Court decision on the deductibility of interest on a loan given for the purpose of acquiring a share in a business

The Regional Court in Prague judged the situation of a company that claimed interest on a bank loan for the purchase of a share in a Czech company with which it was subsequently to merge. The loan had been granted by a group of banks to an entire investment group, and the debt was subsequently transferred to the Czech company that had made the purchase of the shareholding.

The tax authority ruled that the interest on the bank loan could not be deducted because it deemed the restructuring transaction to have been a special-purpose transaction that had been entered into with the sole intention of obtaining a tax advantage. According to the tax administrator, the company had not proved that it had incurred the interest and financial costs related to the loan for the purchase of the business share in a manner that was in accordance with the law and had therefore unduly reduced its tax base. However, the Regional Court saw the main economic reason for the transactions as enabling the group to be taken over by a new investment group. It also pointed out that the terms of the loan had been set by the lending banks and that it could not therefore be assumed that the banks had deliberately set conditions that would lead to the creation of an artificial structure. The Regional Court therefore annulled the decision of the tax administrator. The Appellate Financial Directorate has lodged a cassation complaint with the Supreme Administrative Court, so we must wait for the final decision in the case.