Tax deductibility of interest on an acquisition loan – abuse of law

After a longer time, a court decision has appeared in the Czech Republic that is positive for the taxpayer as part of the issue of the tax deductibility of interest on an acquisition loan and the application of the institute of abuse of law. So far, however, this is only the decision of the regional court and the tax administration has filed a cassation appeal in the matter, which will therefore have to be assessed by the Supreme Administrative Court.

The tax deductibility of interest on an acquisition loan granted by a consortium of banks was examined in the proceedings before the regional court. The subject of the acquisition was a Czech operating company owned by foreign related entities of the buyer, which was the Czech acquisition SPV. After the acquisition, the operating company merged with the SPV.

However, the acquisition loan was not granted directly to the Czech SPV, but to its parent company. Subsequently, this loan was transferred over several steps to the Czech SPV, and after the merger finally to the operational entity. In fact, this was a debt-push-down transaction, which had already been assessed as an abuse of law several times by the tax administration with the subsequent blessing by the judiciary in relation to the tax deductibility of interest. In this case, the tax administrator and the appellate tax directorate rejected the tax deductibility of interest on an acquisition loan, arguing that the debt-push-down transaction seemed to be calculated, without economic justification and was performed in such a way that the taxpayer would obtain an illegitimate tax advantage.

Nevertheless, the regional court has leaned to the taxpayer's side. Below we provide a selection of its arguments:

  • the main and, according to the court, legitimate economic reason for the given transactions was the acquisition of an entire group by a new owner, whereas the procedure where the acquisition loan was first accepted and the Czech companies subsequently merged resulted from the conditions of the external financing banking consortium;
  • all transactions must be assessed as a whole, not like the tax administrator, which focused only on the acquisition of the operating company itself and its subsequent merger with the Czech SPV. The primary objective was not the acquisition of a new asset in the group, but to take over the entire group by a new investor, and this can be a sufficient economic reason;
  • the loan was not granted by a related party - it is essential that the restructuring conditions were laid down by an external party;
  • in the case of the provisioning of an external loan, it is difficult to assume that the banks would set the conditions deliberately in order to create an artificial structure to obtain an unjustified tax advantage – on the contrary, the banks wanted the conditions to ensure maximum efficiency in the repayment of the loan, i.e., the procedure was economically rational;
  • however, even this structure does not automatically mean excluding the possibility of applying the institute of abuse of law – it cannot be simply argued that any requirement of an (external) bank makes economic sense – but the tax administrator must prove the abuse of the law, which has not happened in this case.

Following the filing of the cassation appeal, the case in question will be examined further by the Supreme Administrative Court and it will be interesting to see what arguments it will bring, whether it will lean towards the taxpayer or the tax administration. In any event, it is still necessary to assess in detail each similar transaction (debt-push-down), taking into account the risk that the tax administrator will assess it as an abuse of law.

Court case 55 Af 4/2020–137

Author: Olga Těhlová, Tax Senior