Akvizicni uver a zneuziti prava

Acquisition loan and abuse of law

In today's alert we would like to draw your attention to an interesting decision of the Regional Court in Brno in the case of abuse of law (HERE).

The case concerned the deductibility of interest expense for a Czech corporation. The interest was incurred in the context of several transactions connected (as far as can be deduced from the text of the court decision) with the entry of an unrelated investor into an international manufacturing and trading group. The new investor did not legally enter directly into the Czech corporation, but into the parent company of the entire group. From the point of view of the assessment of Czech credit financing, this was a situation falling into the category known as a debt push-down.

In short, the parent company sold a stake in one of its subsidiaries ("target") to another of its (newly established) subsidiaries ("SPV"). The SPV took out a loan from the parent company to buy the stake. The interest on the loan taken to buy the subsidiary is generally tax ineffective. After the purchase of the shareholding, Target then merged into SPV. After the merger, the SPV treated the interest on the loan as tax-effective because the reason for the ineffectiveness (the existence of the subsidiary for the purchase of which the loan was taken out) had disappeared.

The Regional Court concluded that, in its view, there was nothing to prevent the merger of the subsidiaries being carried out straightforwardly, i.e. without the sale and the associated loan. It considered the sale and the loan to be artificial and the related interest costs to be tax ineffective on the basis of the prohibition of abuse of law.

In this particular case, the court was not convinced by the taxpayer's argument that the case had to be considered in the context of the entry of a new investor into the foreign parent company of the group and taking into account the requirements of the financing bank (which provided a loan to the parent company).

The taxpayer lodged an appeal against the judgment. It will be interesting to see how the Supreme Administrative Court will rule on the case.

We will take a closer look at this case and other abuse of law rulings in a continuing series of webinars, Topics in Tax Audits, which we plan to hold in the second half of September. Stay tuned for our posts and more information coming soon.

If you have any questions, please contact the authors of the article or the EY tax team you work with.

Authors:

Radek Matuštík

Jakub Tměj