A recent decision highlights that Interest Deductibility Now Requires Clear Operational Nexus.

Swiss Federal Supreme Court Ruling on Debt Push-Down Structures

The Swiss Federal Supreme Court has once again reinforced a strict stance on debt push-down structures, sending a clear signal to investors and corporate groups navigating leveraged transactions in Switzerland. In its recently published decision, the Court denied the deductibility of interest expenses at the level of the operating company following a leveraged buyout and subsequent merger.

Background

In the case at hand, a real estate company was acquired through a leveraged buyout using an acquisition vehicle, which was followed by a merger. This resulted in a classic debt push-down, with the acquisition debt ending up in the merged entity. 

The total financing amounted to CHF 11 million, comprising of CHF 8.4 million for the acquisition of the shares (i.e. financing costs) and CHF 2.6 million for the renovation of the property portfolio (i.e. operational costs).

The Swiss Federal Supreme Court drew a clear and decisive distinction:

• The interest related to renovation costs (i.e. operational) was considered commercially justified and tax-deductible, as the funds were directly used for the core business and contributed to income generation. 
• The interest related to the acquisition debt (i.e. financing costs) was not tax-deductible, as it merely financed the purchase of shares and lacked any operational nexus to the target company’s business.

Key Takeaways

This decision once again highlights the complexity and risk of implementing tax-efficient debt push-down structures in Switzerland. The bar for demonstrating a sufficient operational nexus is high, and purely structural or post-transaction justifications are unlikely to succeed.

For the Swiss Federal Supreme Court, the only decisive factor for the deductibility question of the interest in the case at hand was the debt’s nexus with the operations of the target entity.

A&M’s Perspective

In light of the increasingly stringent approach confirmed by the Swiss Federal Supreme Court, achieving a tax-efficient debt push-down in Switzerland remains highly challenging and complex. The latest decision underscores the high threshold for demonstrating a sufficient operational nexus.

However, a debt push-down is not impossible. With careful structuring, forward-looking tax planning, and targeted reorganizations, it remains feasible to achieve defensible and tax-efficient outcomes within the confines of the respective cantonal practices, which take detailed knowledge to navigate.

This is precisely where experienced M&A tax advisory makes the difference: Designing structures that are not only commercially sound, but also robust under scrutiny.