2. 4. 2024
2. 4.
2024
New case law on interest on loans against taxpayers
At the beginning of 2024, the Supreme Administrative Court (SAC) issued two judgments concerning interest income and expense on loans from a corporate income tax perspective. In the first judgment, the SAC addressed the tax deductibility of costs incurred as a result of contractual increase in interest rates. The second judgment concerned the accounting for and taxation of interest income on a loan after the due date of the relevant debt.
Case 4 Afs 119/2022 - 47 concerned the financing of the construction of a solar power plant, which the given company had secured both with a bank loan and with loans from investors. Due to deteriorating financial indicators, to pay out the remaining part of the loan, the bank required the company to increase its minimum own resources. The company claimed that these funds could only be obtained from investors who had thus asked for an increase in the interest rate on their loans to 19% instead of the original 6% p.a. The increase in interest rates had been confirmed by concluding amendments to the original loan agreements.
However, the tax authority assessed additional income tax on the difference between the interest calculated at the increased interest rate and at the original interest rate. In their view, the company had not proved that these were costs incurred to generate, secure, and maintain taxable income. The tax authority found that at the beginning of the project, the investors had undertaken in a letter of comfort to provide the company with the necessary financing to carry out the project even if the relevant costs increased. In the opinion of the tax authority, the bank's additional requirement for increased financing from own resources represented precisely the aforementioned increase in project costs, which were to be financed by the investors without any further conditions.
After the company did not succeed in its appeal against the payment order at the regional court, the case was brought before the Supreme Administrative Court. The SAC agreed with the regional court's conclusions that it was not necessary to conclude amendments to the original loan agreements with the investors, as the company did not receive any additional funds under these amendments. The company had a right to the additional funds under the letter of comfort previously concluded with the investors. The SAC therefore concluded that the increase in the interest rate in this case merely increased the income of the creditors, and did not contribute in any way to generating, securing, and maintaining the taxable income of the company.
The SAC’s judgment in case 2 Afs 79/2023-62 concerned several situations where the tax administrator assessed additional income tax on a company due to its incorrect accounting. The SAC addressed the question of up to what time the company should have accounted for interest income on the loan, as the company stopped accounting for the interest on the loan at the time of the loan's maturity, arguing that it found the debt uncollectible and therefore covered it by a 100% accounting adjustment.
The SAC upheld the regional court's decision and the tax administrator's view that interest arising from commercial relations (i.e., on loans) is to be accounted for until the principal is repaid regardless of whether the business partner pays interest. The interest income accounted for then represents taxable income, which in this case the company lacked. The SAC found the company's argument that the debt was uncollectible unproven and pointed out that for that reason, it did not address the issue of charging interest on uncollectible receivables. According to the court, the company's subjective decision to record an accounting adjustment to the receivable cannot be considered as evidence of uncollectibility. Not providing any evidence of termination of the relationship with the debtor or of a unilateral waiver of the right to the receivable was also held against the company. It was also found that the company entered into a debt acknowledgement agreement with the contractual partner two years later.
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