SAC on transfer pricing: section 23(7) of the ITA also applies to non-profit and public entities

In its judgment 3 Afs 23/2024–60 of 29 October 2025, the Supreme Administrative Court (SAC) confirmed that Section 23(7) of the Income Tax Act also applies to transactions between affiliated non-profit and public entities, if they carry out economic activities affecting the tax base. According to the SAC, the public interest alone does not justify the use of a price lower than the normal price.

The case of Jihomoravské lázně

The case concerned the tax entity Jihomoravské lázně, a voluntary association of municipalities founded by Hodonín and Lednice for the purpose of constructing and subsequently operating spa facilities. After several years of operation, the association sold the spa facilities to both founding municipalities and subsequently entered into liquidation. The purchase price corresponded to the tax residual value of the transferred assets, not the usual price. The tax administrator assessed the transaction as a transaction between related parties concluded at a lower-than-normal price and assessed additional income tax.

Key conclusions of the SAC and implications for practice

• Related parties due to participation in management

The link between the municipalities and the association of municipalities was due to the direct participation of the mayors in its management and control.

• Private law nature of contracts

Although the sale was motivated by public interest, the contracts were of a private law nature and therefore Section 23(7) of the ITA applies to them.

• Public interest does not justify a non-arm’s length price

A significantly lower price would only be acceptable if it compensated for loss-making operations in the public interest. In this case, however, the spa was profitable and the association did not demonstrate economic reasons for deviating from the arm’s length price.

Conclusion

The judgment confirms that Section 23(7) of the ITA applies to transactions between related parties regardless of their legal form or public purpose. Non-profit and public entities must therefore assess the arm’s length nature of the prices in their transactions and be prepared to document the reasons for any deviations.