In a recent ruling, the Supreme Administrative Court assessed the tax-deductibility of interest on a loan provided by a bank. The company included this interest on the loan without any further in tax expenses, although a legal relationship was established between it and the bank based on a contract on the collateral transfer of a business share as security. Based on this contract, the bank became the sole partner of the company, which was also evident from the Commercial register. In such a case, however, stricter rules for the tax deductibility apply (so-called thin capitalization).

The Supreme Administrative Court confirmed the conclusion of the regional court that there was a capital interconnection between the complainant and the lending bank fulfilling the definition of interconnected persons under Section 23 para.7 of the Act on Income Taxes. The complainant did not succeed with the argument that it was only a matter of securing a claim without any real accomplishment of the ownership right. The Court emphasized that the legal effects of the transfer of a share – even a security one – are of decisive importance for the assessment of tax relations. As a result, the interest on loans provided by the bank was assessed as an undeductible expense.

As for the financing and funding, we recommend paying increased attention to the security institutes in the contract, as some may negatively affect the tax deductibility of costs.