Abuse of Rights in a New Supreme Administrative Court Ruling

01.12.2015

A sophisticated international restructuring was subject to a dispute initiated by an impulse from the Dutch tax authority. As a part of this restructuring, the tax payer’s group accomplished, among other steps, a merger with a related push-down of a loan to a Czech real estate subsidiary.

This restructuring resulted in minimization of the group’s tax liability compared to the original situation in the Czech Republic and abroad. The tax authority contested the restructuring as purpose-built and evaluated the related costs resulting from such a restructuring as being non tax-deductible.

The dispute reached the Supreme Administrative Court, which agreed with the tax authority and overruled the cassation objection filed by the tax payer. The Supreme Administrative Court did not contest the individual steps of the restructuring, i.e. neither the debt financing nor purchase of shares with the subsequent merger, which is a standard tool on the Czech real estate acquisitions market; it was rather the restructuring as a whole which was evaluated as an abuse of rights, for the main purpose of the restructuring was to reduce the tax burden, and, concurrently, the purpose of the Income Tax Act was not fulfilled.

From our perspective, the ruling is an illustration of the application of the abuse of rights principles to the specific situation. Moreover, the whole case documents a greater willingness on the parts of tax authorities to oppose restructurings which target minimization of the tax burden and shows improved international cooperation among tax authorities.