At issue was whether interest on bank loans was deductible when the borrower’s majority shareholder had assured the lenders – through a formal guarantee and through “letters of comfort” embedded in the loan contracts – that it would stand behind the debt. Under article 32 ZDDPO-2 (thin-capitalisation rule) a company may not deduct interest on loans “guaranteed” by a qualifying shareholder if, with that support, its indebtedness to that shareholder (or on that shareholder’s guarantee) exceeds four-to-one debt-to-equity. The key legal question was what counts as a “guarantee”.
Judgment
The Supreme Court overturned an Administrative Court ruling from June 2019 and sent the case back to the tax authorities for a fresh decision on the company’s 2010–2012 corporate-income-tax assessments.
The Court held that the term covers any explicit or implicit commitment that gives lenders a reasonable expectation the shareholder will repay the debt if the borrower defaults, not just formal sureties that allow direct payment from the shareholder’s assets. Nevertheless, if the taxpayer can show it would have obtained the same amount on the same terms without the shareholder’s backing—or that an unrelated party would have given an equivalent guarantee—then the interest remains deductible. Conversely, where the shareholder assumes a burden an independent party would not, the interest must be disallowed; any fee paid for the guarantee must still be tested under transfer-pricing rules.
Because neither the tax authority nor the lower court had examined whether the shareholder assurances actually improved the loan conditions or merely reflected the group’s ordinary commercial reality, the factual record was incomplete and the legal conclusion premature. The Supreme Court therefore annulled the tax decision in full.
The Court also criticised article 140(2) ZDavP-2, which bars taxpayers from introducing evidence that arises only after inspection minutes are issued; it found the rule an excessive restriction of the right to be heard (Article 22 of the Constitution). Although it refrained from lodging a constitutional challenge—having already set the decision aside on other grounds—it made clear that the provision is constitutionally doubtful and may not withstand future scrutiny.
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