Real increase in the taxpayer’s assets

The starting point of the case law development of the interpretation of the term “income” is often considered to be the judgment of the SAC 2 Afs 42/2005–136, which deals with when the technical improvement carried out by the lessee can be considered as the owner’s income. The tenant reconstructed the rented house at his own expense (he carried out a technical improvement according to Section 33 of the ITA) and the tax administrator considered the technical improvement to be a non-monetary income of the owner already in the year in which the reconstruction was approved. However, the SAC concluded that the real enrichment of the owner occurs only when the lease ends and the owner can freely use or rent the renovated property again. This conclusion was preceded by an analysis of the concept of non-monetary income in Section 23(6) of the ITA. After considering the explanatory memorandum to the legislative proposal of the ITA and academic literature, the court stated that an increase in the taxpayer’s assets must be considered taxable income and that it must be real income and not merely apparent. This means that this increase in assets must be reflected in the legal sphere of the taxpayer in a real manner, in such a way that the taxpayer must be able to actually take advantage of this increase in assets. Otherwise, it is merely an apparent increase.

A look at Section 10 of the ITA

The introductory part of Section 10 of the ITA, which reads: “Other income in which there is an increase in assets, unless it is income under Sections 6 to 9, and individual types of income are…”, was first explained by the SAC in its judgment 5 Afs 33/2004. The plaintiff claimed that when assigning the receivable, she only “converted” the already existing receivable into cash of the same nominal value, so that there was no increase in her assets and it could not be taxable income. However, the SAC rejected this view and agreed with the Municipal Court’s grammatical interpretation. It does not follow from the introductory sentence of Section 10(1) of the ITA that an “increase in assets” is an independent condition for the application of this provision. On the contrary, it inferred from the text that all income that does not fall under Sections 6 to 9 of the ITA is automatically included among the “other income for which there is an increase in assets”, while the wording on the increase in assets is rather declaratory in nature and cannot be used to exclude a specific item of income from the regime of Section 10 of the ITA.

The Constitutional Court in its decision IV. ÚS 650/05 responded to this argumentation of the SAC by interpreting Section 10(1) of the ITA in a constitutionally compliant manner. It recalled that a tax constitutes an interference with the right to property under Article 11 of the Charter and that the principle of the substantive rule of law and the principle “in dubio mitius” must be respected when interpreting tax norms, i.e. more leniently in case of doubt. From this point of view, the Constitutional Court rejected the purely grammatical approach of the SAC and concluded that income from the assignment of a receivable from the sale of securities, in which there was no increase in the taxpayer’s assets, cannot be considered as “other income” within the meaning of Section 10 of the ITA. The “increase in assets”, which the SAC understood in its judgment 5 Afs 33/2004 only as a description, thus becomes, in the Constitutional Court’s view, a material condition for a certain item/performance to be subordinated to Section 10 of the ITA at all.

Subsequent direction of case law

The subsequent case law shows how the SAC continues to work with the concept of “income”. In its judgment 2 Afs 192/2017-26, the SAC assessed a transaction aimed at changing the structure of shareholdings between several persons while maintaining the level of assets of each of the participants. The SAC emphasized that when assessing “other income” under Section 10 of the ITA, it is necessary to look at individual transactions as a whole and to examine whether any of the parties actually had an increase in assets. If the will of the parties was a gratuitous “exchange” of business shares, which does not actually lead to asset enrichment, taxable income does not arise.

In its judgment 1 Afs 375/2019-37, the SAC explicitly interpreted the meaning of the term “income for the tax period” in the context of the tax relief for a non-working spouse. With reference to 2 Afs 42/2005-136, the SAC emphasized that income is only income that can actually be used (genuine, real), not merely apparent, so that a mere entitlement to maternity benefit is not yet income, income is only its payment.

Judgment 2 Afs 396/2020-34 further extends this line in a case concerning the sale of an apartment, where part of the purchase price held in an attorney’s escrow account was applied directly to repay a third party’s debt. The SAC concluded that the income under Section 10 of the ITA is the entire agreed purchase price, because the actual increase in assets may be reflected not only in an increase in assets (e.g. collection of money), but also in a decrease in liabilities (e.g. the extinction of debt). According to the SAC, the decisive factor is the fact that the taxpayer could freely dispose of the increased assets (whether these assets are directly in the form of money or otherwise). The increase in assets must be reflected in the taxpayer’s legal sphere in a real manner and it is not necessary for the money actually to be credited to his account.

Current direction of interpretation of the term “income”

In conclusion, it is appropriate to draw attention to the recent judgment of the SAC 8 Afs 261/2023-56. The SAC approaches a different interpretation of the term “income”, despite the decision IV. ÚS 650/05. In this case, the SAC dealt with the term “income” in the sense of a transfer of a share for consideration, at a loss. The taxpayer claimed that as a result of the loss-making sale, there was no real increase in his assets and therefore he did not realise any “income”, and consequently he could not incur the obligation to report exempt income under Section 38v of the ITA. The SAC consciously returns to the previous line of judgments (2 Afs 42/2005-136, 2 Afs 396/2020-34) and to the decision IV. ÚS 650/05. It carried out a grammatical, historical, systematic and teleological interpretation of Section 10 of the ITA and explicitly deviates from the relevant judgment of the Constitutional Court. According to the SAC, the “increase in assets” is not a condition for the occurrence of “other income”, but a question of determining the tax base. According to the SAC, the interpretation favoured by the Constitutional Court erased this key difference. Income is any consideration (e.g. crediting an amount to an account) that is actually reflected in the taxpayer’s economic sphere if it is classified as income under Sections 6 to 10 of the ITA. The SAC explicitly emphasizes that the analytical approach should not start from the question whether a certain item/performance is “in general” income, and only then seek its subordination to specific provisions, but vice versa. In the first step, it is necessary to examine whether a particular item/performance falls under any of the forms of income listed by law (Sections 6–10 of the ITA), and only if such a type classification is possible can we speak of “income”, and thus of an object of taxation under the ITA. However, the mere fact that income is subject to tax does not mean that it will also be taxed. This case law therefore contains relatively new ideas and views on the concept of “income” under Section 10 of the ITA and the question is how this approach will develop in the future.