As we have previously informed you, the tax administration has performed numerous tax inspections at various companies that issued bonds with the nominal value of one crown until the end of 2012. Thanks to the system of rounding down to whole-crown sums, which was in effect at the time, the income from these bonds is not subject to effective taxation. Although this was a standard financing method at the time, tax authorities have challenged many of these cases and assessed additional interest from these bonds, considering them non-tax deductible. The Supreme Administrative Court has just dealt with the first of these cases.

The subject of the dispute in this case was whether the company proved it had met the conditions for the tax deductibility of bond interest pursuant to Section 24 (1) of the Income Tax Act, namely the condition that the company had paid the interest with the purpose of achieving, securing or maintaining taxable income. In this specific case, therefore, the conclusion was not that this was a case of an abuse of rights as the tax administration has ruled in other cases dealing with one-crown bonds.

Reasons for dismissal

The factor that played an essential role in the negative decision of the Supreme Administrative Court was the fact that the business plans stated by the company could not be accepted as the reason for issuing the bonds, as these had mostly been implemented before the bonds were issued.

In addition, the Supreme Administrative Court pointed out that the payment of the bond was made, in part, through a cashless contributions of shareholders, which was also made before the bonds were actually issued, and in part, the payment was offset against the shareholdres’ non-interest bearing receivables resulting from rent (including future receivables and receivables before their due dates). The Supreme Administrative Court therefore came to the conclusion that by issuing the bonds, the company did not gain any available funds to implement its business plans; on the contrary, it was burdened with the obligation to pay interest on these bonds.

It should also be emphasised that the Supreme Administrative Court did not rule out the tax deductibility of one-crown bonds as such, but it agreed with the regional court and the tax administration’s bodies that in this specific case, the company did not prove it had met the conditions. Any similar upcoming cases will therefore very much depend on the specific factual circumstances and on whether the taxable entities will be capable of proving the need and the use of the funds gained from the bonds. The fundamental question – whether issuing one-crown bonds could be considered an abuse of rights – therefore remains unanswered in the rulings of the Supreme Administrative Court.

Should you have any questions regarding the impacts of this decision, do not hesitate to contact us.