) (a) of the ITA. She believed that she had met exemption conditions because she resided in the property immediately before the sale – she lived there and used the property.

Extract from Section 4 (1) (a) of the ITA

(1) The following shall be exempt from tax:

(a) Income from the sale of a family house and related land, or a unit, which does not include non-residential premises other than a garage, a cellar or a storeroom, and related land, if the seller resided therein for a minimum of two years immediately before the sale;...

Decision of the Tax Administrator and the Regional Court (the “RC”)

In the tax administrator’s view, the condition of residence immediately before the sale was not complied with, and the tax administrator initiated a procedure to remove doubts. Using her means of proof (testimonies, etc.), the complainant failed to sufficiently prove that the property was the place of her residence. Moreover, she left the family house approximately one month before the contract for the property’s sale was signed, and, as a consequence, the condition of residence immediately before the sale was not complied with. The tax administrator arrived at a conclusion that exemption pursuant to Section 4 (1) (a) of the ITA cannot be applied to the income, and they assessed additional individual income tax on this income.

The Regional Court agreed with the tax administrator’s conclusions and stated that the definition of ‘residence’ used in Section 4 (1) (a) of the ITA was important.

SAC’s Statement

The SAC states that the definition of residence in Section 2 (4) of the ITA does not define the general term ‘residence’, but the meaning of the particular ITA provision has to be taken into account. The term ‘residence’ used in Section 2 (4) of the ITA can be used in connection with provisions within that Section, which deal with the question of determining tax domicile in relation to the Czech Republic. Under this provision, residence is the taxpayer’s permanent dwelling where the taxpayer intends to permanently dwell and which is anytime available to him or her as and when needed. According to the SAC, it is not sufficient to prove the intention to permanently dwell in the apartment before the sale for an unlimited period of time. This means that the definition of the term ‘residence’ used in Section 2 (4) of the ITA cannot be applied for the purposes of exemption pursuant to Section 4 (1) (a) of the ITA.

The SAC refers to Judgment No. 2 Afs 4/2014-84, which deals with exemption pursuant to Section 4 (1) (a) of the ITA. This exemption’s purpose is exemption of income from the sale of property, in which the taxpayer resided (the centre of personal and family interests), and, at the same time, elimination of speculative sales. Where the taxpayer fails to meet the exemption conditions, the general time test (five years / ten years) for exemption pursuant to Section 4 (1) (b) of the ITA is applied.

The SAC adds that the fact whether the taxpayer has or has not reported his or her permanent residence in the property, does not automatically mean that he or she has permanently lived in the concerned property.

Commenting on the condition ‘immediately before the sale’, the SAC stated that no general definition of this term existed. In the SAC’s opinion, a taxpayer who sells a property does not have to live in the property until the actual sale’s date. It is acceptable that a taxpayer needs certain time to clear the property, etc. However, it is important to meet the condition of the property not being used in any other way, e.g. to be rented, etc.

If you are dealing with these issues, please feel free to contact us. We will be happy to help you.

Stela Bartošová
bartosova@clarksonhyde.cz