Supreme Administrative Court defends taxpayer’s acquisition structure
The Supreme Administrative Court rejected the tax administration's view that the purchase of a share in a corporation financed by a loan and the subsequent merger to transfer the loan to the newly acquired operating entity constituted an abuse of law. The taxpayer’s ability to explain the economic rationale of the transaction contributed to the court’s decision in favour of the taxpayer. The requirement of the financing bank to effectively transfer the loan to the operating entity also played an important role.
The case at hand involved the acquisition of a Czech operating entity by a new investor, a foreign group. The acquisition was followed by intra-group transactions, including a merger which led to the transfer of a bank acquisition loan to the Czech operating entity. This was required by the external bank in the relevant loan documentation.
The tax administrator viewed the transfer of the loan to the Czech operating entity by means of a merger (and other transactions) as an abuse of law leading to an unjustified tax advantage (in the form of tax deductible interest on the loan’s financing). The tax administrator argued, inter alia, that the transaction could have been arranged in a different manner or that a different transaction could have been carried out.
Both the Regional Court and the Supreme Administrative Court sided with the taxpayer in this case, as they acknowledged that the taxpayer had sufficiently explained the economic rationality of the transactions, with the bank's requirements in the loan agreement playing a key role. According to the SAC, the bank's requirement to transfer the loan to the Czech operating entity was rational because it strengthened the bank's position as a creditor. According to the court, the economic sense of the transaction could not be denied simply by stating that the transaction could have been carried out differently or that a different type of transaction could have been carried out.
We expect this decision to be widely discussed in the future and potentially impact the structure of external acquisitions.