Reporting Tax-Exempt Income Over 5 Million CZK in the Czech Republic

If you received tax-exempt income exceeding five million CZK in 2026, you are subject to a legal obligation under Czech law where ignorance is no excuse. The Czech tax authorities are intensively focusing on these specific types of income and strictly monitoring whether they have been properly reported. In this article, you will learn which types of income must be reported, what sanctions you may face for non-compliance, and how to navigate your 2026 tax obligations in the Czech Republic without unnecessary errors.

Current Outlook on Tax Law in 2026

The year 2026 brings a continuing trend of increased financial transparency for property owners and entrepreneurs in the Czech Republic. These changes are not merely administrative matters that can be ignored. They involve principles that will directly affect you if you hold significant assets or execute financial transactions in the range of millions of Czech koruna.

While 2025 brought a revolution in the form of a time test for crypto-assets, 2026 is the first period where investors can realistically utilize this exemption on a massive scale in practice after a three-year holding period. However, it is necessary to remember a persisting distinction: while the CZK 40 million limit for shares was abolished for 2026, this cap on exemptions continues to apply to cryptocurrencies under Czech tax legislation.

Our attorneys in Prague at ARROWS law firm focus on the issue of income exemptions and their reporting in practice daily, often as part of our "Tax Law and Tax Proceedings" service. We find that this area is more complex for entrepreneurs and investors than it appears at first glance. Individual categories of exempt income overlap with various forms of ownership and exceptions within the Czech legal system.

What is Exempt Income and Why Report Transactions

Exempt income is income that the Czech Income Tax Act explicitly excludes from taxation. This means that although you have received money or acquired property, you do not pay income tax to the state. It might seem that if no tax liability arises, you have nothing to manage. However, the reality is different.

According to Section 38v of the Income Tax Act, if a natural person receives exempt income that individually exceeds five million CZK, they are obliged to notify the relevant Czech tax administrator of this fact. This obligation applies regardless of the fact that no tax is paid on the income. The obligation is assessed for each individual income separately.

Why report money to the state at all if it is exempt? Simply so that the tax administrator has an overview of where the assets in your possession originated. If you do not report the assets and the tax administrator later discovers that you own expensive real estate, they may call upon you to prove the origin of your assets. Our Czech legal team at ARROWS handles these reporting obligations regularly, as ignoring them leads to significant sanctions.

FAQ – Legal Tips on Exempt Income and Reporting

1. Do I have to report an inheritance I received from my parents?

Yes, if the value of the inheritance share exceeds five million CZK. Although inheritance in a direct line is exempt from income tax, reporting (notification) is mandatory when the limit is exceeded according to Section 38v of the Income Tax Act.

2. How is the five million CZK limit calculated if I receive several gifts during the year?

The limit is assessed for each income (legal title) separately according to Section 38v, Paragraph 1 of the Income Tax Act. If you receive four gifts, each in the amount of 1.5 million CZK, no reporting obligation arises.

3. Which types of income are most commonly exempt and must be reported?

Typically, this includes income from the sale of real estate (after meeting the time test or residency condition), inheritances, gifts within the family, income from the sale of securities and business shares, or property settlements between spouses.

Which Income the Tax Administrator Will Focus On

In 2026, the Czech tax administrator is focusing particularly on income from the sale of real estate, securities, and business shares. Thanks to the digitalization of the state administration and the interconnection of registers, the Czech Financial Administration has an increasingly better overview of asset transfers. Special attention is paid to individuals selling investment portfolios or business shares in the range of tens of millions of CZK.

Even if the sale of real estate is exempt from tax after meeting legal conditions, the tax administrator monitors whether any reporting obligation was fulfilled. They particularly note situations where the taxpayer claims an exemption based on the satisfaction of their own housing needs, where it is necessary to reinvest the acquired funds within specified deadlines.

Experts from ARROWS law firm in Prague have extensive experience working with clients in these situations. In practice, we often find that clients confuse exemptions based on the time test with exemptions for housing reasons. Individual types of exemptions have their own specific conditions and deadlines under Czech law. Without professional consultation, it is easy to get lost in these categories and face the risk of additional tax assessment.

Exempt Income from the Sale of Real Estate

The sale of real estate is among the most common exempt incomes that must be reported. The exemption is primarily based on the principle of long-term ownership. If you own a property for 10 years from its acquisition (after January 1, 2021) according to Section 4, Paragraph 1, Letter b) of the Income Tax Act, the income from the sale is exempt from tax.

If you inherit real estate in a direct line and later sell it, the ownership period of the decedent (the deceased) is included in your time test according to Section 4, Paragraph 1, Letter b) of the Income Tax Act. This means that if your father owned the property for nine years and you own it for one year after inheriting it, the ten-year test is met overall and the income is exempt. However, you must be able to prove this cumulative period to the Czech tax administrator.

The second path to exemption for real estate is meeting the residency condition. If you live in the property for at least two years immediately preceding its sale, you are exempt from tax. Additionally, there is a special case where income from a sale is exempt if you use the acquired funds to provide for your own housing needs.

Our attorneys in Prague at ARROWS regularly resolve situations where clients are unsure if their specific case meets the conditions for exemption. In the real world, mistakes are made on details – missing evidence of residency, incorrectly calculated time tests, or improper use of funds for housing needs.

Exempt Income from Securities and Shares

For securities (shares, mutual fund units), a 3-year time test applies for tax exemption under Section 4(1)(u) of the Czech Income Tax Act (ZDP). For interests in business corporations (e.g., an s.r.o.), this test is 5 years according to Section 4(1)(q) of the ZDP. If you meet these deadlines, the income from the sale is exempt from income tax in the Czech Republic.

A fundamental change that many investors are unaware of is the regime for crypto-assets. Under Section 4(1)(zk) of the ZDP, a three-year time test for exemption now also applies to them. Furthermore, if the total of your income from the sale of cryptocurrencies in 2026 does not exceed CZK 100,000, such income is automatically exempt under letter zj) regardless of the holding period.

In practice, this means that our Prague-based attorneys at ARROWS help clients with the correct classification of their digital assets. Determining whether a specific instrument has the character of a security (security token) or a crypto-asset (payment or utility token) is decisive for whether an unlimited exemption applies or whether it will be subject to the aggregate financial limit of CZK 40 million per year under Czech law.

Procedural Requirements for Reporting to the Tax Authority

The report (Notification of Exempt Income) does not have a strictly prescribed legal form; however, the Czech Ministry of Finance publishes a recommended template, the use of which minimizes the risk of errors. Submissions can be made in writing, orally into a protocol, or via a data message. If a taxpayer has an active data box, they should primarily use the electronic form of submission.

When reporting, according to Section 38v(2) of the ZDP, you must state the amount of income, a description of the circumstances of acquisition, and the date the income was generated. The deadline for submitting the notification is the same as the deadline for filing the tax return for the taxable period in which you received the income. It is safest not to leave the submission until the last minute.

Reporting Exempt Income Step by Step

The first step is ensuring that your income is truly exempt. This is where the biggest mistakes occur, such as confusing a gift (exempt within the family) with income that is effectively remuneration for work (taxable). If you are unsure, consult the situation with a professional.

Our Czech legal team at ARROWS recommends that clients archive all documents even after submitting the notification for potential future audits. Compile a list of all income exceeding CZK 5 million. For each income, prepare documents proving the right to exemption (purchase agreements, inheritance resolutions, evidence of the duration of ownership).

The third step is the submission itself. Sending via a data box or by registered mail with an acknowledgment of receipt is a necessity to prove timeliness. Many clients cause themselves unnecessary problems by not having proof of delivery, and in the event of an administrative error on the part of the Czech tax office, they cannot prove they fulfilled their obligation.

Sanctions for Failure to Report Exempt Income

If you fail to fulfill the obligation to report exempt income higher than five million CZK, you face a fine under Section 38w of the Czech Income Tax Act, the amount of which is graded according to when the correction occurs. This is a key point – failure to report can cost you hundreds of thousands to millions of crowns.

The fine is 0.1% of the amount of unreported income for a voluntary late report, 10% if you submit the report only upon the request of the tax administrator, and 15% if you do not respond to the request. For an income of CZK 10 million, the fine can thus reach up to CZK 1.5 million.

It is important to realize that the fine is calculated from the gross amount of income, not from the profit. If you sold a house for CZK 20 million, a 10% fine amounts to CZK 2 million, even if your net profit from the sale was lower.

FAQ – Legal Tips on Sanctions and Fines

1. Can I apply for a waiver of the fine?

Yes, Czech law allows the tax administrator to waive the fine for failure to report exempt income in whole or in part if the delay occurred for justifiable reasons according to Section 38w(6) of the ZDP. It is necessary to actively apply for the waiver and pay the administrative fee.

2. What is the latest I can submit the notification?

The deadline is tied to the deadline for filing the tax return. If you received the income in 2026, the standard deadline ends in the spring of 2027.

3. Do I face a fine even if I do not file a tax return at all?

Yes. Even if you have no obligation to file a tax return (e.g., your annual settlement is done by your employer), you have a separate obligation to file a Notification of Exempt Income over CZK 5 million under Section 38v of the ZDP.

Liability for Reporting Violations

While the fine for failure to report exempt income is an administrative (tax) sanction, there is also a criminal law risk in the background. If a taxpayer intentionally conceals income that is not exempt and presents it as exempt, it may constitute the crime of tax evasion under Section 240 of the Czech Criminal Code.

If an intent to evade tax on a large scale is proven, the perpetrator faces imprisonment. The Czech Financial Administration and law enforcement agencies cooperate in detecting serious tax crime.

It is important to distinguish between an error (forgetting to report truly exempt income) and tax evasion (pretending an exemption for taxable income). In the first case, "only" a high fine under the Tax Code is at risk. Our attorneys in Prague at ARROWS regularly handle the defense of clients in tax proceedings and help minimize the impact of errors.

The principle here is that the sooner you realize the mistake and start addressing it, the milder the consequences tend to be.

International Income and Automatic Exchange of Information

In connection with increased transparency, rules are also tightening for income and assets abroad. The Czech Republic is involved in the system of automatic exchange of information. This means that the Czech tax administrator obtains information about balances on foreign accounts and certain types of income from abroad.

If you sell real estate abroad or securities through a foreign broker and this income is tax-exempt under Czech law, you are still required to report it in the Czech Republic if it exceeds CZK 5 million pursuant to Section 38v of the Czech Income Tax Act. The mistaken assumption that "the authorities cannot see what is abroad" can lead to severe consequences once data arrives via international information exchange.

Experts from ARROWS law firm in Prague, supported by our extensive international network, handle cases involving cross-border transactions and tax implications for Czech tax residents.

Executive Summary for Management

The year 2026 requires increased vigilance from asset owners. Entrepreneurs and investors should be aware of the following facts:

• Reporting exempt income over CZK 5 million is a strict obligation, and sanctions can be liquidating.
• Time tests for exemptions (3 years for securities, 5/10 years for real estate) remain critical under the Czech legal system.
• Crypto-assets now have their own 3-year time test for exemption; however, unlike shares, this exemption is limited to a total cap of CZK 40 million per year.
• International information exchange is fully operational, and foreign income cannot be hidden from the Czech tax administrator.
• The difference between exempt and taxable income often depends on specific legal nuances.

Conclusion

Reporting exempt income is not a mere formality. It is a legal obligation with potentially drastic financial impacts for non-compliance. If you receive income exceeding five million CZK that is tax-exempt—whether it is an inheritance, a gift, or the sale of real estate or a company—you must report it pursuant to Section 38v of the Income Tax Act.

A fine of 10 or 15 percent of the total income amount under Section 38w of the Income Tax Act is an unnecessary loss of assets that can be avoided by submitting a single form on time.

The experts at ARROWS law firm in Prague handle these matters daily. We know where mistakes are made and how to prevent them. Our firm carries professional liability insurance up to CZK 400 million, ensuring you a professional and secure approach.

You don't have to face this alone; email us at office@arws.cz with a brief description of your situation, and we will provide initial guidance or comprehensive legal services.

FAQ – Frequently Asked Legal Questions Regarding Exempt Income Reporting

1. Do I have to report exempt income if banks and the Land Registry already know about it?

Yes, you must. The Notification of Exempt Income is an independent obligation of the taxpayer under Section 38v of the Income Tax Act. The fact that the state administration has access to data from the Czech Land Registry or banks does not waive this obligation.

2. How is the notification filed if I receive multiple exempt incomes?

You file a summary notification for the entire taxable period (calendar year), but within it, you specify individual incomes that exceeded the limit under Section 38v(2) of the Income Tax Act.

3. What documents should I keep?

Keep all contracts (purchase, gift), inheritance decrees, bank statements proving receipt of payment, and above all, confirmation of the Notification's submission to the tax administrator (filing receipt, data box delivery note).

4. What should I do if the Czech Tax Office issues a notice to file?

If you receive a notice, respond immediately. You will be given a grace period to file. In this case, you face a 10% fine under Section 38w(2) of the Income Tax Act, but if you fail to respond, the fine increases to 15%. In such a situation, we recommend contacting a Prague-based attorney immediately to minimize damages.

5. I found out I forgot to file a report in the past. What now?

File the report voluntarily as soon as possible, before the authority issues a notice. In such a case, the sanction is only 0.1% of the unreported amount under Section 38w(1) of the Income Tax Act, which is significantly lower than if discovered by the tax administrator. We can assist you with the preparation of the filing at office@arws.cz.

Disclaimer: The information contained in this article is for general informational purposes only and serves as a basic guide to the subject matter. While we strive for maximum accuracy, Czech legislation and its interpretation are subject to change. To verify how these rules apply to your specific situation, it is essential to contact our Prague-based law firm, ARROWS, directly (office@arws.cz). We accept no liability for damages resulting from the independent use of this information without professional legal consultation under the Czech legal system.

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