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Corporations

Gernot Shaking

Claudia Schaub

Tax-efficient allocation of financing/debt push-down and deduction on own financing

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Workshop on the occasion of the ISIS) seminar on 20 April 2021 entitled "Tax aspects of corporate finance, including reorganisation topics".

04/2021
The corresponding case solutions can be purchased for CHF
120.00
(introductory price)
be on sale in the shop
The case solutions and other documents can be obtained free of charge in the shop.

Case 1: Acquisition structuring in the DACH region

Facts

The buyer group is active in the DACH region and plans to acquire the target group. The purchase is to be financed with debt and equity.

Question

How must the transaction be structured in the countries of the DACH region so that the debt interest on the bank loan can be used efficiently for tax purposes?

  1. Germany
  2. Austria
  3. Switzerland

Case 2: Natural debt push-down

Facts

TargetCo, which is domiciled in Switzerland, is an operating company. TargetCo has taken out a loan of CHFm 10 from a bank, which bears interest at 2%. The simplified balance sheet of TargetCo is as follows:

Tax-efficient allocation of financing - debt push-down and deduction on equity financing_zsis_Zitter, Schaub

A Swiss financial investor is interested in buying TargetCo. The acquisition is to be made through a newly founded AkquiCo based in Switzerland. AkquiCo will finance the acquisition with a bank loan in addition to equity. This will bear an interest rate of 4%. The purchase price for the shares in TargetCo is CHFm 30.

Tax-efficient allocation of financing - debt push-down and deduction on equity financing_zsis_Zitter, Schaub

Questions

  1. What to consider when financing the purchase?
  2. How must the transaction be structured to result in a "natural debt push-down" and what tax issues arise?
  3. What tax considerations should be made when financing AkquiCo?

Case 3: Leveraged dividend

Facts

Target OpCo, based in Switzerland, is for sale. A private equity (PE) group wants to acquire Target OpCo (purchase price CHFm 40) and establishes a Swiss AkquiCo for this purpose, which is financed with equity and with a bank loan of CHFm 20. The bank loan bears interest at 4%. Balance sheets and acquisition structure are as follows:

Tax-efficient allocation of financing - debt push-down and deduction on equity financing_zsis_Zitter, Schaub
Tax-efficient allocation of financing - debt push-down and deduction on equity financing_zsis_Zitter, Schaub

Question

How can the bank debt of the AkquiCo be "pushed down" to the level of the Target OpCo (debt push-down) and what needs to be considered from a tax perspective?

Case 4: Repurchase of own shares

Facts

The Swiss sole shareholder of TargetCo negotiates a succession solution with the buyer group. The parties reach an agreement and the buyer group acquires TargetCo through a newly formed CH AkquiCo.

Tax-efficient allocation of financing - debt push-down and deduction on equity financing_zsis_Zitter, Schaub

During the tax due diligence, it emerges that TargetCo has not made any distributions to the shareholder in recent years. As a result of this and the extremely good business performance, TargetCo has a high level of equity capital with practically no borrowed capital. The balance sheet of TargetCo immediately before the sale is as follows:

Tax-efficient allocation of financing - debt push-down and deduction on equity financing_zsis_Zitter, Schaub

The par value of each share is CHF 10 (total par value: CHF 1,000,000; total of 100,000 shares).

Based on the purchase price negotiations, the current fair value of one share is CHF 60 (fair value TargetCo: CHF 6,000,000).

For the seller, it is a condition of the transaction that the buyer group accepts the typical indirect partial liquidation clause, according to which the buyer indemnifies the selling shareholder for tax consequences from indirect partial liquidation triggered by transactions of the buyer after purchase. The Buyer Group accepts this clause and furthermore waives any debt financing of CH AkquiCo, as it sees no possibility to achieve a tax debt push-down under these circumstances.

Question

Is a debt push-down conceivable in this constellation and, if so, how would such a push-down have to be structured and what tax and other issues arise?

Case 5: Intra-group sale

Facts  

In order to acquire the Swiss Target OpCo with its two German investments 1 and 2, the buyer group establishes a Swiss AkquiCo. To finance the purchase price, AkquiCo takes out a EUR bank loan. After the purchase, AkquiCo is merged "downstream" into Target OpCo (hereinafter "1st debt push-down").

Finally, Target OpCo sells stake 1 to stake 2 against an interest-bearing CHF loan (hereinafter "2nd Debt push-down"). The CHF loan is subsequently converted into a EUR loan on identical terms as AkquiCo agreed with the bank. Subsequently, Target OpCo makes value adjustments due to currency losses on the foreign currency loan and claims these for tax purposes.

Tax-efficient allocation of financing - debt push-down and deduction on equity financing_zsis_Zitter, Schaub

Questions

  1. How should the 1st and 2nd debt push-down be assessed from a tax perspective?
  2. What lessons for practice can be derived from the decision of the VerwG ZH?

Case 6: Interest deduction on equity and debt push-down Switzerland

Facts

OpCo, domiciled in Zurich, holds Participations 1 and 2. OpCo sells Participation 1 to Participation 2 at fair value and leaves the purchase price as a loan. The loan bears interest at third-party conditions.

Tax-efficient allocation of financing - debt push-down and deduction on equity financing_zsis_Zitter, Schaub

Questions

  1. Is the interest expense at the Participation 2 level tax deductible?
  2. Can OpCo claim the deduction for self-financing pursuant to § 65b StG ZH?

Case 7: Interest deduction on equity and debt push-down abroad

Facts

OpCo, based in Zurich, holds the German participations 1 and 2. OpCo sells participation 1 at fair value to participation 2 and leaves the purchase price as a loan. The loan bears interest at third-party conditions.

Tax-efficient allocation of financing - debt push-down and deduction on equity financing_zsis_Zitter, Schaub

Questions

  1. Is the interest expense at the Participation 2 level tax deductible?
  2. Can OpCo claim the deduction for self-financing pursuant to § 65b StG ZH?
CHF
120.00

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