In a recent decision, the Swiss Federal Supreme Court confirmed the tax authorities’ practice of denying the deductibility of interest arising from acquisition financing where the debt is subsequently transferred to the target company through a merger (so-called “debt push-down”).
In October 2008, a U.S. company acquired all the shares of a Swiss company (A SA), whose main asset consisted of a rental property purchased for CHF 8.5 million.
To carry out the transaction, the acquirer incorporated a Swiss acquisition vehicle (C SA). C SA contracted a bank loan of USD 9.5 million (approx. CHF 11 million) to finance the purchase of the shares in A SA. The financing agreement provided for joint liability of C SA and the target company.
The following year, C SA was merged into A SA (a downstream merger), with A SA thereby assuming the entire debt incurred to finance its own acquisition.
The Geneva tax authorities denied the deductibility of the interest relating to the portion of the loan used to finance the acquisition of A SA’s shares. However, they accepted the deduction of a fraction of the interest corresponding to the part of the financing used for renovation works on the property (approximately 25%).
The dispute concerned whether the interest relating to the acquisition debt could be regarded as a commercially justified expense for tax purposes.
The Federal Supreme Court confirmed the tax authorities’ position and upheld the application of the debt push-down doctrine.
According to the Court, the debt incurred to finance the acquisition of the target company’s shares serves exclusively the interests of the acquirer and of the former shareholders. It does not provide any economic benefit to the target company itself.
Under these circumstances, the corresponding interest cannot be regarded as a commercially justified expense in the hands of the absorbing company.
The Federal Supreme Court further emphasized that the legal assumption of a debt does not automatically mean that the related expenses qualify as commercially justified expenses for tax purposes. It also rejected an argument frequently raised in legal doctrine according to which the acquisition of the target company was in its own interest, as it ensured the company’s financial continuity.
This decision therefore confirms the restrictive approach adopted by the Swiss tax authorities regarding debt push-down structures.
