Leverage buy-out: tax avoidance and interests paid deduction
The Supreme Tax Court with the decision No. 868/2019 ruled that the LBO transactions cannot constitute a tax avoidance when they have an economic substance other than tax benefits.
In the case in point, the activity of leveraged buy-out was about the acquisition of 50% of the capital share of a trade company by two new partner. The Tax Office challenged the acquisition of the subsidiary shareholding using a bank loan despite positive balance sheets. For the Tax Authority this transaction was without economic substance and did not produce significant effects other than tax benefit (as per Circular 6/2016).
However the Supreme Court consider the acquisition of new financing partners as a valid economic reason that comply with tax law principles. The LBO acquisition did not procure undue tax avoidance, because it produced significant economic effect.
In addition the Supreme Court (according with the decision No. 19430/2018) admitted the deductibility of interests paid within the limits of 30 percent of the ROL (as per art. 96 Presidential Decree n. 917/1986 and Circular 6/2016 of Tax Authority).
Please note contrariwise, the following decisions of Supreme Court No. 7292/2006, No. 24930/2011 and No. 4115/2014 that considered the deductibility of interests paid only as inherent to the transaction profit.