Veřejné zakázky – změny, které nás v brzké době čekají (4)

Intra-group share sale, merger, crown bonds and abuse of law

For your interest, we bring you another case decided by the Supreme Administrative Court (SAC) on the topic of abuse of law.

• In October 2012, company A was established and by the end of the same year it issued bonds in a favourable tax regime (so-called crown bonds).
• In 2014, Mr K became the owner of A through his company B.
• Mr K subsequently transferred another of his companies, the prosperous company S, to A.
• As a result of the transfer of S to A, Mr K incurred a material claim against A.
• Mr K subsequently subscribed himself for the entire amount of the crown bonds issued by A, for which he incurred a material debt to A.
• That debt was subsequently offset against the claim that Mr K had against A in respect of the transfer of the S shares.
• Subsequently, Mr K decided to merge his companies A and S and, following the merger, the interest costs in question were claimed as tax deductible.
• Unsurprisingly, the tax authorities did not like this and concluded that the related interest was not a tax-deductible expense as a result of the abuse of rights. The bond financing and the merger of related entities did not make clear economic sense according to the tax authorities and the other motives appear unconvincing and irrelevant.
• The Regional Court rejected the company's claim and the Supreme Administrative Court also sided with the tax administrator. The Supreme Administrative Court stated, inter alia: “According to the Supreme Administrative Court, even the merger, as a necessary intermediate step for the tax effectiveness of the interest paid, was clearly predominantly motivated by the desire to reduce the tax liability of A... On the contrary, the complainant's alleged, but unspecified, benefit to its business consisting in the acquisition of a legal form of a European company already in 2014 and the setting up of a favourable holding structure does not appear credible. The whole operation becomes economically meaningful only if it is viewed through the eyes of Mr K., who managed all the entities involved and whose main intention appears to have been to obtain effectively tax-free interest on the bonds while artificially reducing the complainant's tax base, contrary to the purpose of the Income Tax Act..."
• We shall see how the SAC views mergers in less controversial situations in the future.

If you have any questions, please contact the author of this article or the EY tax team with whom you regularly work.

Author:

Radek Matuštík