Until the end of 2017, it was a common practice to use so-called a debt-push-down structure in restructuring processes. The structure typically involved setting up a special purpose vehicle (SPV) which received a loan that was used to acquire directly shares in another company. The newly acquired company was then merged with the SPV (i.e. with the company's shareholder). The tax benefit of this restructuring process was that the acquired entity’s operating income could be reduced by the interest on the financing used for acquisition of shares in this entity.

After 1 January 2018, the provisions of the Corporation Tax Act prevent to use of the tax benefits resulting from debt-push-down structures under article 16(1)(13e) of the Corporation Tax Act. The provision expressly provides that  taxpayers cannot treat the costs of debt used to finance the acquisition of shares in companies as tax-deductible costs, to the extent that such costs would reduce the tax base that includes revenue from that company's business activities, particularly in the case of mergers, in-kind contributions, conversions to a different legal form or the formation of a tax capital group.

It is worth noting that the limitation provided for in article 16(1)(13e) of the Corporation Tax Act applies only to the costs of debt borrowed to pay for shares in an acquired company to be merged with the borrowing company. This provision does not apply to the costs of debt obtained for any other purposes, such as refinancing the acquired company’s debt incurred in the course of its business.

The right to treat as tax deductible the costs of debt obtained to refinance an acquired company debt if it is subsequently merged with a company being its shareholder was the subject of analysis in an official tax ruling issued by the Head of the National Revenue Information of 29 March 2019 (reference: 0111-KDIB1-3.4010.46.2019.1.MBD). The doubts concern whether the taxpayer was allowed to recognise as tax-deductible costs the interest paid by the acquiring company to its shareholder on debt obtained to refinance the acquired entity’s debt.

The tax authority stated that although interest on debt obtained to refinance the debt of a acquired company which then was merged with its shareholder is not covered by the restriction provided for in article 16(1)(13e) of the Corporation Tax Act, such interest may not be treated as a tax-deductible costs according to the general tax rules, because it is not paid by the SPV to earn revenue or to retain or secure source of the revenue. The tax authority's argument to support its standpoint was that interest used to finance the activities of an acquired entity is not connected with the activities of the acquiring company, because such interest is related to the repayment of the debt of another company. The authority also notes that the acquiring entity was aware that it would not earn any revenue, e.g. interest received, because the acquiring entity's intention was to merge with the acquired company. The taxpayer appealed against the tax ruling obtained to the Voivodship Administrative Court in Warsaw.

In its judgment of 12 December 2019 (Case No.: III SA/Wa 1374/19), the Voivodship Administrative Court in Warsaw disagreed with the tax authority and confirmed that the costs of debt borrowed to refinance an acquired entity's debt might be treated as the tax-deductible cost after the merger. The court has found that as a result of the merger, debt borrowed by the acquiring company is replaced with debt from the acquiring entity's shareholder, which does not mean that the interest on the refinancing debt is no longer connected with the acquired company's business. The judgment is not legally binging yet. 

Under the universal succession in mergers, the tax ruling issued by the tax authority seems highly controversial. As a result of the merger, the acquiring entity continues the acquired company's operations and, therefore, the acquired entity's revenue becomes the acquiring company's revenue. Consequently, the loan replacing the debt obtained to finance the operation of the acquired entity is connected with the taxpayer revenue. Therefore, it is unjustified to assume that as a result of the merger, the interest on the loan used for debt refinancing does not meet the criteria for treating such interest as tax-deductible costs. We strongly agree with the verdict of the Voivodship Administrative Court in Warsaw issued in this respect.

Although the tax benefits of debt-push-down structures are expressly restricted in provision 16(1)(13e) of the Corporation Tax Act, it is important to take note of some other limitations on the treatment of debt financing costs as tax-deductible expenses, such as earning stripping rules (provided for in article 15c of the Corporation Tax Act), which also apply to debt for financing purposes received from unrelated parties; the division of revenue into capital and operating ones, which prevents the setting-off of the cost of interest paid resulting from loan for shares acquisition in another company against operating income; or restrictions imposed by transfer pricing regulations.

In addition, in the case of any restructuring transaction that involves a merger, the applicability of general anti-avoidance rules (GAAR) and/or specific anti-avoidance rules (SAAR) should be also taken into consideration. 

Sylwia Czardybon Senior Manager in the Tax M&A Team at KPMG in Poland

Marlena Maliszewska Consultant in the Tax M&A Team, KPMG in Poland